Posted on behalf of author and local New Zealand Fintech guru, Andy McLean.
My take on the benefits for small businesses and their fans wanting to back them with cash.
While I have been back in my homeland of New Zealand, there had been a wave of publicity about the country’s first equity crowd funding platforms being granted licences and opening for business. I was asked by one of the exciting new entrants on why this news matters, so here goes.
The financial crisis showed regulation does not always favour the consumer. Having worked in a city bank since 2005, often in regulatory compliance roles, I have had time to form a view on whether regulations have the effect intended by regulatory bodies. In the case of the deposit protection scheme, it has worked — depositors have had a clear benefit in the form of being able to deposit more funds in a bank without fear of losing them. However, my view is that banks and other financial services firms are often forced to treat consumers with kid gloves, due to the fear of fines from the regulator. It is less about the intent, which is good, and more about the costs of implementation and the mindset adopted by compliance teams. When one considers the breadth of products covered by the regulation, an unintended (significant) consequence is a lack of choice for the consumer. This has been highlighted over the last five years while the Bank of England base rate of interest has remained at 0.5% since March 2009, where the safe place (a bank) has offered close to negative returned when inflation is considered. The alternatives for investors have been stark. It is ironic to think that the European investment business rules (MiFID) came in on 1 November 2007 to protect consumers by extending the scope of ‘retail client’ to cover a wider group of individuals and small businesses. This change became a disincentive for financial services firms to offer equity products to their customers due to the cost of compliance of re-classifying a client base and developing new client sign-up processes (amongst other things).
As mentioned above, the fear of fines was also a factor. And this was in listed, liquid markets! The downside for cash-rich individuals was clear — they would have to look offshore for investment opportunities as there would be situations where his or her banker would not be able to deem as ‘suitable’ (a regulatory term) for the client. This is because to be considered as a ‘professional client’ where suitability is easier to prove, even a seasoned investor needed to provide evidence on matters such as trading history and types of previous investment.
There was no ability to self-certify and if this was the case where there was the ability for an investor to sell shares on the secondary market, imagine how it has been for the investor wanting to support his or her country and economy by investing in small, unlisted businesses? Here I mean those where the banks have been hoarding consumer deposits and have not been lending those funds to small businesses, despite the desperate need for funding. I have not been one of those individuals with extra cash during the these austere times but, almost as fate would have it, at the exact time I am looking to invest some money into an exciting kiwi business (of which there are loads coming out of places like Lightning Lab), it is now possible to do so in a regulation + consumer friendly way.
This is thanks for New Zealand establishing crowd funding rules which came into effect at the same time as in the UK, earlier this year. Recently the Financial Markets Authority has issued licences to Pledgeme and Snowball Effect to enable them to raise funds from the crowd (the Kiwi public) on behalf of Kiwi businesses. Crowdcube from the UK is not far behind and the likeable lads from Equitise in Sydney are also setting up in New Zealand.
So, as a Kiwi that has lived abroad for the last nine years, it is incredibly pleasing to see my homeland so well positioned to raise funds to support the next wave of local business, including my passion, Fintech. Best of all, this is no arbitrary limit per investor under the maximum for a single investor of $2 million. In my view, this is a good thing, so those that have the cash that they are willing to risk can back businesses they are excited and passionate about.