Prinesha Naidoo | 17 December 2015 10:54
JOHANNESBURG – As the commodities rout makes it increasingly difficult for mining companies to tap capital markets, equity crowdfunding is emerging as an alternate financing mechanism.
Traditionally considered the domain of technology startups, equity crowdfunding appears to be changing the way in which companies, irrespective of the sectors in which they operate, are raising funds. According to Oscar A. Jofre, President, CEO and Founder of KoreConX, $30bn dollars was raised via global equity crowdfunding platforms in the first quarter of the year.
Equity crowdfunding for companies in the mining sector, a relatively new concept whereby investors receive a stake in the companies in which they invest, appears to be gaining momentum. “There are more mining companies that would like to crowdfund through our platform than we can deal with at the moment,” said Cameron McLean, Managing Director of Mineral Intelligence, an Australian platform in which investors with as little as AU$500 can buy stakes in mining projects.
For Jofre, the relative success of equity crowdfunding, lies in the “democratisation of capital” and exposure to a wider investment pool. “Until now there has been no precedent for non-professional investors to invest in innovative ideas and potentially receive great returns,” he said. Speaking to Mineweb from Toronto, he added that only about 1% of potential investors have been able to participate in private placements over the past 10 years.
For companies, other benefits of crowdfunding include a faster process, free listing (on Mineral Intelligence) and less administrative rigour around listing rules, McLean said from Perth. Mineral Intelligence doesn’t list all the projects it receives for crowdfunding on its website but takes five to six to conduct independent assessments of companies that wish to raise funds via its platform as well as their projects before listing only the most promising ones, he said. As per the terms and conditions on its website, the company does not accept any liability which may arise from the use or reliance on any part of the site or its content.
“Equity portals are required to conduct full due diligence and if they fail that process not only can they be sued by investors but [they] also face regulatory enforcement,” Jofre said, noting that portals are required to be registered, bonded and carry insurance. “Securities commissions are charged by the local government to implement laws providing detailed regulations, monitor and provide oversight and intervene when necessary with fines, penalties and sanctions,” he said.
Like public companies, those raising funds via equity crowdfunding are also required to disclose material information to shareholders on a regular basis albeit at a lower cost. “The difference in equity crowdfunding globally [is] we do things voluntarily because it is good for everyone and we adopt technology to make us more efficient,” Jofre said.
According to McLean, equity crowdfunding is replacing the seed capital stage thereby allowing a broad range of shareholders to realise greater value. During the seed capital stage, only people who were very close to a company had chance to invest, usually at very low prices due to the high risk associated with stage of funding, he said. “Equity crowdfunding presents an opportunity to increase shareholder value between buying shares, without brokers or middlemen, when the company is unlisted and when the company is either listed or acquired by someone else,” he said.
Should investors wish to sell or buy additional shares prior to a company going public, Jofre said they can do so via secondary markets. He anticipates that there will be more secondary markets in the world than stock exchanges by 2017.
Depending on the country and jurisdiction of the crowdfunding platform, Jofre said companies typically have 30 to 90 days in which to raise funds. “If the minimum amount is not reached within the listing period, the funding round has not succeeded. In this case, nothing will happen, all funds in escrow are returned to investors,” he writes. Jofre added that the “golden rule” of crowding funding that companies should secure 30% of the amount they intend raising before going to the crowd as it proves the credibility of their offering. At the fundraising stage, companies are able to determine the rules around their offerings such as the minimum price at which equity investors can buy a stake, whether investors will gain voting rights and the percentage of dividends to which investors will be entitled.
Thus far, the most successful mining related crowdfunding campaign appears to be that of asteroid mining company
Planetary Resources. Through a 33 day Kickstarter campaign in 2013, it raised more than $1.5m from over 17000 backers to fund the world’s first public space telescope.
Jofre maintains that equity crowdfunding is “the most disruptive thing to happen to the finance sector this century” and anticipates both its popularity and investor appetite to grow. “It is a multi-billion dollar sector that is just waiting to be tapped,” he said.
