What is equity crowdfunding?
The concept of crowdfunding has a long history however the concept of equity crowdfunding - the process whereby everyday investors can invest in early stage businesses in return for equity (shares) in that business - is only really just beginning. The UK pioneered equity crowdfunding through legislation introduced in 2011 with 17% of seed stage capital coming from equity crowdfunding in 2017. New Zealand passed the legislation in 2014 and the US in 2016, but it took Australia until September 2017. The first platforms received their crowd-sourced funding license (CSF) from ASIC several months later, in January 2018, with Equitise being among the first. Previous to this change, only sophisticated investors could invest in unlisted businesses. Now any Australian citizens over 18 years of age (retail investors) are eligible to invest.
Why Invest:
Invest in exciting start-up you believe in
Equity crowdfunding allows investment in early-stage companies that are aligned to the investor’s passions and interests. It lets them to get in early, joining an exciting startup as a shareholder. On the flip side, for the founders of these early-stage companies, they acquire a crowd of investors who care about their brand.
Low barriers to entry
Equity crowdfunding requires only a small amount to be invested as a minimum with offers starting from as little as $50. This means, unlike other investment routes, it’s highly accessible to everyone. Investing is also super taking only minutes.
Anyone can invest
Equity crowdfunding goes under the idea of enabling “everyday” investors access to great investment opportunities. In the case of Equitise, anyone in NZ and Australia over the age of 18 can invest in the offers of the platform.
Diversify your portfolio
There are no limits on the number of companies in which you can invest. In this way, you can create your own diversified portfolio of small investments focusing on startups that you feel are good investment opportunities.
The companies are carefully selected by the platform
Before launch, a company has to go through a rigorous due diligence process in order to be accepted by the platform. The platforms aim to select companies that have the highest chance of success for the potential investors spending weeks to months looking at the financials, team, business model, offer specifics and future plans.
High potential returns if the company is successful
Similar to venture capital, investing in private companies with equity crowdfunding can carry greater risk, but it can also bring greater returns if the business is successful and either pays dividends, is acquired or lists on stock exchange.
Funds returned if the minimum funding target is not reached
Every equity crowdfunding campaign sets a minimum and maximum funding amount. This is to ensure the company has enough capital to undertake the growth activities outlined in the offer document. If the minimum amount is not reached, all funds are returned to the investor.
Who can invest:
Equity crowdfunding is open to both retail and sophisticated wholesale investors.
- Retail Investors: individual investor above the age of 18 who are an Australian citizen. Retail investors can invest up to $10,000 per company per year but are free to invest in as many companies as they choose. To invest, Retail Investors simply have to create an account, verify their identity and invest via the offer page.
- Wholesale Investors or Sophisticated Investors: The definition of a Sophisticated or Wholesale Investor is someone who has a gross income of $250,000 or more per annum in each of the previous two years or net assets of at least $2.5 million. Sophisticated or Wholesale Investors are not limited in how much they can invest in any offer. They also aren’t shielded by the same benefits and protections as Retail Investors. Sophisticated and Wholesale investors must present Equitise with a certificate issued by a qualified accountant before investing more than $10,000 in an offer.
How to invest:
Even if you have never invested before, the process is easy and takes only minutes.
- Create an account with Equitise
- Verify your identity online using your choice of identification
- If you’re a wholesale investor, upload your s708 certificate from your accountant
- Head to offer page of your preferred start-up, download the offer document if you need more information and click invest.
Why do companies choose equity crowdfunding?
- Brand awareness and advocates: The equity crowdfunding campaign runs for approximately 3 months, increasing brand awareness for the company through channels such as press, social media and email. At the end of the process, the company has a ‘crowd’ of investors who become brand advocates.
- Opportunity for loyal customers to join the business: Customers are a company’s most important asset and equity crowdfunding allows a business to invite their customers to join them, rewarding them for their loyalty and giving them the opportunity to become further involved. Many founders even use their ‘crowd’ as a sounding board for changes within the business and new initiatives, asking their opinions and inviting feedback.
- Simple and alternative route for fundraising: Conventional fundraising methods, such as venture capital, are often tedious. On the other hand, equity crowdfunding makes the pitching process faster and simpler and allows a start-up to efficiently tell its story. A lack of funding is a common reason early-stage companies fail, equity crowdfunding is therefore giving founders another route to raise the capital they need.
Risks of investing in equity crowdfunding
Like all investing, there is risk involved in equity crowdfunding. As the company is early-stage there is a higher risk it will fail and your investment will be lost. We ask that you therefore only invest in what you can afford to lose which is one reason investment can start from as little as $50. However on the flip side getting in early means there is potential for higher returns.
How will I make a return on my investment?
- Initial Public Offering (IPO): If the business grows to a point where it decides to list on the stock market, an investor will be able to sell their shares on the ASX.
- Mergers & Acquisitions: If another company acquires the company, the existing shareholders might be paid out for their stake at the current share price which might be more than the purchase price.
- Share buyback: If management decides to buy back equity (shares) from its investors at a share price higher than the share price at which the shares were issued (this would require shareholder approval, and a selective buy-back would require a special resolution usually 75% of shareholders in the class affected).
- Dividends: If the company continues to grow, then the board may choose to pay dividends to shareholders.