New Zealand led the way in business reform with laws allowing equity crowdfunding, which fundamentally changed the way that private companies can raise funds, and gave them a meaningful, cost effective and efficient way of doing so.

The implementation of the Financial Markets Conduct Act 2013 allows companies to raise up to $2 million from the New Zealand public in a 12 month period, in return for shares in their company, provided they do so via a licensed equity crowdfunding provider.

Why is this so different?

Previously, raising capital from the public had been rigorously regulated and accordingly, expensive, time consuming and often unviable for companies.

Equally, it has been difficult for everyday New Zealanders to access equity investments in exciting and up-and-coming businesses. Historically, these opportunities have been available only to a limited pool of wealthy angel investors.

What it's not

True equity crowdfunding is a brand new concept in New Zealand.

It is not raising funds in return for some form of gift or other reward (as has been made popular by companies such as PledgeMe and Kickstarter). It is not companies raising money by way of a loan.

It is about raising money in return for shares from the general New Zealand public.

Risk and reward

Companies seeking to raise capital under the new law are required to do so via a licensed equity crowdfunding provider. The eligibility requirements for obtaining a licence are detailed, the people involved with the provider are subject to rigorous scrutiny, and there are ongoing and extensive compliance obligations for all providers. To enable the costs of raising funds for a company to remain comparatively low, the law shifts a significant level of regulatory scrutiny to the licensed provider.

Investors are not limited in the individual amount which they can invest in a participating company, provided the $2 million and 12 month thresholds are not exceeded. Some have argued that individual investor caps should have been introduced to protect investors; however there are compelling reasons why policy makers decided not to cap individual investment amounts. These include the fact that such individual caps could stifle the growth of equity crowdfunding by limiting cornerstone investors investing through the crowdfunding platform (a proven metric for success on global platforms seeking to attract the 'crowd'). In addition, the ability for investors to circumvent such caps would likely render it a practically meaningless protection. Supporters of the current law also correctly note the relative lack of any regulation or oversight over the ability to gamble, and the inequality of the law then doing so for equity crowdfunding.

Investments are not risk free by their very nature, and the new law does not purport to remove all risk for investors investing via equity crowdfunding providers. Instead, the new law recognises a significant gap in the market for companies looking to raise funds, the fundamental role of the internet in business and communities, and giving the public and businesses more flexibility and control over their investment decisions. It also recognises the fundamental principle that an equity crowdfunding provider's success will be directly aligned with the quality and success of the companies which raise funds through them - this in turn means success for investors.

The Financial Markets Authority is now accepting licence applications for equity crowdfunding providers.

As part of the Government's wider business growth agenda, we welcome this new law and the development to New Zealand's capital markets.