Snowball Effect to launch secondary market
Equity crowdfunder Snowball Effect is looking at launching a secondary market, potentially filling a hole left by the demise of the NZX’s two small-cap exchanges.
Snowball Effect chief executive and co-founder Simeon Burnett says the company is building and testing a prototype platform to let private companies put their shares up for trading at specific times of the year. This would give existing investors the opportunity to sell their shares - or buy more.
Burnett says the prototype trading mechanism would be honed over the next two-to-three months as investors and companies test the waters. It could be launched in the second half of the year.
He says Snowball Effect has been looking at the possibility of a secondary market for some time, but the decision by the NZ Stock Exchange to abandon its unsuccessful NZAX and NXT smaller company markets left a gap.
“We’ve already had good interest from 6-10 companies.”
He says it’s likely most companies looking at the idea in the early stages would be ones that had already raised money either publicly or privately through Snowball Effect. But the company was also open to other small and medium-sized businesses looking to make their shares tradeable.
The way the market could work, Burnett says, is companies wanting to take part would release a trading report, including a financial statement, information about strategy, and key disclosures, such as directors wanting to trade shares. This would be immediately followed by a two-to-four week trading period.
“Short trading windows help to concentrate buyers and sellers into the market to maximise liquidity. And it means less hassle for companies as they don’t have to have continuous disclosure throughout the year.”
During that trading window the company would need to abide by the same sort of disclosure rules enforced by the stock exchange - making announcements to the market whenever there was an important piece of news.
Each company could choose whether to open up trading to outside investors or only its own shareholders, and how many trading periods to have each year.
“Short trading windows help to concentrate buyers and sellers into the market to maximise liquidity,” Burnett says. “And it means less hassle for companies as they don’t have to have continuous disclosure throughout the year.”
Since Snowball Effect launched in August 2014, it has raised $33 million for 35 companies, including Invivo wines, venture capital fund Punakaiki, Zeffer cider, SOS hydration drink, and digital therapy games provider AbleX.
The platform now has 60 percent of the equity crowdfunding market and helps companies raise money both through public campaigns on its site and through private capital raising via a database of about 1000 private equity investors. The average investment to date is $7,500.
One of the key problems with traditional equity crowdfunding is that investors have to be patient. Once they put their money in, it could be years before they get any return - if they get a return at all. Three of the Snowball Effect companies, including Renaissance Brewing, the first company to get equity crowdfunding in New Zealand, have gone under.
Burnett hopes the introduction of a secondary market will give investors more confidence to put their money into SME businesses needing capital - because they will be able to get it out again.
“We’ve had feedback from Snowball investors, that if a company makes a commitment to use our secondary market in their offer, the offer will have a better chance of success.”
UK-based equity crowdfunding platform Seedrs launched a secondary market in June last year. Its model involves opening its market on the first Tuesday of every month and closing it a week later. So far the company says 1434 buyers and sellers have traded shares in 334 companies, with 1.3 million British pounds ($2.5 million) changing hands.
One of the hardest things will be fixing a price for the shares on offer. Burnett says the company hasn’t made a final decision yet, but the most likely way would be finding a couple of key buyers and sellers and using them to set the initial price.
“Then the opening trades take place and market mechanisms kick in after that.”
“The whole point of a market of listed stocks is disclosure, transparency, tradeability and the presence of a regulator. All of those things are missing here.”
Shareholders' Association CEO Michael Midgley
Burnett says setting up a secondary market for existing Snowball Effect customers would need only a small change to the company’s existing licence with the Financial Markets Authority; although a quick look at the Financial Service Providers Register might suggest otherwise. “Snowball Effect Limited must not provide any secondary market for the equity securities offered through its service unless and until FMA approves the terms on which it propose to offer that secondary market,” the listing says.
Burnett says the company hasn’t made any application to the market yet, but he has spoken informally to FMA chief executive Rob Everett.
The reaction to Snowball Effect’s decision is mixed.
Joanna Lawn, NZX’s head of issuer relationships, says Snowball Effect’s secondary market plan will be good for capital markets.
“I see it as complementary to the NZX. They target investors with different risk profiles and companies that are smaller - startups or looking for expansion capital.
“These companies could possibly grow into the public market; [Snowball Effect could become] the pipeline for the capital market. Anything that’s going to help grow the capital market is a good thing.”
But Shareholders' Association CEO Michael Midgley says unregulated markets just increase the risk for small, unsophisticated investors.
“The whole point of a market of listed stocks is disclosure, transparency, tradeability and the presence of a regulator. All of those things are missing here and that’s always a risk.”
The association has in the past spoken out about lack of oversight in the Unlisted Securities Exchange - and the Snowball Effect proposal is even more worrying, Midgley says.
“This has even less light shining on it than that. These are dark spaces where [inexperienced] investors should not go.
“People can invest in anything, but they need to be aware their ability to buy and sell is limited and does not come with any of the protections that investing in listed companies has.”
Meanwhile, Burnett says Snowball Effect posted a small profit last year of some $50,000. However, the company is mostly focused on investing in growing the business.
“A return for our investors is probably a way off - maybe 10 years. There’s a lot of stuff we want to do. If someone was interested in purchasing us now, we’d not be interested in selling.”