When you invest via crowdfunding you're buying shares usually in a start-up or growing business. Equity crowdfunding is risky – your investment may do well, but you could also lose your entire investment.
What is crowdfunding?
Crowdfunding works by many people (the crowd) putting in small amounts of money to raise funds for a company or project.
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.
Equity crowdfunding is usually done on websites run by crowdfunding service 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. Then they’ll pass it on to the company who issues you with the shares you now own.
Companies seeking money have to follow 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 crowdfunding is $2 million in a 12 month period.
Understanding the risks
It's important you understand the specific risks of crowdfunding so you can make informed decisions.
Companies raising money via crowdfunding websites are often new or growing businesses. They may not have a track record to help you decide if they are likely to succeed. Some of these companies may fail. Think carefully about how much you can afford to lose before you invest. The general risks involved in investing also apply.
Things to look out for
You won't get all the information you normally get when buying shares
Companies raising money via crowdfunding don't have to provide detailed information or ongoing reporting that a company normally would if you were buying shares.
Make sure you read the information provided, and do your own checking if you still have questions.
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 offering 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 you invested in fails.
Selling your shares may be difficult
It may not be easy to sell shares you've bought via a crowdfunding website, as they are not usually listed on a market (such as New Zealand's stock exchange, NZX). The company may also place restrictions on how they can be sold.
Ask the crowdfunding company how you might be able to sell your shares at a later date.
How to reduce risk
Make sure the service you’re using is licensed by us.
Ask questions, read all the information you are given, and seek financial advice before committing yourself.
Choose a licensed provider. 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. Each year they give us up-to-date information to help us understand more about their business.
Peer-to-peer lending and crowdfunding: sector snapshot