Below is a blog post I wrote for PledgeMe on 25 August 2016 about what to expect as an investor in an equity crowdfunded NZ company. Companies considering using equity crowdfunding to raise capital can find detailed information in Cygnus Law’s Equity Crowdfunding Guide on legal factors you may need to consider when getting ready for, and running, an equity crowdfunding campaign.
Crowdfunding is an exciting development but what does it mean to be an investor? When it comes to equity crowdfunding it means that you own a part of the company – you own shares. You ultimately benefit if the company is successful, but you also risk losing your whole investment if it isn’t. I’ve briefly considered below some of the things you can expect and can do once you’re an investor.
You can hopefully expect good communication from the company. While at law the company has limited obligations to proactively communicate with you (and very few if you hold non-voting shares), there’s an expectation that crowdfunded companies will regularly update you on their progress. If you have voting shares then you can expect an annual report before the annual general meeting (AGM). Also, as a shareholder and regardless of the rights attached to your shares, you have the right to request information from the company, but they aren’t obliged to provide that information (and might impose an administration fee), particularly where it is commercially sensitive. You do have a separate right to inspect and ask for copies of certain company records, including shareholder resolutions and financial statements.
The company must hold an AGM (and invite you!). It’s an opportunity to find out more about the company’s progress and future plans and to ask questions of the directors (the company might make it possible to attend using technology). Tea and biscuits (or something better) might be laid out for you. Or they might not, so check beforehand if refreshments are your main reason for turning up! An AGM must be held within six months of the company’s financial year balance date so, if that’s 31 March (which it usually is), then you can expect an AGM to be held no later than the end of September.
The company might have offered shareholder discounts as an incentive to invest. So use them if they’re of value to you. But if you’re getting more than minor discounts check to make sure that the company has made arrangements to deal with tax arising – some companies pay your share of tax for you.
Selling your shares
You can sell your shares, though the law places restrictions on sales in some situations. There is currently no stock exchange for trading crowdfunded shares so finding a buyer might be difficult. If you do want to sell you could contact the company to see if they know of potential buyers (though because of restrictions at law the company may have limited ability to assist). However you may not be looking to sell. Many investors invest with other goals in mind. You might have invested because you believe in what the company is doing (and are less concerned about an economic return). You may have invested to enjoy shareholder discounts, to earn dividends, or to benefit from a future sale of the company or its business (though this is by no means guaranteed). Or you may have a mixture of those goals. Dividends are probably unlikely for long periods where the company is growing fast, since the focus is on reinvesting profits to support sustained growth and hopefully significant value add.
Enjoy the ride!
Enjoy the ride and remember that this post is a very broad (and incomplete) summary only and is not legal or financial advice. The Financial Markets Authority provides useful information for investors. The law is complex and investing is risky so make sure you seek appropriate professional advice before acting.