Equity crowdfunding: The new black

  • Opinion

    13 September 2018

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Floral prints in spring may not exactly be ground breaking, but the impact of equity crowdfunding in the market certainly has been.

Equity crowdfunding has been around for a few years now, and has matured into an established alternative and viable means of capital raising for all manner of businesses. It has also provided a new investment channel for retail investors.

What is equity crowdfunding and why do it?

Equity crowdfunding (ECF) provides companies with an alternative way to access moderate amounts of capital (up to $2m per annum), without the cost and burden that would otherwise be required with a public offer.

The process involves a company making an offer through a licensed crowdfunding platform inviting investors (a.k.a. the crowd) to subscribe for shares in the company. If the company manages to reach the minimum funding target, the offer is successful, and investors are issued shares. This allows investors (not just professional investors) to enjoy the fruits of the company’s success.

ECF can be contrasted with project-based or reward-based crowdfunding, where the business offers supporters products or other rewards (but not shares) in return for their financial support. This type of fundraising is quite common, but is generally only useful for funding smaller projects.

What is involved and what are the risks?

ECF has facilitated the growth of many companies, and has opened up investment opportunities beyond the ‘professional investor’ community. However, it comes with risks that both investors and companies need to be mindful of.

Under an ECF offer, the process is less rigorous and investors don’t receive the same information and protections they would under a fully regulated public offer. This means ECF investing is a riskier investment proposition.

Although there are fewer disclosure requirements with an ECF offer, companies still need to put in a lot of hard work to ensure their campaign is successful. The main legal risk for the company is ensuring the offer documents and campaign materials are accurate and balanced and that all claims are supported by evidence. The biggest criticism of ECF to date has been the tendency of companies to be overly optimistic about the upside, without adequately balancing that with the potential downside.

ECF may also raise some not-so-trendy legal and practical issues that may create additional work and cost down the track. For example, a company can become subject to the Takeovers Code if it ends up with 50 or more voting shareholders after the campaign is complete. Similarly, the financial reporting requirements for companies change, depending on how many shareholders there are. These things can lead to unexpected work and costs if not factored into the campaign planning.

Careful thought also needs to be given ahead of time about how the company will communicate and engage with its new investors and shareholders.

In an industry with high barriers to entry, ECF can be an innovative way for fashionistas to test the market, attract customers and create a captive audience of potential investors

Is equity crowdfunding fashion forward?

A common thread among the successful offers is that investors are not just in it for the money – they are customers or clients of the company that are enthusiastic, have brand loyalty and confidence in the company’s strategy and personally align themselves with the company’s values.

Customer acquisition and retention is crucial to success. In an industry with high barriers to entry, engaging in ECF can be an innovative way for budding and new fashionistas to test the market, attract customers and create a captive audience of potential investors.

So far, there has been one successful fashion-related ECF campaign in New Zealand: Designer Wardrobe, an online fashion community of individuals who buy, sell and rent designer items to and from each other. The company raised $1.7m with 155 investments through its campaign on Snowball Effect to fuel the growth of the Designer Wardrobe business, as well as expanding in Australia and opening the platform up to men’s and kids categories.

Several fashion-centred enterprises have made successful rewards-based crowdfunding campaigns. This includes Nisa Clothing Limited, a Wellington-based underwear label that aims to help refugee woman by providing them with meaningful and interesting paid work. The label raised over $20,000, double its initial target, through PledgeMe. In return, the company provided its supporters with pairs of underwear.

Others have successfully raised campaigns to bring their designs to various fashion week events across the globe.

Sustainable Projects successfully raised over $13,000 through a rewards-campaign on PledgeMe to support to bring the Good For You app to New Zealand: a sustainable and ethical fashion rating mobile app to help consumers find brands and companies that do better by their workers, the environment and animals.

What are the trends for the next season?

ECF is very much a fashionable destination for businesses and investors alike. There have already been several successful campaigns, and with new providers starting to list offers, there is an increased level of competition within the market. With the rise of ethically minded consumers seeking sustainable fashion and locally produced products, we expect that the use of ECF in the fashion industry will trend upwards as an innovative way to raise funds.