‘Equity crowdfunding’—small Internet-based public securities offerings exempt from the usual regulations for such transactions—is an exciting new source for entrepreneurial finance, and New Zealand has emerged as a worldwide leader in the field, as I explain in a recent article published in the New Zealand Law Review. The concept originated in the United States as an outgrowth of ‘reward crowdfunding’ (e.g., Kickstarter) and was authorized by federal law in 2012 but, due to a lengthy regulatory process, the American market only commenced in 2016. In the interim, New Zealand enacted its own equity crowdfunding law (modelled on the US version) and had its market up and running by 2014, among the first in the world, making that country the perfect place for an academic study of this fast developing area.
I accordingly spent the first half of 2017 in New Zealand, conducting research and interviewing entrepreneurs, platform operators, investors, lawyers, academics, government officials and other participants in the crowdfunding market. My article uses this original research, as well as the results of the first year of crowdfunding in the United States (which concluded in May 2017), to compare the two systems. (Other aspects of my research are reported in other recent or forthcoming publications, including The Gatekeepers of Crowdfunding.)
My findings, in brief, are that New Zealand’s equity crowdfunding market is orders of magnitude more successful than its counterpart in the United States, at least from a financial perspective: scaled for the size of its economy, and focusing on the first year in each jurisdiction, New Zealand had thirteen times as many crowdfunding campaigns which collectively raised about thirty times as much capital, and the success rate for New Zealand crowdfunding campaigns was about 80%, compared with 50% in the United States.
What accounts for the much stronger relative financial performance of the New Zealand equity crowdfunding market? Based on my research, it appears that certain key differences between the crowdfunding laws enacted in New Zealand and the United States may account for the differential experience in each jurisdiction.
For one thing, the cost of conducting a crowdfunding offering in New Zealand is relatively lower than the United States, because New Zealand completely exempted crowdfunding companies from the usual disclosure and registration obligations, placing the primary regulatory onus on the Internet platforms that act as online stock exchanges. The American legislation, by contrast, retained traditional concepts of mandatory disclosure and standard forms.
Other distinctive features of New Zealand’s crowdfunding law also enhance the functioning of their market. Notably, the United States imposes an annual cap on each investor, allowing them to invest only about $3,000 in all crowdfunding companies each year, while New Zealand has no such investor cap. This is truly exceptional; practically all of the other countries and states that have passed or are considering crowdfunding laws have included an investor cap. But New Zealand’s liberal law permits ‘lead’ investors to invest large amounts, as much as $500,000, thereby lending credibility to the company and encouraging the ‘crowd’ to rely on the judgment and expertise of the lead investor. This sort of ‘syndication’ would not be possible in the United States (or elsewhere), however, because large investments would violate the investor cap.
Finally, New Zealand’s law envisions that the Internet platforms would act as gatekeepers and only allow legitimate and promising companies to access the crowd, on the theory that they have a self-interest in establishing and maintaining a reputation as a reliable place for people to invest. In fact, the platforms have acted as effective (and strict) gatekeepers, as shown by the fact that almost all of New Zealand’s crowdfunded companies remain in business, and no market participants have been publicly accused of fraud.
Given the novelty of equity crowdfunding, these findings and analyses should be taken with a grain of salt. Even so, New Zealand’s early outperformance in the field is so striking as to merit careful attention as well as further study.
Andrew A. Schwartz is a Professor of Law at the University of Colorado Law School.