Know your rights
With equity crowdfunding, the most a company can raise is $2 million in a 12-month period.
The lenders must be licensed by the Financial Markets Authority (FMA).
Check the FMA list of licensed crowdfunding providers(external link) before you invest. They must also comply with certain rules, such as:
- helping you get information before you buy shares in companies listed on their website
- displaying a warning statement telling potential investors about the risks involved
- having systems in place to run some basic checks on the companies who want to raise money
- belonging to an independent dispute resolution scheme.
It is important to note that crowdfunding success does not mean the underlying business will succeed. Many successful crowdfunding campaigns still fail due to the usual business challenges such as poor planning, execution and cash flow.
Most crowdfunding platforms have fees. These differ depending on their terms and conditions. Usually they are a percentage of the total amount raised (success fee) plus transaction fees. These can all add up to 10% of the total amount raised.
With equity crowdfunding platforms, a business will have to pay application fees whether or not they are successful in raising funds.
What the lending service provider must tell you
As an investor, you must receive:
- the disclosure statement setting out how the service works, the fees you'll pay, and the checks the service has and hasn't done on the borrower(s) you're lending to
- the client agreement. This is your contract with the service provider, with the terms of your agreement.
Companies going the equity crowdfunding route don’t have to provide detailed investment or financial statements as they would if it was a regular public share offer. They don’t have to provide ongoing financial reporting either. It is up to you to do your own investigations into the companies, using what is presented on the platform and any other information you uncover.
You can check whether a provider has been licensed on the FMA’s list of licensed peer-to-peer lending services(external link).
Licensed peer-to-peer lending services that have been checked by the FMA must:
- present information clearly to you and other potential investors
- have systems in place to assess whether the individuals, companies, community groups and charities who want to borrow money are at risk of non-payment (eg credit checks)
- belong to an independent dispute resolution scheme.
The benefits for investors are higher interest rates than bank deposits, but the risks are also higher since you will lose all your money if the borrower defaults. Borrowers range from small businesses to people wanting to do home extensions.
Also, as an investor, you can’t get your money out early if you need access to it. You have to stay invested for the term of the loan.
Borrowers are charged platform fees, which can be a percentage of the loan or a flat fee. Also, If borrowers are late with repayments on the loan, they will be charged late payment fees and dishonour fees. The Commerce Commission is looking into whether these fees fall under the Credit Contracts and Consumer Finance Act and therefore must be reasonable.
As a borrower, you will pay a high rate of interest on your loan if you are a high credit risk.