Capital Markets: New capital platforms getting on track in NZ

The innovative, creative and entrepreneurial among us are set to receive a new tool in their capital-raising arsenal, with the first domestic crowd-funding platforms now waiting official regulatory approval.

Gathering capital from a collection of public backers, crowd-funding utilises the public at large, soliciting and leveraging contributions of all sizes from a variety of people.

The crowd-funding phenomenon is a new addition to the small business owner's toolbox in New Zealand - with businesses eligible to raise up to $2 million domestically from the crowd every 12 months. The framework was introduced in the Financial Markets Conduct Act 2013, laying out what is and isn't acceptable while ensuring all providers are approved and registered.

More than US$5 billion is thought to have been raised globally from the crowd during 2013, growing from a standing start of only US$89 million in 2012. It's seen the establishment of a new form of capital market with major providers emerging as substantial companies in themselves.

Crowd-funding as a source of capital will help bridge another gap in New Zealand market, aiding entrepreneurs' transition ideas through to businesses. Though the NZX New Market initiative will facilitate taking small companies through to large-cap businesses, crowd-funding can contribute much earlier as domestic capital markets offer more comprehensive options for businesses at each stage of growth.

There are three main types of return investees can offer to the crowd in exchange for their capital:

• Rewards-based crowd-funding raises capital for the broadest range of projects, recompensing investors with rewards or products for their contributions.

• Debt-based crowd-funding (peer-to-peer lending) raises capital in exchange for loan interest, with lenders competing in a reverse auction style bidding process.

• Equity crowd-funding raises funds for business, with investors purchasing an equity stake in the business and sharing in their future successes.

Though New Zealand is a little late to the party in establishing domestic platforms for crowd-funding of all persuasions, it hasn't stopped innovative Kiwis generating the capital they need.

Taika Waititi, the film-maker behind the instant Kiwi classic, Boy, raised more than $100,000 on KickStarter to help fund American distribution of his film in 2011. Former All White Tim Brown took just one day to reach the $30,000 he was looking for to help develop his sockless wool running shoes, raising $120,000 over five days in exchange for orders which will be fulfilled when the product is finished.

Undoubtedly the most bizarre crowd-funding venture originating here came earlier this year, when a comedian raised $164 after initially seeking $39 support to purchase a KFC family feast and return bus fares.

The most prominent crowd-funded project to date has been Oculus Rift, a venture developing a virtual reality headset for use with video games. The Oculus team took to Kickstarter to raise the requisite funds for the project to continue to grow, receiving more than US$2 million without relinquishing any equity in their company - the 9500 contributors were compensated through a rewards-based scheme which returned early versions of the product to those who contributed money.

Facebook purchased Oculus in March for US$2 billion in what CEO Mark Zuckerberg described as a "long term bet on the future of computing". Had Oculus Rift's early backers done so through an equity crowd-funding platform like Crowdfunder instead of Kickstarter, they would have made 200 times what they invested - receiving US$50,000 for their US$250 investment, instead of a prototype headset.

The Best of the Bunch
INTERNATIONALLY

• Kickstarter - The gold standard for rewards-based crowd funding, Kickstarter has received more than US$1 billion since it was launched in 2009. Entrepreneurs looking for funding offer experiences, advertising, products and more in exchange for an equity-free investment. Officially open to New Zealand and Australian projects since November 2013, Kickstarter has so far channelled more than NZ$2 million through to Kiwi-based businesses. Successful New Zealand projects range from wearable cameras and 3D virtual tabletops through to comic books and documentaries.

Commission on successful projects: 8 per cent (5 per cent to Kickstarter, 3 per cent credit card)

• Lending Club - Despite not being available outside the United States, Lending Club has issued in excess of US$4 billion in loans since its inception in 2006. Applicants can receive between $1000-$35,000 for business or personal purposes, with investors receiving interest income based on the creditworthiness of the individual applicant. Rates vary between 6.03 per cent right through to 24.89 per cent with investors thus far earning US$379 million.

Commission: Investors, 1 per cent of all income; borrowers, 1-5 per cent of the loan amount.

• Crowdfunder - The crowdfunding platform exclusively for business, Crowdfunder looks to connect existing small businesses and startups with investors seeking an equity stake in return for capital. The business lobbied hard for legislative change in the US which enabled them to operate an equity-based system. Aimed at investors with deeper pockets than other platforms, potential donors are screened before being able to actively participate and deals come with a recommended minimum investment of US$10,000. Open to businesses worldwide, a monthly registration is charged depending on the amount of capital being raised.

DOMESTICALLY

• Pledge Me - New Zealand's largest domestic crowdfunding platform, Pledge Me has seen more than 500 successful local projects raise more than NZ$2.5 million since it went live in 2012. Succsssful projects have tended to be of the creative variety, with books, movies and documentaries funded. Individuals and sports teams have also been successful in attracting funding for international events. The service is currently raising more than $50,000 per week for domestic projects.

Commission on successful projects: 8 per cent

• Snowball Effect - Now open for investor registration, Snowball Effect is in the final stages of securing its licence from the Financial Markets Authority so capital can start changing hands. Businesses seeking capital are assessed on their suitability for an equity offer-raising, then helped with creating and listing their offering for investment.

Commission on successful projects: Up to 6 per cent