Crowdfunding may catch you a big fish, a tiddler or nothing at all. Photo / Alan Gibson
The results are varied and the FMA regulates and monitors only licensed crowdfunding service providers.
I have been looking at crowd-sourced investing with interest. I've made a couple of small investments in ventures I think are fun, while maintaining what I consider is an appropriate risk profile.
Most recently I have invested in an investment through pledgeme.co.nz. I have been surprised by - and concerned by - the push from one of Pledge Me's offerings for me to promote the investment through my "crowd". This is my only investment with Pledge Me, but I can only assume this is a marketing strategy for all of its investments.
I have had six or seven emails in the past two to three weeks asking to share via Facebook, Twitter, email or otherwise. One included the enticement of investors going into the draw for a trip to the Gold Coast.
While this is okay for projects where people are looking for a donation in return for a small reward, it seems far less appropriate for an equity stake in a company where the required investment is much higher ($500-plus), in what are quite risky investments, and often a lot riskier than they disclose.
I also have a couple of investments with Snowball Effect, but it seems to be operating with a much more professional approach.
Most people don't know what is good for themselves, much less friends and family. They shouldn't be promoting these offerings to others. While technically not advice, the promotion of an investment among friends would probably be considered advice - as seen by the number of people who got into Blue Chip/Bridgecorp and many other investments because (insert name here) recommended it.
How risky do you see crowd-sourced funding? I suspect it might be more like fishing than investing, something fun to spend a lot of money on, and if you catch something that is great.
And are the activities of crowd-source funders monitored by the Financial Markets Authority?
I like your fishing analogy. If you invest through crowdfunding, you might catch a big one or a tiddler, but there's also a fairly good chance you'll catch nothing.
Let's take your last question first. Says FMA general counsel Liam Mason, "The FMA regulates and monitors the licensed crowdfunding service providers." Currently, the licensed providers are Crowdarm, Equitise, My Angel Investment, Pledge Me and Snowball Effect. "We do not monitor the companies using the platform to issue shares."
However, he continues, "We are able to use the fair dealing provisions of the Financial Markets Conduct (FMC) regulations to take action where we find that a company issuing shares has misrepresented or provided misleading information to investors."
So were the comments in the samples you sent with your letter misleading? Mason doesn't think so: "Asking investors to 'spread the word' is not in itself a breach of legislation under the terms of the FMC Act."
And Anna Guenther, who describes herself as Pledge Me's chief bubble blower, defends the practice.
"We encourage campaign creators to keep their crowd updated, which if done through Pledge Me generates emails out to pledgers and followers (users can unsubscribe).
"This isn't asking their crowd to give financial advice - it's just asking people to share the campaign wider, which is one of the reasons why companies are attracted to online equity crowdfunding platforms: the ease of sharing information.
"Not all companies run competitions during an equity crowdfunding campaign," she says. But "all platforms encourage people pledging on their campaigns to share the link to the campaigns they support. The whole point of this approach is that you bring in your crowd." Crowdfunding "can help build an army of customers turned investors. These new investors become brand ambassadors. Investors in equity crowdfunding campaigns are often motivated by more than just the potential return."
Nevertheless, it's important that anyone who invests in a company via crowdfunding understands what they are doing.
Typically the companies are "start-up or early-stage businesses, so their financial track record and business prospects will be much less clear than listed companies", says Mason. And the disclosure rules aren't as strict as for companies listed on the NZX stock exchange.
"The service providers must ensure that they provide sufficient information about the companies that issue shares through their websites. The service providers must also display a prominent warning on their site that this a high-risk form of investing," he says.
And anyone who wants to invest in a company through crowdfunding "must come back to the service provider's website to make that investment, where they should see prominent warnings about the risks involved".
Adds Guenther, "Every equity crowdfunding page on Pledge Me has the legislated warning statements about risk, and pledgers will see these multiple times during the pledging process. By signing up to be an investor you must read and agree to terms, which clearly point out the risks involved in equity crowdfunding."
While you might think the Government should be tougher, there's a counter argument - that New Zealand needs to further develop its capital markets. "As well as encouraging new and innovative ways for companies wanting to raise capital, licensed crowdfunding platforms offer new opportunities for investors," says Mason.
