We are sometimes asked about the safety and legitimacy of equity crowdfunding. It’s a reasonable concern, given the relative youth of the industry and lack of widespread knowledge of the practice. There are concerns over the legal protections, as well as the safety of investments themselves. Below, we break down the key components that contribute to the safe and well-regulated area of equity crowdfunding.
Regulatory Protection
The good news for investors is that the government has your back in this area. Equity crowdfunding was only recently legalised in late 2017 in Australia, and in 2013 in New Zealand, owing to the potentially higher risk of investing in early-stage companies. These acts were passed because the Australian and New Zealand governments were completely satisfied with the protections being put in place to ensure everyday people avoid financial harm. Our own founders, Chris and Jonny, were heavily involved in developing the protections in Australia, having already operated in the New Zealand equity crowdfunding market. These regulations include investing limits, disclosure and mandatory due diligence and require intermediaries such as Equitise to receive a variety of approvals and licences prior to operation. The industry is closely monitored by key regulatory bodies with severe penalties in place for those who flaunt the rules.
Due Diligence Process
As part of the industry’s regulation mandates, we perform a number of checks and verifications as part of our due diligence process. This means we confirm the identities of all key company stakeholders such as major shareholders and directors. We check key contracts and intellectual property holdings and assess the health and validity of the business itself. These base level protections are in place to ensure the company doesn’t chuck a runner the moment they receive your money. On top of this, we hold ourselves to a higher standard of due diligence to provide our investors with the best opportunities in our opinion. We comb through financials, markets, teams and more. We do all the boring stuff and only proceed with companies we think have the best chance of success. We also urge you to perform your own kind of due diligence, considering the deal room, offer document and risk warning together.
Risk Profile of Investments
Like all investments, your investment itself also carries certain risks. For a variety of reasons, there is the potential that the company might not flourish or even make it which would result in you losing part or all of your investment. Private company investments are also relatively illiquid, meaning it’s harder to exit your investment for cash as compared to publicly traded stocks. This generally means a longer investment horizon, you can read more about exit opportunities here.
In short, yes, equity crowdfunding is safe. It’s a highly regulated and public-facing industry, however, there is risk involved. The benefits are that with greater risk comes the potential for greater return as you’re getting in early. It’s also a great way to support the Australian and New Zealand economies and innovation, investing in businesses that you believe in and that have the potential to improve the world around them.