Just add liquid

by Suze Metherell / 15 October, 2015
Equity crowdfunding has appeal – who wouldn’t want a piece of a brewery? But investors are yet to work out exit strategies.
 

CraftBeer
Thirst for shares: Yeastie Boys’ Stu McKinlay says stakes in the brewer are in demand. Photo/Thinkstock


Auckland economist Will Taylor likes beer. It seemed a no-brainer, therefore, for him to invest in equity crowdfunding offers from breweries when the chance arose. Renaissance Brewing, the first Kiwi company to raise money via equity crowdfunding, gave him his opening.

Renaissance solicited investors on the freshly licensed Snowball Effect platform last August. After just a week and a half, the brewery had hit its target of $700,000, gained 300 new shareholders and lots of free publicity for being the first mover.

Now New Zealand has seven equity crowdfunding platforms and 37 offers have either been run or are under way, of which 24 successfully raised a total of $13.3 million. The platforms, licensed by the Financial Markets Authority, help early-stage companies offer their “crowd” some equity in exchange for a capital injection. The capital-seekers get nothing if their minimum target is not reached.

Taylor has invested in 11 offers and views equity crowdfunding as a way of “democratising capital”.

“Previously, a start-up would have to convince a gatekeeper of sorts – angel investors, fund managers, etc – that it had a good idea. If it couldn’t convince that group of people, chances are it wouldn’t get funded.”

He had watched the trend overseas, thought it was a good idea and wanted to put his money where his mouth is when equity crowdfunding reached New Zealand. That the first offer was a brewery was a happy coincidence.  “Every home brewer dreams of one day owning their own brewery, so I have now indirectly achieved that,” he says.

NO SURE THING


Taylor knows the risks and has limited equity crowdfunding investments to about 10% of his wider portfolio, which includes an equity index fund, term deposits, peer-to-peer lending and a house. “Outside equity crowdfunding, I’m a boring economist who doesn’t invest in individual stocks,” he says.

He’s not worried about lack of liquidity or the inability to easily sell his crowdfunding-acquired shares on a secondary market. If the company is madly successful, there will eventually be some kind of exit event, he says; if it’s a dud, he doesn’t expect to get much for the shares anyway.

The companies raising funds take a punt, which has paid off for some and not others. For example, Wellington craft brewer Yeastie Boys reached its target of $500,000 within half an hour. But eco-tourism company Rainforest Experiences, which provides guided walks in the Whirinaki Forest, fell short of the $1.2 million it sought, raising just $2500 from three investors last month.

Companies gain more than money through the process. They also get the intangible benefit of highly engaged shareholders who become “brand ambassadors”, says Renaissance’s development director, Roger Kerrison.

People are often drawn to be an early-stage investor in a product or good idea they couldn’t access before. But the crowd is also taking a risk. Punters make an illiquid investment in a young company that may or may not deliver on its promises. Personal circumstances also change and some investors may find it’s not so easy to get their money out again.

Kerrison has seen three parcels of small holdings in the brewer change hands so far, with share­holders contacting each other and trading through Facebook. Share brokers have also contacted him about keen would-be buyers.

Yeastie Boys’ Stu McKinlay reports similar trading interest. The co-founder of the brewer, which is launching its products in the UK, says he has seen three parcels of its shares change hands. Demand for the stock means anyone needing to sell has a ready buyer, he says. But both Yeastie Boys and Renaissance are focused on brewing rather than share trading.

WAITING IN THE WINGS


Snowball, the largest equity-raising platform, which has raised about $9.3 million from 12 successful offers, says it’s ready with a solution when sufficient demand for a secondary market for the shares builds up. The trading mechanism won’t be the same as a stock exchange in which there are multi-issuers with daily, live trading, says Snowball co-founder Josh ­Daniell. Instead, companies would have a designated trading period, preceded by an update on the business’s performance, with offers made via auction, similar to Trade Me.

The FMA is also looking at trading options for equity crowdfunders. Markets oversight director Garth Stanish says there’s a range of ways secondary markets could be structured. As long as both the original and secondary markets operate fairly and trans­parently, the regulator is “agnostic” about the mechanism, he says.

As Australian legislators nut out equity crowdfunding regulation, ­transtasman platform Equitise is lobbying policymakers to follow the New Zealand lead. Equitise’s secondary market solution would provide and facilitate capital flow between the two countries, says New Zealand manager Will Mahon-Heap. “That will also mean shares will be tradeable between the two, along the lines of a non-territorial stock exchange. That’s the way capital markets will evolve.”

Alternative stock exchange Unlisted also wants to cash in on investors looking to cash out. Its owner, Armillary Private Capital, which co-owns equity crowdfunding platform Crowdcube, is offering discounted fees to crowdfunded companies to list their shares on Unlisted regardless of the platform used to raise cash.

Although some platforms are looking at how to clip the ticket on shareholders wanting to trade, others aren’t sure demand is there yet. Anna Guenther, head of Wellington-based PledgeMe which has overseen 19 offers, 12 of which have raised $3.2 million, says it’s still early days for a secondary market, though she is keen to work with people on a solution in future.

PledgeMe has raised more than $465,000 from investors on its own behalf and Guenther says anyone wanting to sell shares can approach the company directly.

Liftoff managing director Adam Hunt is cautious about “muddying the waters” by allowing prospective investors to rely on a secondary market. Liftoff, a relative crowdfunding newcomer, has decided against establishing a separate entity to run a secondary market for now, because of the difficulty in making it fair and transparent.

Propellar, the latest licensed platform, is yet to launch an offer. Director Paul Hocking is “philoso­phically hesitant” about a secondary market, saying investors should be investing in the journey, rather than looking for a quick exit.

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