Having only been introduced in Australia in late 2017, equity crowdfunding is still a relatively unknown area for most. Some have never even heard of it, despite being involved with the stock market or traditional forms of crowdfunding.
The name itself can be quite confusing. After all, most associate the concept of crowdfunding with a donation or rewards-based initiatives, and the idea of buying shares in a private company seems foreign. Below, we break down the key differences between these three areas.
Equity Crowdfunding
Equity crowdfunding is, in essence, a means by which everyday individuals can invest in high-growth early-stage private companies. Through a licensed intermediary platform, such as Equitise, companies can conduct campaigns during which they raise funds through the sale of ordinary shares. These shares come with traditional benefits such as capital gains, and the potential for dividends, but are also associated with higher risks and illiquidity. Don’t let the word crowdfunding fool you - equity crowdfunding is at its core the purchase of private shares, a practice as old as industry itself, but traditionally limited to the well-connected and ultra-wealthy. The concept of the crowd merely refers to the fact that many individuals are able to invest, where traditionally private companies would use only a few, select, large investors. This increased spread brings a range of benefits to our portfolio companies, such as a network of engaged stakeholders, marketing and mass media exposure. For more information on the benefits of equity crowdfunding, click here.
The Stock Market
The stock market is fairly familiar for most Australians, in fact, Australia has one of the highest rates of stock market involvement in the world. Australia’s primary stock market is the Australian Securities Exchange (ASX). The traditional way of getting your savings to work a little harder, publicly traded stocks are associated with more moderate, but stable returns and dividends, as well as high liquidity. At the same time, however, these stocks are generally more prone to overarching market movements, and daily price fluctuations. The key difference with public stocks is that these companies are listed on a stock exchange, meaning any individual can buy or sell shares relatively freely with limited restrictions. Owing to the costs associated with trading publicly, this is often a route taken by more mature companies seeking to raise significant amounts of capital through an Initial Public Offering (IPO), which is the first occasion the company lists on the exchange. Nonetheless, there are plenty of smaller, high risk companies on the stock market, just as there are many mature and stable private companies. Equitise also conducts IPOs, for more information, click here.
Crowdfunding
Crowdfunding is a relatively modern concept that has gained significant popularity in the wider community over the last several years. Championed by platforms such as Kickstarter, Indiegogo and Go Fund Me, crowdfunding enables the crowd to support innovative projects and charitable causes through simple platforms. Traditional crowdfunding can be split into two main categories: rewards-based and donation-based. Rewards-based crowdfunding is most akin to pre-ordering a product, with a few less guarantees. Individuals can commit funds towards an idea, invention or young business with the promise of a future product or reward, although this doesn’t always eventuate. Donation-based crowdfunding involves simple charitable raises for a specific cause or organisation purely out of an individual’s own goodwill. The reason these forms of crowdfunding have been around for so much longer, and the key difference with equity crowdfunding, is that you are essentially pre-ordering a product or giving money away, rather than purchasing a stake in a company. Governments wanted to ensure sufficient protections for individuals were in place before regulating in favour of equity crowdfunding, which is now growing to become part of the mainstream mix of capital-raising instruments.
If there are any other specific terms you’re unsure about, check out our equity crowdfunding glossary here. We also have a bunch of educational resources on equity crowdfunding here. Enjoy!