Consumer Watch: Prosper by following the crowd

The company behind director Lee Tamahori's film The Patriarch has already raised some $468k from 182 investors.

High-risk but high return investments tempt people with limited funds

Fancy a slice of a New Zealand company with its sights set on growth? Backing businesses in their first growth phases were once for mega-wealthy angel investors but since the Financial Markets Conduct Act made crowdfunding investment possible it has opened up to "mum and dad" investors.

Previously, only charitable crowdfunding was permitted, in which people did not want anything in return for their money except maybe a copy of the new album they were helping to record.

But people can now buy shares in companies that should aim to eventually pay dividends. So far licences have been granted for crowdfunding equity platforms Snowball Effect and PledgeMe.

Snowball Effect has closed two offers, one for funding Renaissance Brewing, which raised $700,000 from 287 investors, and one for a new Lee Tamahori film The Patriarch, which raised $468,800 from 182 investors.

It has one offer, for as much as $1.5 million for cleantech company CarbonScape. If the offer raises $400,000 then 4.32 per cent of the company will have gone to crowdfunding investors. If it gets $1.5m, almost 14.5 per cent will be in the hands of the funders.

PledgeMe has two equity offers open, for investment in tourism company H2Explore, which wants to provide hovercraft trips on the Tasman River, and computer museum Techvana.

PledgeMe also runs a "projects" arm that offers more traditional crowdfunding, helping fund projects in return for small, non-financial rewards. Another company, Liftoff, is still waiting for a licence.

Tim Langley, of Carbonscape, said crowdfunding was an accessible way for people with relatively small investments to be involved. It had been difficult to raise capital under the old rules.

"We saw moves being made last year to amend the rules to enable crowdfunding and thought it was an opportunity."

Carbonscape uses microwave technology to turn carbon in waste wood into products such as high-quality coking coal.

The company wants the money to build a pilot plant to supply New Zealand Steel.

Snowball Effect spokesman Shaun Edlin said crowdfunding was a way to "democratise" investment. "It's allowing mum and dad investors to get on board. They previously didn't have the opportunity to invest in companies that weren't making a public offer."

Edlin said most offers could be described as high risk but high return. "This is a great way to broaden a portfolio with some investment in small to medium businesses at an early stage in their growth."

Crowdfunding offers don't have the same disclosure requirements as most financial products so investors should have a clear idea of what they are getting into. The shares may not be easily traded if you want out.

Claire Matthews, of Massey University's school of economics and finance, said investors should understand what returns were expected. "If you're expecting a return, do the normal analysis: what are the risks, what is the risk I'm not going to get any return or I'm not going to get my money back?"

Adviser Liz Koh said the fact investments could be small meant the risk would be spread.

The offers

Snowball Effect: The Patriarch (closed)

If the film is successful, shareholders get their investment back, plus 20 per cent once distributors are paid. People who invest $5,000 see their names in the credits. For $10,000 they can visit the set, for $50,000 go to the premiere and $100,000 have mentoring in the film business.

Snowball Effect: Renaissance Brewing (closed)

Investors should get dividends, although not for the first three years. But for every 1,000 shares they will get a 12-bottle case of beer every year.

Snowball Effect: Carbonscape

Investors should get dividends but not for a few years, because the company wants to invest profit into the business.

Pledge Me: H2Explore

Investors can attend a launch party, an "epic" annual meeting and get one free Tasman River hovercraft trip for $1,000 invested.

Pledge Me: Techvana - The New Zealand Computer Museum

Techvana plans to return dividends to shareholders within three years, with a return from dividends of 28 per cent forecast.