Equity Crowdfunding NZ
Equity crowdfunding lets ordinary investors buy shares in early stage companies through a licensed online platform. The pitch is access: the sort of opportunity that once went only to wealthy investors, open to anyone with a few hundred dollars.
The access is real. What is less often stated is what was removed to make it possible, because the regime works by switching off the disclosure obligations that apply to ordinary public offers.
The three things to remember
An issuer can raise up to $2 million in twelve months this way. There is no product disclosure statement. And there is usually no way to sell, at any price.
What the exemption does
A company making a public offer of shares in New Zealand normally has to produce a product disclosure statement, a prescribed document with prescribed content, and register it. That is expensive, which is why small companies historically could not raise money from the public at all.
The crowdfunding regime removes that requirement for offers made through a licensed intermediary, up to $2 million in any twelve month period. The platform is licensed and has obligations. The company largely does not, in disclosure terms.
| Ordinary public offer | Equity crowdfunding offer |
|---|---|
| Registered product disclosure statement required | Not required |
| Prescribed content and format | Whatever the platform requires |
| Financial statements to a set standard | Often limited and sometimes unaudited |
| Liability attaches to the disclosure document | Far narrower |
| Usually a liquid market afterwards | Usually no market at all |
What you are reading on a crowdfunding page was written to persuade you, and it is not a document with the legal weight of a product disclosure statement behind it. That does not make it dishonest. It means the diligence a disclosure regime would ordinarily do on your behalf has not been done by anyone, and if you do not do it, it is simply not done.
The illiquidity, which is the underestimated part
Listed shares can be sold on any trading day at whatever the market offers. Crowdfunded shares in a private company generally cannot be sold at all. There is no exchange, usually no secondary market of any kind, and often constitutional restrictions on transfer requiring board approval.
So the realistic assumption is that money committed is inaccessible until one of three things happens: the company is sold, it lists, or it fails. Those are the exits, and the first two are rare and the third is common.
Dilution
A company that raises money once will usually raise again, and each subsequent round issues new shares. Your percentage falls unless you can put in more, and small investors generally cannot and often have no pre-emptive right to.
Later rounds may also carry terms your shares do not have: liquidation preferences that pay those investors first on a sale, or anti-dilution protections. It is entirely possible to own shares in a company that sells for a substantial sum and to receive very little, because the money goes to preferred holders ahead of you.
Reading an offer properly
A good business bought at a bad price is a bad investment. Early stage valuations are the outcome of a negotiation rather than a calculation, and a crowd of small investors has no negotiating position at all, so the price is simply presented. Comparing the implied valuation against actual revenue is a sobering exercise and takes about five minutes.
What the platform's licence covers
A licensed intermediary must meet its own obligations, including some checks on issuers and fair dealing requirements. That is worth something, and it is worth understanding precisely: the licence covers the platform's conduct. It is not an endorsement of any company on it, not a view on the valuation, and not a suggestion that the business will succeed.
A sensible way to participate
That final point deserves elaborating. Crowdfunding campaigns are frequently for consumer businesses with appealing products, and enthusiasm for a product is not analysis of a business. Plenty of companies make something excellent and never make money, and as a shareholder you are buying the second thing rather than the first.
What this guide does not cover
Individual offers, platforms and their terms vary widely and nothing here describes any particular one. Wholesale investor exemptions, convertible instruments, SAFE arrangements and the tax treatment of losses on shares each require specific advice. This is general information rather than financial advice, and equity crowdfunding is high risk capital that should only be committed by people who could lose it entirely without it changing their circumstances.
Related guides and tools
- If your investment platform fails guide, for how the shares are held once you have bought.
- Investment scams guide, for offers that are not what they present as.
- Business structure basics guide, for what owning shares in a private company means.
- Buying a franchise guide, for the other route into a small business stake.
Test Your Knowledge
Ten questions on crowdfunded shares, disclosure and liquidity.
Sources: the Financial Markets Conduct Act 2013 and its regulations, under which licensed crowdfunding intermediaries may facilitate offers of up to $2 million in any twelve month period without a product disclosure statement. Platform terms and issuer disclosure vary widely. This is general information rather than financial advice, and equity crowdfunding is high risk capital that should only be committed by people who can lose it entirely.