With more and more equity crowdfunding listings going live every month, we have put together this guide to outline the unique risks and shortfalls that come with investing in young companies. PledgeMe, Snowball Effect and Equitise are three examples of crowdfunding platforms listing investment opportunities within New Zealand, and our guidance below applies to any company listed on any of these platforms.

As this is the first edition of this guide, user experience and feedback is welcome. Please email our team if you have anything you would like to contribute. 

If you are wanting to invest money with peer-to-peer lenders, this guide is not for you - read our Harmoney, Squirrel and general P2P guides for more details. 
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Equity crowdfunding occurs when an investor buys shares in a private company that lists on a crowdfunding website. The process is facilitated by a 'campaign' where the company promotes its positive future with financial statements and strategy documents known as an 'investor memorandum'. Equity crowdfunding opens up investment opportunities in private and often new businesses looking for money to grow and expand. Equity crowdfunding aims to offer shares to anyone willing to risk the money the company is asking for. Investors often put in between as little as $100 and as much as $10,000 (or more) in the hope that the investment will be successful. 

Summary of Equity Crowdfunding

• Equity crowdfunding has been in New Zealand since 2014 and is here to stay for the foreseeable future.
• Pick the right investment and a small contribution to an early stage business could make you millions. But, to date, there has been little upside in the offers everyday Kiwis have invested in. In fact, quite a few have had a successful campaign, then spent the money and, for whatever reason, gone out of business.
• Anyone thinking that one or two investments are going to turn into the next TradeMe, Xero, Vend or Jucy is going to be disappointed. 
• In general, startups have a hard grind - the odds are that they will fail in less than five years, they need to win new customers, and now, with the need to raise money publicly, there is a lot of pressure to make it all work. 
• If you do have a burning desire to invest in a campaign to make money, do so with a heightened sense of awareness. It’s a fact that most startups, around 90%, will go out of business.
• Even experienced venture capitalists, the professionals when it comes to picking companies to succeed, lose their money on as many as 75% of their investments.
• Be aware that once you invest, selling your shares is probably going to be difficult.
• Usually when an investor is approached to buy shares in a startup or young private company, there is a presentation, subsequent in-person meetings and lots of questions raised. With equity crowdfunding, everything is communicated online. This means questions are asked and responded to in writing; getting a face-to-face conversation with the company directors isn’t an option.
• Individuals are left with the decision on whether or not to invest solely from the information they are given. There is little or no opportunity to stress-test the assumptions, dig deep into the sales plan, analyse the marketing strategy or even have a chat about the director dynamics. We don’t believe that’s good enough to make an informed choice.
• Our position is that equity crowdfunding is best avoided if the investor's objective is to make a return on their investment.
• Crowdfunding equity offers are extremely high risk and investors should be comfortable with losing all of their money. Investors need to be realistic and get some perspective on the upside of these investments. 
• Only invest money in equity crowdfunding that you are 100% happy to lose.

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Our Guide Covers:

• ​FAQs
• Understanding Equity Crowdfunding
• Tips to Decrease the Chance of Losing Your Money
• Fact vs Reality - What We Think Every Investor Needs to Know
• Equity Crowdfunding - Final Thoughts and a Warning for Every Investor

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It depends. The market for each company you invest in is likely to be small; read our section on selling your shares here.

It depends on the success of the company; read our section on selling your shares here which explains when investors will receive their investment back.

Equity crowdfunding works in a similar way to the popular television show Dragons' Den. Startup businesses with an existing product pitch to a set of investors, known as the dragons, who say yes or no based on what they see and hear. Dragons challenge the sales numbers, scrutinise the product and ask tough questions. No dragon invests in a business because it sounds like good fun, and you shouldn't either when looking at crowdfunding opportunities. 

Knowing Enough is the Minimum Required

• We challenge anyone thinking about buying shares via a crowdfunding campaign to get to know the business inside out before investing even $100.
• The supplied investor memorandum (a document outlining the prospects of the business) is probably not going to be enough to make an informed decision. Every investor needs competitor analysis, market size and sales growth information and cash spend data.

  
Equity Crowdfunding is Relatively Untested
Equity crowdfunding has been in New Zealand since 2014 and is here to stay for the foreseeable future. Pick the right investment and a small contribution to an early stage business could make you millions. But, to date, there has been little upside in the offers everyday Kiwis have invested in. In fact, quite a few have had a successful campaign, then spent the money and, for whatever reason, gone out of business. Anyone thinking that one or two investments are going to turn into the next TradeMe, Xero, Vend or Jucy is going to be disappointed.   
 
We believe it could take anywhere from five to ten years to get a clear picture of how well equity crowdfunding investments perform.

Marketing is Key to Campaign Success
Gimmicks, possibly misleading graphs and incentives are some of the tools campaigns use to get funding. Some campaigns have offered investors putting down $2,000 (or more) the incentive of a free case of beer every year, or something similar. We would say that anyone investing $2,000 in a bank term deposit would earn enough money every year to buy two or three cases of craft beer, all while protecting the original investment. Investors need to be pragmatic when it comes to the potential returns and not be fooled by marketing spin. 

