My reflections for 2016 as a director of Snowball Effect were published in NBR last weekend.

I’m predicting that market practice will shake out. Launching on a platform without a good reputation could be an irretrievable waste of time. And platforms will be keenly interested in disclosing the lead taken by substantial investors. Private offering to large investors in advance of the public offering may become the norm, or even a precondition, so that smaller investors can sensibly look at the most relevant and understandable questions – ‘who will be putting in more money on the same terms as me?’ and ‘are they the kind of people I should assume to be better than most in working out if the prospective returns are worth the risk?’

If I’m right, in a flight to platform quality, practice will develop to recognise that rational investors:

• know they can’t usefully themselves appraise investments from publicly available information;
• rightly suspect that even experts can’t identify winners, though they might be better at recognising early duds;
• understand their investment is gambling under irreducible and overwhelming uncertainty about the future;
• accept gambling losses if they have not been calculatedly scammed or made to seem foolish;
• look for reputation mechanisms to cut the risks of gambling foolishly;
• assess reputation mostly from perceived endorsements, being;
  • the concern of the offering platform for its own reputation;
  • learning whether and which lead steer’ investors are investing on the same terms, thereby implicitly endorsing the offer;
• not be embarrassed to ignore other disclosure material.
• not expect to blame the endorsers in the absence of bad faith.

here is the article –

“Permitting equity crowdfunding was bold but the NZ market has launched successfully. That boldness contrasts with the timidity that could yet make a fizzer out of Australia’s partial copy of our regime.

To the end of 2015 Snowball Effect, of which I am a director, has raised $10.45m in 13 successful public offers, and more in other private offers on its platform. Pledgeme has reported $3.24m in 12 offers, including $466,000 for itself, Equitise $2.313m in five offers, Crowdcube $470,000 for one issuer, Liftoff has had two unsuccessful offers and My Angel Investment has had one unsuccessful offer.

We are all tempted to think the past is the best steer to the future. But, realistically, the equity crowdfunding sector could have had its best conditions or just be starting a long run. It is likely to be super-sensitive to investor sentiment. Internationally IPO activity is highly responsive to business cycles. Start-up and early stage funding should be even more volatile. After friends, family, and customers, early stage investing is for our best kind of gamblers. They are the optimists who give a country its animal spirits, its business edge. They gamble on bold productive people and assets instead of the zero-sum (guaranteed net loss) horses, pokies and lotto gambling, which, for generations, have hogged the fond sponsorship of the New Zealand government.

If New Zealanders maintain this year’s confidence about business, equity crowdfunding momentum should increase. If, collectively, we become pessimistic, equity crowdfunding could suffer disproportionately.

Individual fundraising platforms are unlikely to be so tied to sentiment. Market share is within a platform’s control even if buoyancy in the market is not. If times get tougher equity crowdfunding may see the so-called ‘flight to quality’. Under investor anxiety, only the best (and the best known) may be able to attract capital. In that case, few companies will think they can afford to experiment with less experienced entrants.

Most platforms do not appear to have sustainable businesses. But it is still early days. One or two more may reach take-off scale. But the sector seems to be shaking out. From Snowball Effect’s experience, and examining the accounts of other platforms filed at the Companies Office, no platform would have covered costs this year. Indeed, if the others are putting anything like the time Snowball Effect has invested in companies contacting us, there has been a substantial loss across the sector.

Equity crowdfunding platform companies may, therefore, have to be as optimistic as the companies they serve. Many of our offerors project a transition to positive cashflow in the future. Our hopeful platforms are presumably doing the same. Perhaps it will be this year for some. In the meantime intense competition will continue. Happily, despite that competition, we’ve noticed no sign of the ‘race to the bottom’ strategy feared by opponents of the reforms.

In addition to well-conceived law amendments, the success to date owes something to sensible implementation work by the FMA and much to good media interest and coverage.

The sustained interest in the sector by business journalists (particularly NBR) has been important. I’ve always found fascination in business growth, and in those who grow them. But I’ve never seen as much healthy (and sceptical) interest in small businesses as now, over my 35 years of involvement in capital markets. For decades, our cultural elite has ignored or discreetly despised business. Whether it is affected UK-derived snobbery or the antipathy of left-tinged envy from those who talk more than they can do, the result was a soft disparagement of business as a suitable interest for our brightest young people.

Now, however, we have the happy combination of youthful excitement about business, pent-up demand after decades of ridiculously effective prohibitions on willing investors transacting with willing entrepreneurs, and a vital interest from business media.

So where next for the equity crowdfunding model?
I expect investors will begin to realise they should not be embarrassed about being unable to make decisions from the financial disclosure. Despite regulatory exhortations to consider the disclosure material carefully and to seek advice, that information will rarely predict the prospects of any company. Nobel Prize winner Professor Robert C Merton recently highlighted in a Harvard Business Review article the misfocus of regulation on informing investors, when almost none of us can be expert enough. He compared retirement planning decisions with those we make when choosing a surgeon or buying a car. Car buyers can’t know from the technical specs whether a used car will sell at a Lexus or Mercedes premium, or at the discount of a second hand Holden, or Fiat. No-one rationally expects them to learn. Instead, reputation mechanisms rule.

The ‘informed investor’ fallacy is an unrealistic basis for regulation. Accounts will not sing to many of us. Value is not built on fine business plans disclosed. So we look to follow others who have better information than us. And as Professor Merton says, they are not likely to be paid professionals. We look harder for cheap cues and absence of conflict of interest in our sources of advice than we do for formal expertise.

Successful equity crowdfunding providers will need to capitalise on the web’s ability to warn of a bad reputation, indeed to discourage poor performers from even trying. Psychologically most investors accept that we will sometimes make dud investments. We know the future is unknowable. But we hate being taken advantage of. Satisfying investing means avoiding really bad decisions that others knew were bad.

Early stage companies cannot have substantial reputations. Some of their people may but most are young. So investors want the public offer process to expose key people with bad reputations.

More positively, they want to follow others in their investment decisions. They look for better than average assessment and leadership reputations. They want to coat-tail on the revealed preferences of bigger, more experienced investors investing alongside them.

As the market beds down, launching on a good platform may require preliminary private rounds and disclosed committments of substantial investors.