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Crowdfunding

When you invest via crowdfunding you're buying shares - usually in a start-up or growing business.

Crowdfunding rules are different to other types of share investments so make sure you understand what you're getting into before you choose to invest.

Some points to consider:

Learn more about crowdfunding:

Crowdfunding: investing with the crowd

How does crowdfunding work?

Crowdfunding works by many people (the crowd) putting in small amounts of money to raise funds for a company or project.

Our website covers the financial laws that apply to equity crowdfunding. When you put money into an equity crowdfunding project, you're buying shares. Typically this will be in small or start-up businesses, meaning you become a part owner of the business.

Crowdfunding is also often used to describe donation or rewards based fundraising. In those cases supporters receive rewards (for example tickets to a show or a credit on a film or website) or simply make donations to individuals in need or charities. This type of fundraising is legal, but is not covered by financial market laws.

Crowdfunding on the web

Equity crowdfunding is usually done on websites run by crowdfunding services providers.

Each service will work in a different way, but typically you'll be able to browse the website to see potential companies to invest in.

You'll be able to read information to help you work out which companies you'd like to support then the service will tell you how you can purchase shares. For example the service may hold your money until the fundraising goal has been reached. They'll then pass it on to the company who will issue you with the shares you now own.

The companies seeking money have to abide by certain rules such as being honest about the information they provide and how they will use the money. The most a company can seek to raise from equity crowd funding is $2 million in a 12 month period.

Using a licensed crowdfunding service

If you're buying shares through a crowdfunding service, make sure they have been licensed by the FMA. You can check whether a provider has been licensed on our list of licensed crowdfunding service providers.

Licensed crowdfunding services have been checked by us and have to follow rules around helping investors get information to help with share buying decisions.

They must also have systems in place to run some basic checks on the companies who want to raise money, such as checking company senior managers or directors are not bankrupt, or that they don't have convictions for fraud or dishonesty. They must have a system in place to handle complaints and belong to an independent dispute resolution scheme.

Licensed crowdfunding service providers have ongoing obligations to continue to comply with the standards they met when we licensed them.

What information must you receive?

Crowdfunding rules make it quicker and easier for small companies to raise money. Instead of detailed documents companies usually have to publish when raising money from the public, they only have to provide basic information on the crowdfunding service website.

To help you understand what you are getting in to, a licensed crowdfunding service provider must give you three important pieces of information:

  1. The warning statement about the risks of crowdfunding. You'll be asked to acknowledge you've read this information and to acknowledge that you understand the usual information requirements and legal protections for share offers don't apply.
  2. The disclosure statement. This tells you things like how the service works, and the fees you'll pay. It also tells you the checks the service has and hasn't done on the company you're planning to invest in.
  3. The client agreement. This is your contract with the service provider, outlining the terms of your agreement.

Make sure you read the information you get. Look carefully at the details of the company and about how they will use your money. If the service offers a question and answer facility, use that to find out more about the company you're planning to invest in. Ask questions and do some research, for example, you might do some website searches about the company and people involved in it.

Risks involved in crowdfunding

Every investment has risk and dealing with risk is a normal part of investing. It's important you understand the specific risks of crowdfunding so you can make informed decisions. Here are a few points to consider.

You won't get all the information you normally get when you're buying shares

Usually when you buy shares, you'll receive a detailed product disclosure statement. The companies making these regulated share offers also have to provide other information on an ongoing basis such as financial statements. This information helps you better understand the risks associated with the company you're investing in.

Companies raising money via crowdfunding don't have to provide such detailed information and don't have the same ongoing reporting requirements. Make sure you read the information they must provide and do your own checking if you still have questions.

Investment in new or rapidly growing companies is very speculative

Companies using crowdfunding websites to raise money will often be start-up's or growing businesses. This means there is less of a track record to help you decide whether they are likely to succeed. Some of these companies may not.

You'll be asked to read a warning statement that tells you equity crowdfunding is risky. You'll be told you may lose your entire investment and must be in a position to bear this risk without undue hardship. Think carefully about how much you can afford to lose before you invest.

We don't check the companies raising money through crowdfunding

By law, the companies raising money have to be truthful about who they are and what they're planning to use the money for, but we don't run checks on them. We only check and license the crowdfunding service provider.

Check how the service you are using assesses the companies who offer shares through their website. The service must also have information on their website about their complaints process and their dispute resolution scheme. If you believe the crowdfunding service hasn't abided by their licensee obligations you can contact us for help. But remember, we won't be able to help you get your money back if the company fails.

Selling your shares may be difficult

It may not be easy to sell shares you've bought via a crowdfunding website. For example, these shares are not usually listed on a market (such as New Zealand's stock exchange, NZX) that makes them easy to sell, or the company may place restrictions on how they can be sold.

Ask the service how you might be able to sell your shares at a later date. You shouldn't invest money that you might need at short notice or that you can't afford to lose.

The general risks around investing also apply

Check our sections on shares and risks involved in investing for other general information about investment risk.

Ask questions, read all the information you are given carefully, and seek financial advice before committing yourself.