The honeymoon for New Zealand's brave new world of equity crowdfunding and peer-to-peer lending has begun in rollicking fashion.
Less than a year after the new Financial Markets Conduct (FMC) Act created the framework for licensed operators to host small capital raisings from the public and loans directly from investors to borrowers, the market has outperformed all expectations.
The most noise and activity on the equity side is coming from Snowball Effect, which has hosted five successful capital raisings on its equity crowdfunding platform since it launched in August last year and has two more currently running. Combined, the offers have raised NZ$5.6 million.
Snowball Effect's Head of Platform and Investor Growth, Josh Daniell, says the market has developed faster than expected.
"We resourced ourselves for a long lean period because we thought that investor awareness would be a bottleneck.
"But like in the UK and other markets, investors are picking up on this new channel very quickly."
The enthusiasm and the party mood extends to two of Snowball Effect's most high-profile capital raising companies, both of which sell the ingredients for a celebration -- beer and wine.
Blenheim-based Renaissance Brewing launched its crowdfunded capital raising on August 11 and raised NZ$700,000 within a month by selling shares for 12.3 per cent of the company to 301 investors.
The money was used to expand Renaissance's domestic and international business.
Renaissance's Development Director, Roger Kerrison, is just as enthusiastic about the initial capital raising. Fresh off a Skype call arranging a shipment to Norway, he says the exercise had been more than just a way to raise money at a relatively low cost.
It has created strong connections with Renaissance's customers and helped Renaissance improve its governance and strategies, he says.
"We see big intangible benefits of having 300 brand ambassadors -- not in the least that we have sold $50,000 of beer online through our shareholder portal in the last six months," Kerrison says.
Invivo Wines blew its own targets out of the water in March when it raised the maximum allowed under the new FMC regime of $2 million in just two weeks through the sale of 20 per cent of the company to 439 investors. This was four times Invivo's initial target and illustrated the enthusiasm for the wine company with big growth plans, including a new wine spritzer range, and a high-profile fellow investor in British talk show host Graham Norton.
The scale of the demand to raise capital on crowdfunded platforms was evident in the more than 1000 companies who had approached the two biggest platforms. Daniell says 700 companies had expressed interest in using the Auckland-based Snowball Effect.
PledgeMe Equity's self-titled "Chief Bubble Blower", Anna Guenther, says more than 300 companies had approached the Wellington-based crowdfunding platform about raising equity in its first year and it is working actively with 100 of those.
"We are very excited about how it is going," Guenther says, pointing to the $1.6 million raised in six campaigns so far.
She has been surprised by the range of companies interested in raising equity through crowdfunding, although for some the process is taking longer than they might expect.
"We have had seriously everything," Guenther says.
"But it is a slower process for companies, because capital raising is something they often think about between 9 o'clock at night and 2 o'clock in the morning -- if the emails we receive are anything to go by," she says.
The initial surge of activity has illustrated the potential, but also how far equity crowd funding has to go to reach anything like maturity.
Both Snowball Effect and Pledge Me Equity acknowledge the next step is the creation of secondary markets where investors who have bought into the growth stories can then sell their shares in a transparent and liquid market.
They'd also like to remove one of the potential impediments for activity remaining in the existing legislation for the Takeovers Code.
The code is designed to ensure takeover battles for big companies are fair and transparent for all shareholders.
The code forces companies with more than 50 shareholders to oblige by the rules restricting any one shareholder with more than 20 per cent from simply or quickly increasing their holding.
The rules are seen as a brake on activity for smaller companies, forcing shareholders to make expensive and time-consuming full takeover bids and disclosures whenever their shareholding changes, including the need for independent reports.
Still early days
DLA Piper Partner Sue Brown, who was previously the Financial Markets Authority's (FMA) head of regulatory operations and strategy in the FMA's first three years, also points to the sector's relative immaturity in any attempt at judging its early success.
"My sense is we haven't really had long enough to see some of these things unwinding, which is when you start to see where the real stress points in the structure are," Brown says.
She points to failures of both platforms and companies raising capital on those platforms in the more mature markets such as the UK, although notes there is great potential for growth as the trend of democratising capital raising moves down through the structure of the economy to investors and companies directly.
