Crowdfunding market headed for shakeout

New Zealand's nascent equity crowdfunding market may be heading for a shakeout as an eighth platform, Property Mogul, seeks regulatory clearance to start operations.

The Financial Markets Authority recently approved a seventh equity crowdfunding platform which is being run by Hong Kong-based Propellar Corp, while the backers of Property Mogul, based solely on property crowdfunding, say they are in the throes of gaining regulatory approval.

There is no limit under the Financial Markets Conduct Act on the number of licences the FMA grants for equity crowdfunding service providers and it's obliged to issue a licence to whoever meets the criteria.

Garth Stanish, director of markets oversight, says funds invested in these platforms are required to be held in trust, and managed in accordance with client funds regulations.

The other most recently-approved platforms - Liftoff and My Angel Investments - have struggled to get funding for their first offers and the NZ Shareholders Association is worried too many players will lead to a shake out.

"It's inevitable some of these companies will fail and inevitable people that have invested there haven't realised these are higher risk types of investments," association chairman John Hawkins says.

He's concerned that if the market gets too competitive it will mean some platforms don't conduct sufficient due diligence on the companies wanting to raise funds in order to get the number of offers they need to stay viable.

Josh Daniell, co-founder of Snowball Effect, an early entrant when equity crowdfunding launched last year, says there's a risk the whole industry will get tainted by newcomers that fail to provide companies seeking funds and investors with good experiences.

He says there is a growing market as well as differing offers from equity crowdfunders, but that's in danger of being drowned out by there being too many platforms.

Anna Gunther, chief executive of another early entrant PledgeMe, says the problem isn't the number of platforms, but the quality of what is offered to investors and the service provided to companies seeking funds.

"Some of the new platforms don't seem to understand how crowdfunding works – that you support the companies to activate their own networks and help them with that as opposed to building a crowd in the cloud."

Propellar New Zealand says there is no rush to bring its first offer to market and that's unlikely to happen until the end of this year or early next year.

"You can't rush companies to market, that would be a mistake. The market has already shown it is being discerning and not accepting everything being put in front of it," says Paul Hocking, one of its two directors and a former executive director of Infinz.

Mr Hocking chaired Auckland-based finance company Mutual Finance at the time it triggered the Government's retail deposit guarantee for about 400 investors in 2010 when it went into receivership.

He says there's room for a lot of players given New Zealand is a nation of small businesses with a need for capital to grow and there have not been a huge number of equity crowdfunding offers to date.

But fellow executive director Hong Kong-based Craig Skein says a market shakeout is likely unless platforms start to differentiate themselves.

"I don't see a lot there now that are different and if all operators are doing exactly the same things there is no room for that," he says.

He declined to reveal how Propellar plans to be different. He says it is seeking quality offers rather than quantity, which is what his competitors also say they do.

Mr Skien is the founder of Propellar Corp, which has aspirations to establish crowd-funding platforms throughout Asia-Pacific.

He and two joint venture partners are one of six out of 27 applicants approved to set up equity crowdfunding in Malaysia later this year following recent law changes.

Mr Skien said he's seeking equity partners for the New Zealand platform and is keen to set one up in his home country, Australia, once legal changes allow it.

The backers of Property Mogul, which will be New Zealand's first property crowdfunding site, say on its Facebook page it has reached 1000 likes with would-be investors invited to register their interest, despite the company still awaiting FMA approval.

Property Mogul's online marketing material says it offers investors a portion of residential real estate when they can't afford to buy their own homes, and includes a share of rental income and any capital gains.

It says in response to a Facebook comment that it is hardly surprising there is divided opinion over the idea which is disruptive and will change the way people buy investment property. It says property crowdfunding is popular in the UK and the US.

Snowball Effect plans to launch property offers, including farms, before Christmas rather than just sticking to early stage high growth companies.

The property offers will be nationwide rather than just in the hot Auckland residential market, Mr Daniell says, and will provide investors with yield income.

(BusinessDesk)

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