Equity Crowdfunding is a Big Step to a Company
Startups have a hard grind - the odds are that they will fail in less than five years, they need to win new customers, and now, with the need to raise money publicly, there is a lot of pressure to make it all work. Also, New Zealand is a small place,  so it can be embarrassing for a founder if they have gone public with a campaign and later gone bust. Also, investors feel a level of ownership that may be greater than their share percentage, but all of this needs to be managed by the company. A company offering its shares to the public with a campaign has to get every moving part to their business working in unison to protect investor money - this is not an easy task. If the company asking for your money is managed by people who have never run a business before or had a successful exit (i.e. sold the business), then there is a greater risk that your money could be used on their 'learning' journey.

Ask Yourself Something - Why are YOU being Asked to Invest?
Campaigns come and go on a regular basis - but it's a possibility that other means of raising money have failed. Is it fate that you found the company on PledgeMe, Equitise.com or Snowball Effect? Or is it something else? A standard route for funding a young company is with small investors known to the founders, followed by larger investments from established venture capitalists and/or bank loans. But if the company asking for your money hasn't successfully tapped these markets, the obvious reason could be that the product they are offering isn’t unique, the business doesn’t have the scale and/or the valuation they think the business is worth is too much. Venture capitalists bring a lot of experience and business savvy to every company they invest in; they have the best interests of the company at heart with everything they do as by doing so their investment is protected. Crowdfunding money doesn't come with such benefits for investors. 

If You Still Want to Invest, Read On. Carefully 
If you do have a burning desire to invest in a campaign to make money, do so with a heightened sense of awareness. It’s a fact that most startups, around 90%, will go out of business. Even experienced venture capitalists, the professionals when it comes to picking companies to succeed, lose their money on as many as 75% of their investments. Our tips below decrease the chance of losing your money should you take a risk and invest.
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• ​Our view is that crowdfunding equity offers are extremely high risk and investors should be comfortable with losing all of their money. Investors need to be realistic and get some perspective on the upside of these investments. It’s unlikely that the next Xero or A2 Milk is going to appear on a crowdfunding website. The companies listing equity offers are often small cap and most, we believe, have the best intentions. Investors wouldn’t know if conventional financing had been refused and potentially forcing directors to crowdfund to keep the business afloat.  

• Zombie companies, i.e. entities which trade at a loss, often have little long-term prospects but need cash to keep going, and in such instances can easily whip up a flashy investor memorandum and talk up their game. Investors, on the other hand, have no clue about what the reality is or are too inexperienced to ask the right questions. The FMA has been involved previously in formally warning the director behind a PledgeMe campaign on the basis of investor misrepresentations after questions were raised by PledgeMe relating to the solvency of the business, which went bust four weeks later.

• Investors should tread with caution. Renaissance Brewing was the first company to carry out an equity crowdfunding campaign in New Zealand, raising $700,000 in mid-2014 with a nine-year trading history. Three years later it was in placed in voluntary administration with all investor money lost. Before this happened, there were regular media reports of revenue growth, operating profits and improving margins. But despite the hype, there are numerous inherent risks with running a business and bad news doesn’t get reported. Ultimately, equity shareholders are unlikely to hear anything significant from the company they have invested in until it is sold, needs more money, or goes bankrupt.

 

• In the case of Snowball Effect’s second offer, mum and dad investors coughed up $488,000 to help finance the production of a film. The investors were pitched with lofty international sales projections, but the reality of a wide release turned sour after the film failed to be sold in most territories, with the promoters eventually conceding the film didn’t meet buyer expectations of fitting with the ‘family’ or ‘drama’ genres. Investors saw 99% of their money wiped out.

 

• PledgeMe’s Riot Foods is a recent example of a funding campaign that should have raised red flags from the outset, but it’s difficult for amateur investors to pick up key essentials. In that situation, the promoters presented a ‘forecasted’ balance sheet, post-funding. This made it impossible for anyone to know how much cash the company had in the bank and whether the business needed investor cash to continue as a going concern. There was a single line mentioning that a further one million dollars would be needed and that the money being raised wouldn’t last a year.

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• It's easy to run an equity raising campaign, harder to meet the target and even harder to make the business a success in the long term. 

 

• Venture Capital, in almost all situations, comes with close eyes on the business. Similar to Dragons' Den, there is an expectation that the dragon, i.e. venture capitalist, will sit on the company's board, provide guidance and oversight and offer their business expertise and contacts. With crowdfunding, investors have no checks or balances over how the company behaves. Crowdfunding investors don't sit on the board, meet with the directors or even have a right to receive ongoing financial statements. The investors instead take most of the financial risk but don't get any immediate benefits and have to trust and hope that the company's management knows what it's doing.

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• We take a view that the FMA regulation that companies can crowdfund up to two million dollars in a twelve-month period is perhaps the best protection currently in place in an otherwise loosely regulated market. Increasing this limit should only be looked at when the crowdfunding equity raising model proves to be successful to investors. At the moment, the total sum of publicly-sourced investor money that can be lost per investment is high enough.

 

• Our position is that equity crowdfunding is best avoided if the investor's objective is to make a return on their investment. Alternatively, investors could make an outright initial decision not to invest, and then look for convincing reasons that the opportunity is worthy of an investment.