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Idealog—in the ideas business

Want equity with that? Snowball Effect seizes on impending crowd-friendly law

A trio of Fonterra middle managers has devised a new web portal that will launch in time to capitalise on changes brought in by the Financial Markets Conduct Bill, which from next April will pave the way for equity crowdfunding.

Snowball Effect is the brainchild of directors Simeon Burnett, Francis Reid and Richard Allen. Reid is policy and advocacy manager for Fonterra in Europe, Russia & MEA; Allen is general manager of global value chain optimisation; and Burnett is its portfolio manager for commodity risk and trading. They say they have over 25 years' collective experience in international business and trade, corporate finance, strategy and valuation.

Burnett says the site will connect small and medium businesses that need capital with potential investors including younger and older people with disposable income.

“The country’s economic engine room is small to medium-sized enterprises and there are thousands of them with big vision who can’t take the next step on the growth ladder because the banks won’t lend, and other sources of capital don’t fit or are cost prohibitive. There are also thousands of New Zealanders with innovative ideas that can’t get them off the ground because raising startup capital is typically limited to loans from friends and family.

“On the other side, tens of thousands of proud Kiwi investors or would-be investors would love to take a stake in one of the most dynamic sectors in the economy, but are currently unable to do so, particularly if they only have a small amount of money that they're willing to invest.”

Another potential audience is offshore investors, he says.

"The government has really been looking to bring the overseas sector into this. The investor base in New Zealand is quite small. "There are thousands of SMEs that drive New Zealand's GDP and expanding capital to markets like Australia and Asia will be key."

Snowball Effect will also play a role in educating potential investors, Burnett says. "I think the site will lay out very clearly how to go in and back those businesses and what the process is," he says. "Part of that is explaining in very simple terms what they're backing and pointing out the risks as well. With startups and small businesses there's clearly risk involved and it's a case of buyer beware."

It also hopes to facilitate meetings between businesses and potential investors, whether online or face to face.

Under current law, companies can't offer securities without a prospectus or investment statement. But the bill, which recently passed its third reading, creates compliance exemptions for licensed intermediaries (crowdfunding platforms and peer to peer lenders). Issuers and lenders will be restricted to $2 million in a 12-month period.

The Snowball Effect directors are working with the Icehouse, which has a six percent stake in the venture. They have also worked with law firm Wynn Williams and met with the Financial Markets Authority and passed on market feedback. The trio also wants to add governance expertise, says Burnett.

A range of local crowdfunding platforms have been established already, including Pledge Me, Boosted and Give a Little, while global giant Kickstarter will open to Kiwi projects from next month.

The US opened the way for equity crowdfunding in that country with the Jumpstart our Business Startups Act.

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Will be interested to see what their own revenue model is.

There are at least two or three other groups (other than those mentioned) that are looking at this same opportunity, very hard to see more than one being successful, and even then given the size of the NZ market it may not be economic for a NZ site even if it has a dominant market position.

But good luck to them, hopefully they are talking to more people than just the Icehouse - they backed Nexx (or something) that was doing peer to peer lending at a time it was illegal - not a great track record. .

Yes - it would be interesting to see what the revenue model would be.
The typical way to get money out of startups and backers is to take a slice on the way through - and that's a valid way of doing it I guess.
It'd be more interesting if they used the data generated by the service/site to allow them to rank the opportunities and allow their reward to come from a more successful portfolio of investments - that would be innovative and newsworthy - not many of the services provided to startups are done “at risk” and incentivised to help the startup/investment succeed.

In the uk there are a couple of crowdfunding companies that not only take a cut of the amount raised but also take a cut of any of the carry (profits) if / when a company decides to exit. I'm not a big fan of that double dipping but I also think that taking a cut of the investment raised is not in the best interest of the start-ups. Say the amount taken is 5% of the investment raised, wouldn't the start-up be better off / more likely to succeed with that extra 5%? Clearly there should be a better model but unfortunately I can't figure out what it is just yet.

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