"These are immature businesses looking for ways of funding through non-traditional models, and there will be business failures. And that's when the whole model gets to be tested -- how the regulatory system deals with those failures," she says.
"That's where the risk comes in. It's not only a risk for investors. It's a risk for confidence in the regulatory system."
Former Commerce Minister Simon Power, now Westpac's Head of Business Banking and Wealth, has been impressed by the initial impact of equity crowd funding, but cautions about the sector's maturity.
"They have carved out a really interesting place in the market. There may still be some way to go with getting the public and investors to fully understand the model, but it is gaining increasing exposure," says Power, who was the main architect of the new framework for the FMA and the Financial Markets Conduct Act in National's first term in office.
"It is fundamentally a disruptive model, so I am sure it will be watched with interest by both the market and regulators as it develops," he says.
Education about the risks associated with such young companies, along with the returns, is a top priority for the new platforms and the regulator alike.
"The challenge is getting that message out without stifling the innovation and new opportunity that the model is intended to produce," says Brown.
So far, even warnings like the following ones put at the bottom of all of the offers have yet to dampen the enthusiasm.
Pledge Me Equity's warning: "Investment in these types of business is very speculative and carries high risks. You may lose your entire investment, and must be in a position to bear this risk without undue hardship."
Snowball Effect's warning: "Investing is risky. Some of the key risks include illiquidity, lack of returns, dilution, loss of key people and customers, and lack of control. You should only invest money that you can afford to lose."
Crowds in the Cloud
- NZ$5.6 million raised in first year from 1047 shareholders
Renaissance Brewing ($700k, 301 investors), The Patriarch ($500k, 204 investors), CarbonScape ($860k, 207 investors), Aeronavics ($1.5m, 239 investors), Invivo ($2 million, 439 investors).
Mad Group (targeting $750k) Breathe Easy (Targeting $350k)
Pledge Me Equity
- $1.6 million raised from 533 investors
Completed raisings: PledgeMe itself - $100,000 (49 investors) Yeastie Boys - $503,900 (211 investors) Sellshed by Websoft Limited - $711,100 (68 investors) Pineapple Heads - $204,900 (96 investors) Parent Interviews - $52,100 (58 investors) Chariot - $34,282 (51 investors)
Ongoing raisings: Powerhouse Wind (targeting $400k)
Completed: TRNZ Digital Travel Guides ($211k)
The FMA has licensed Crowd Arm and My Angel Investment as equity crowdfunding platforms, but they have yet to launch any capital raisings.
In harmony with Harmoney
The biggest player in the new world of crowd funding is Harmoney, which launched in September last year with big backers, TV advertising and big plans to lend $100 million in its first year on its peer-to-peer lending platform.
Hoping to follow in the fast-growing footsteps of the likes of Lending Club in the United States and Zopa in Britain, Harmoney lent $30 million in personal loans in its first six months, although it is also looking to enter the mortgage market.
Initially backed by Heartland Bank and America's Blue Elephant Capital Management, Harmoney has since received extra equity from local online powerhouse Trade Me, which, in January, invested $7.7 million for a 15 per cent stake in the fledgling firm.
Harmoney is initially targeting personal loans of between $1000 and $35,000 per borrower and investors are lending around $5000 each on the platform, with returns for investors for three to five year loans of around 17 per cent per annum. Harmoney accepted only 20 per cent of the applications on its platform in its first six months and less than 0.1 per cent of its loans had defaulted.
One investor on Harmoney, Interest.co.nz personal finance columnist Elizabeth Kerr, is positive about her experience of lending $5000, starting in February.
"Once you get your head around how Harmoney works as a service, then working their website is relatively easy and intuitive," Kerr says. "I chose to invest some money via the self-directed option -- that's where I chose which borrowers I wanted to lend to -- and some via the "quick-invest" option, where the technology randomly assigns me to loans that fit my risk profile," she says, adding that her expected rate of return is currently 19 per cent per annum and she has yet to see any defaults.
Kerr warns that Harmoney does not allow lenders to pull their money out before the end of the term.
"This is one of those sit tight and wait it out investments, and you are rewarded for that patience and commitment with a decent rate of return."