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.
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
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.