Capital Markets: Crowdfunding, NXT next on list

Tim Bennett (left): Secondary share trading in crowd-funded firms is possible. Rob Cameron (right): NXT market will assist small companies looking for capital.

Crowdfunding is a new way of raising capital online and the NZ Stock Exchange could join the party.

The rapid rise of equity crowdfunding will complement NZX's business rather than pose a competitive threat, says chief executive Tim Bennett.

And he says the sharemarket operator could even get in on the action by establishing an exchange for the trading of shares in crowd-funded firms.

Equity crowdfunding, which became possible in New Zealand last year through a once-in-a- generation overhaul of securities legislation, allows companies to issue shares to the public through online platforms.

Since August last year, more than $7 million has been raised by three equity crowdfunding providers - Snowball Effect, PledgeMe and Equitise.

Like venture capital, equity crowdfunding would provide early-stage funding for small firms, which would help them grow to the point where a listing on NZX's markets became feasible, Bennett says.

"I'm sure we'll see the more successful crowd-funded companies move into the [yet-to-launch] NXT market or the main board over time."

Invivo Wines, which raised $2 million through a record-breaking Snowball Effect campaign in March, says it is considering a NXT listing. Firms can raise up to $2 million in any 12-month period through crowdfunding, while the minimum NXT capital raising will be $5 million.

Bennett says NZX could potentially set up an exchange for secondary trading in the shares of crowd-funded firms. No such exchange presently exists, making it difficult for investors to exit a crowdfunding investment.

"If they [crowdfunding platforms] would like to run a secondary trading platform, we are more than happy to help them do that," Bennett says.

"I don't think it would be very complex at all."

He says crowdfunding was encouraging young people to make equity investments for the first time, which was a positive development for the wider capital markets.

Meanwhile, NZX is gearing up for the launch of NXT, which is targeting fast-growing firms in the $10 million to $100 million valuation range.

Bennett says the exchange is still waiting for a "couple of companies" to be ready to list, at which time the market will be launched.

"There's no point in us launching something when we don't have any companies to list," he says. "Like every listing process it's driven less by us and more by the companies and their advisers."

The stock exchange has also been waiting for broker First NZ Capital to receive sign-off from the Financial Markets Authority to operate NXT's "market maker".

NXT will have a looser disclosure regime than the main board, aimed at encouraging more small firms to list through keeping a lid on compliance costs.

NZX will fund independent equity reports on NXT issuers, as small-cap New Zealand stocks often struggle to get research coverage from local brokers. NXT will eventually replace the NZAX junior market, whose issuers include BurgerFuel, Snakk Media and Pushpay.

The new market was an outcome of the Capital Markets Taskforce, headed by Wellington investment banker Rob Cameron, of Cameron Partners. Cameron says NXT will assist small firms that often find it difficult to raise $5 million to $20 million through private capital raisings.

"NXT fills that gap," Cameron says. "The NZX has done a very good job in tailoring [NXT] for the New Zealand market."

Though the exchange is counting on continuing buoyant market conditions for NXT's debut, Bennett says increased volatility could drive demand for NZX's stock options, which went live last month, and the NZX 20 index futures contracts it launched last year.

So far, demand for the futures contracts has been tepid. The single stock options - based on Trade Me, Fletcher Building and Spark shares - give the buyer the right, but not the obligation, to buy or sell a fixed number of shares at an agreed price in the future. Traders basically bet on stocks either rising or falling.

"All of these markets take time to develop and in particular for futures and options - for these to be successful we actually need a bit of market volatility and we haven't seen a lot of that," Bennett says.

He says NZX is working with fund managers and brokers around the use of options and index futures.

"The first movers in these markets are always the institutional investors and their requirements [of them] are for hedging of portfolios," says Bennett. "When you in a market environment where there's not a lot of volatility, there's not a lot of demand."

With the Government's asset sale programme completed, Bennett says New Zealand's capital markets are entering a new phase of development.

"We've had some good IPO [initial public offering] activity over the last couple of years and we'll continue to see that," he says. "But the next phase of development will be characterised by different drivers.

"There's a different regulatory environment [the Financial Markets Conduct Act], different types and markets and different types of products."