Crowdfunded IPOs: Bringing the “Public” Back into IPOs

With the first public listing of the Dutch East India Company on Amsterdam’s stock exchange, an initial public offering (IPO) presented an opportunity for the general public to own shares in a company (see our post on IPOs). Nowadays, the vast majority of shares being offered in IPOs are sold to institutional investors and banks, however things may be beginning to change.

Australia’s First Crowdfunded IPO

Last year, Equitise successfully closed the first crowdfunded IPO on the Australian security exchange (ASX). In tandem with the traditional roadshow, the IPO of the Chinese agricultural giant, Dongfang Modern, was partially crowdfunded on Equitise’s platform. This demonstrated to the market something that was until last year only theoretical for equity crowdfunding.

Why Crowdfund an IPO?                  

Investor Spread

One of the requirements a company must meet to list on the ASX is obtaining a minimum number of shareholders. This is known as investor spread, and is necessary to ensure the company has sufficient liquidity and trading activity, allowing the market to operate efficiently.

For companies such as Dongfang Modern that have a very concentrated shareholder structure, obtaining the required spread can be a hurdle. To achieve this in the past, complicated structures such as back end listings have been required. Opening IPOs to the crowd is an innovative way to obtain this required number of shareholders.

Mum-and-Dad Investors

In New Zealand, a number of state-owned enterprises were partially privatised through IPOs between 2012 and 2014. There was a strong push to encourage everyday, mum-and-dad investors to participate; the government allowed investors to bypass brokers and invest directly. We see equity crowdfunding as a tool to bring this benefit to all IPOs.

Everyday consumers aren’t usually inclined to seek out brokers and therefore miss out on opportunities to become retail investors in this way. Equity crowdfunding’s online model provides easy and transparent access to investment opportunities, avoiding the costs and inaccessibility of traditional brokerages.

In addition, some countries require minimum portions of an IPO to be available to the general public. Both Hong Kong and Singapore require all IPOs to have 10% of shares reserved for the general public. In the future, equity crowdfunding could prove to be a boon for companies to achieve these minimum public ownership requirements.

Democratising Finance

In Australia, around 33% of the general public directly own shares; in New Zealand, this figure is around 26%. Compare this to the United States where around 55% of the general public invest in the share market. We see this as a clear need for greater access and ease in the Australian and New Zealand markets. Partially crowdfunding IPOs is in the spirit of equity crowdfunding’s roots: the democratisation of finance.

In the UK, two key finance bodies, the Financial Conduct Authority (FCA) and the London Stock Exchange (LSE), have made important moves to facilitate crowdfunded IPOs. The FCA has approved a crowdfunding platform to act as an IPO intermediary and the LSE welcomed another platform as an official intermediary. Both moves are strong signals from authorities recognising alternative finance’s important role in the capital markets.

Including crowdfunding in IPO campaigns highlights the breadth of equity crowdfunding’s capabilities and a significant step in its journey towards becoming a mainstream finance option. With a healthy pipeline of IPOs in our key markets of Australia and New Zealand, Equitise predicts that equity crowdfunding’s involvement in capital markets will only deepen over the coming years and prove integral.

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