What about your concerns about friends giving financial advice? "We would be concerned if people considered their friends' opinions about investments to be a substitute for professional financial advice. For someone to purport to provide advice they must be in the business of providing advice and registered or authorised to provide that service."
He adds that the FMA encourages people to seek proper financial advice when considering a crowdfunding investment.
I hope would-be investors take note of that. I share your concern that newcomers to share investing could be dazzled by crowdfunding marketing.
Nobody should invest any money through crowdfunding that they can't afford to lose. Nor should they count on being able to sell their shares quickly at a reasonable price, even if the company is doing well.
For more FMA info on crowdfunding see tinyurl.com/nzcrowdfunding
Finally, a very important question. Does Guenther chew bubble gum all the time? Her reply: "Only when I'm drinking bubbly :)"
I currently contribute 4 per cent of my salary to KiwiSaver. The KiwiSaver fund I am with is a growth fund with the majority of funds invested in shares.
As sharemarkets are going well at present, is there any benefit in increasing my contributions to 8 per cent while it's going well, and then at a later date reducing back to 3 or 4 per cent when it is not performing so well?
Your idea would work brilliantly if you knew when the markets were turning downwards. If only!
Trouble is nobody can tell when a market trend is changing. If prices fall for more than a couple of days, that might be the start of a plunge. Or it might be just a dip on a track that climbs further upwards. By the time you're sure it really is a major downturn, prices will probably have already dropped lots. Sometimes, they plunge in minutes.
Hugely successful American financier J.P. Morgan was once asked, "What will the stock market do, Mr Morgan?" His reply: "Fluctuate." If he can't do better than that, I'm afraid I doubt if you can!
A basic rule of investing is: don't try to time markets. You probably won't win.
So what should you do instead? First, work out whether a growth fund is best for you - in all market conditions - by using the "Find the right type of fund for you" feature in the KiwiSaver Fund Finder on www.sorted.org.nz.
That tool looks at how long you have before you plan to spend the money - the longer the time, the more suitable a riskier fund is. It also looks at your attitude to risk. Anyone who invests in a growth fund must be prepared to see their account balance sometimes fall a long way, and not panic and bail out into a lower-risk fund at that point. Bailers are often big losers.
But if you stick with a growth fund through thick and thin, you will almost certainly end up with more over the long term than in a lower-risk fund.
If you decide you are definitely a growth fund man, the next question is what proportion of your pay to put into the fund.
Generally, I recommend contributing only 3 per cent to KiwiSaver. You'll get your employer's 3 per cent and - as long as you earn more than $34,762 a year - you'll get the maximum $521 tax credit.
By all means save more than 3 per cent in total. It's a great idea. But perhaps put the extra elsewhere, so you can withdraw it should you need to. If you like the way your KiwiSaver fund invests, ask the provider if they offer a similar non-KiwiSaver fund and set up an automatic payment into that.
Watch the fees, though. If the non-KiwiSaver fund has higher fees, which would really eat into returns over long periods, you may decide to put up with the inaccessibility of KiwiSaver and contribute more there.
Mary, that was a brave call on KiwiSaver last week re the removal of the kick-start. Our daughter (13) has substantial savings and we (mum and dad) are both in KiwiSaver. I agree with your stance - young 'uns who are not working age are not going to benefit until or unless the kick-start is reinstated.
We were about to start her in KiwiSaver, but the loss of the kick-start forced a re-evaluation, and we are opting for a term deposit for the moment. The interest rate is okay and she is able to bank her own money into an account and see it grow, learn about compounding interest and access her money if she needs to.
I am interested to know if you got some political pressure after the weekend's column - Bill English and his people can't have been pleased to see such honest advice from such an influential commentator.
Over the years probably every major political party has come in for praise and criticism in this column. The politicians never comment. Hopefully they've got more important things to do!
On your plans for your daughter, I think you're overrating the advantages of term deposits over KiwiSaver.
Your daughter could similarly deposit her own money into a KiwiSaver account - on either a regular or occasional basis, and she could also watch it grow and learn about compounding.
And within KiwiSaver she - or you - has a wide range of types of investment to choose from.
But you're right about access. The big negative about KiwiSaver is the lack of access to the money - perhaps to pay for university or setting up a business.
Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office.
Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
The average person is still paying 6% on their mortgage.