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If you wish to start a business, you will likely need some startup capital. Luckily, there are strategies that business owners can use to raise money. For instance, new businesses can either raise funds through debt or equity. One particular way of raising equity is through equity crowdfunding. This article will explain equity crowdfunding and how you can conduct it in New Zealand.

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Raising Funds through Debt or Equity

Raising debt means that you have to pay interest on anything you borrow. You also have to pay back the principal amount at a future date. Early-stage companies may find it difficult to borrow money from traditional lending institutions. Therefore, they may seek to raise money through equity. This involves investors buying into the business and taking a shareholding. 

One disadvantage to this method is the dilution of the original shareholding of the founders

What is Equity Crowdfunding?

Equity crowdfunding is a type of equity raising in which many people invest in a business in exchange for shares. In New Zealand, the Financial Markets Conduct Act 2013 covers equity crowdfunding and outlines it as an official financial market service.

In New Zealand, you can conduct equity crowdfunding through a crowdfunding service licence holder. Any equity crowdfunding you do not conduct through a licence holder is bound to more substantial disclosure obligations. 

What Crowdfunding is Covered by a Licence?

A crowdfunding service will not cover certain types of crowdfunding, including rewards-based crowdfunding. Rewards-based crowdfunding is where businesses do not issue shares to those who provide money but instead offer other rewards such as tickets or the opportunity to win something. The Financial Markets Conduct Act 2013 does not cover crowdfunding for charitable services.

The Crowdfunding Process

1. Prepare your Business

When ready to raise capital, you must prepare your business to be the most attractive to investors. This means you should structure your business and present your financial statements so they are clear and coherent and abide by all regulations. Additionally, you should be able to pitch your business to investors. 

You should also make sure that you update the share register to include all your shareholding details. Moreover, this includes the names of all the existing shareholders. Further, you should ensure that there are no restrictions on issuing shares.

2. Find an Equity-Based Crowdfunding Service Licence Holder

The next step you should take is to find a licence holder that can be the intermediary between the business and the investors. In New Zealand, you will need to conduct equity-based crowdfunding via a licenced intermediary due to its regulation. 

3. Prepare an Investor Agreement

Each investor you bring on will have to be privy to an investor agreement. An investor agreement will set out all the rights and obligations of both parties and outline all the necessary information. It is a legally binding document, so the courts can enforce it. Additionally, if either party breaches the agreement, the other party may be liable to pay damages for any loss. 

4. Company Valuation 

To conduct an equity crowdfunding campaign, you must determine your business’s value (a pre-offer value). A pre-offer value gives your investors an idea of what your business may be worth. Further, you can conduct a valuation in many ways. However, it may be best to conduct a comparable company analysis for early-stage companies.

What Class of Shares Should I Offer?

There are different types of shares that you can offer to your investors. However, the most common shares offered in an equity crowdfunding campaign are either ordinary or non-voting shares. As the name suggests, non-voting shares are similar to ordinary shares. However, shareholders do not have any voting rights regarding company decisions. For instance, they cannot vote when the board is appointing directors.

How Much Can I Raise Through an Equity Crowdfunding Campaign?

New Zealand law currently dictates that a business can raise a maximum of $2 million through an equity crowdfunding campaign every 12 months.

Key Takeaways

To grow your startup quickly in New Zealand, you will need money to begin. One way you can achieve this is through conducting an equity crowdfunding campaign. This may be easier than convincing more prominent investors to invest in your company, as crowdfunding allows your business to target a more significant amount of smaller investors. Furthermore, there are several steps that you should take in preparation for an equity crowdfunding campaign. These include valuing your business and making sure that you are drafting the correct investor agreements. 

For legal assistance with equity crowdfunding, our experienced corporate lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

Do I have to use a crowdfunding service licence holder?

Yes, you must conduct equity crowdfunding through a licensed intermediary service. Otherwise, companies will not be able to take advantage of the lighter disclosure obligations available for crowdsourced offers.

Is there a cap on how much each investor can invest in a crowdfunding campaign?

No, there is no cap on how much each investor can invest.


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