Crowd-funding – hot but risky

Crowd-funding is now being used to fund companies as well as films like Boy. Photo: Steven Lewis – Unsplash

Crowd-funding is now being used to fund companies as well as films like Boy. Photo: Steven Lewis – Unsplash

There is a buzz about crowd funding right now and it’s well worth anyone setting up a business, as well as investors wanting something different, taking a look at it.

You may have already tried what is fast becoming old-style crowd funding. This sees friends and family donating money to help arts and charity projects get off the ground. And, in the US, crowd-funders like Kickstarter also showcase young tech entrepreneurs seeking funding to develop new tech gadgets on their websites.

However, Maori film-maker Taita Waititi, who made instant Kiwi classic Boy, has also been quick to take advantage Kickstarter. He used it to raise $100,000 to distribute his film. Women too are keen on Kickstarter – 44 per cent of those investing through the crowd-funder’s website are women, and 35 per cent of the projects are led by women – much higher than the number of women raising money through so-called angel investors.

Taita Waititi raised $100,000 via Kickstarter to distribute 'Boy'

Taita Waititi raised $100,000 via Kickstarter to distribute his instant Kiwi classic ‘Boy’

This older type of crowd-funding is now called donation or reward crowd-funding – the reward bit comes in the form of, say, discounted tickets to a show you helped fund, or a tech gadget from the technology firm you helped get off the ground.

But there is a new form of crowd funding. Called equity crowd-funding, it lets companies sell shares, showcasing them on the website. It is only a few months old in New Zealand, but we have an advantage in that our crowd-funders have to be licensed – by government finance watchdog the FMA (Financial Markets Authority).

So far we have two licensed equity crowd-funders – PledgeMe and Snowball Effect. Wellington-based PledgeMe has been around for three years as a donation crowd-funder so you may have heard of it. Snowball Effect is brand-new, but it has already raised $400,000 for Blenheim craft-brewer Renaissance Brewing.

So, crowd funding is obviously good for companies seeking to raise funds, but what about investors? Crowd-funding is a risky investment, but the amounts people tend to put in as donations are small, so it is probably good to keep share investments small and view them as a punt.

But, on the upside, crowd-funding will allow smaller investors to take a stake in the kind of hot start-up companies that until now have only been available to big investors – the Xeros and TradeMes of this world. But lots of start-ups go belly-up, so be warned.

There is some protection from the FMA. If you’re been duped you can complain to the finance watchdog – the crowd-funder has to take notice because it risks losing its licence.

You should also be able to trade shares soon as the two crowd-funders are both looking at setting up a share market.

Lastly, why is it called equity crowd-funding? Because equity is another word for shares – you take equity in a company. See Busting financial jargon – old and new.

© Johanna Bennett, 2014

Disclaimer

Johanna Bennett is a financial and technology journalist who thinks women need to know more about the big picture when it comes to money. Her blog, Kate & Whio, is intended to help and to educate, but the information contained in it should not be taken as specific financial advice. You are responsible for your own money decisions.

One thought on “Crowd-funding – hot but risky

  1. Pingback: Peer-to-peer lending – a better deal for borrowers and lenders? | Moneypenny NZ

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