Crowdfunding is nothing new. Most have at some point heard of the various forms of crowdfunding out there, usually reward and donation based through platforms such as Kickstarter. A simple concept that has found considerable success across geographies, where backers can commit money out of goodwill, or for a reward such as a pre-order or discounts.
Why Equity Crowdfunding
There are a number of unique benefits for both investors and businesses within equity crowdfunding including access to inspiring and innovative startup investment, greater access to capital for businesses and the ability to create an engaged network of stakeholders. For more information, check out this article here.
Who Can Invest
In Australia, equity crowdfunding is open to both retail and sophisticated/wholesale investors.
- Retail Investors - Individual investors above the age of 18 who are an Australian resident. Retail investors can invest up to $10,000 per company per year, but are free to invest in as many companies as they choose.
- Wholesale/Sophisticated Investors - These accredited investors are able to access a wider range of opportunities with no investment limits. For more information, please read this guide.
In New Zealand, equity crowdfunding is open to any resident over 18, with no limits on total investment.
How To Invest
Even if you have never invested before, the process is easy and only takes a few minutes.
- Create an account with Equitise
- Verify your identity online using your choice of identification (read why we need to do this here)
- If you’re a wholesale investor, upload your s708 certificate from your accountant (Australia), or complete the relevant eligible investor forms or accreditation certificates (New Zealand)
- Head to the offer page of the business you wish to back, download the offer document if you need more information and click invest!
Key Components Of A Campaign
If you’ve invested in IPOs or other opportunities before, you might be familiar with data rooms, prospectuses and information memorandums. Even for seasoned investors, however, there are some unique features within an equity crowdfunding campaign.
- The 3 phases of an offer Initially, potential future raises go through an expression of interest (EOI) phase, during which interested investors sign up to hear more and to gain early access if the offer launches. As it’s all about ‘the crowd’ investing in a business they believe in, there has to be sufficient interest for it to proceed. If there is, the offer will enter into a private phase, during which the company's friends, family and other close networks, as well as EOIs, get the chance to invest first. Finally, if there are any shares remaining, the offer will go public for all investors.
- Offer page - The offer page on the Equitise platform will hold all relevant information including a summary of the offer and a tracker for how it’s performing. It’s also where you can download the more comprehensive offer document, where you can invest and includes a Q&A functionality, where investors can ask questions directly to the company.
- Offer Document - The offer document is the prospectus of equity crowdfunding. It contains several sections mandated by regulations, in addition it also contains company information we believe is important for investors making a decision. It is a detailed view of the business, including financial statements and growth plans. We highly recommend you consider this document before investing.
- Minimum/Maximum funding target - Each campaign has a minimum and maximum raise amount to ensure the company has enough funds to attempt what they set out to achieve. If an offer fails to reach its minimum, all funds committed by investors are returned at no charge. Once an offer hits its minimum it becomes successful, and enters an overfunding period until it either hits the maximum, or the time on the offer expires. Investing earlier can help build an offer’s momentum and its ultimate success, so be sure to get involved as soon as you can! Learn more about this here.
A Brief History
Equity crowdfunding is a relatively recent industry shift where investors can back real businesses in return for equity. In essence, equity crowdfunding provides a platform through which individuals can purchase shares in private/unlisted companies, generally of an earlier stage. While the term crowdfunding is often associated with its donation or reward based models, equity crowdfunding provides real access to a stake in a private company, with all the potential positives of owning shares in a business.
Traditionally, the purchase of shares for most people was limited to public/listed companies through an Initial Public Offering (IPO), or through a secondary market such as the ASX or NZX. Private company investment was highly restrictive, limited to the wealthy and well-connected, usually through venture capital and private equity firms. As investors are ‘getting in on the ground floor’ when share price is usually low, early-stage investing can carry higher risk but also higher returns. For this reason it wasn’t previously open to the general public. However equity crowdfunding comes with many benefits and can be conducted in a way that limits the risk for everyday investors.
With the objective of democratising investment, shifting away from the model that only the wealthy could invest in early-stage companies, the UK was the first to pass equity crowdfunding legislation in 2011, followed by New Zealand in 2014, the US in 2016, and finally Australia in 2017. Equitise operated in New Zealand for several years while playing a key role in passing the Australian regulations. In January 2018, Equitise was one of the first Australian platforms to receive its crowd-sourced funding licence, and went on to launch Australia’s first ever equity crowdfunding deal with neobank Xinja, with over 1000 everyday investors (or retail investors) backing the businesses in return for a stake.
Equity crowdfunding industries locally and abroad continue to experience rapid growth, taking an increasing proportion of capital raised away from exclusive venture capital firms, and letting the crowd get involved. The oldest equity crowdfunding market, the UK, has seen deal numbers rise from 8 in 2011, up to around 400 in 2019, with hundreds of millions of pounds raised. Equity crowdfunding deals are now the second most backed in investment value, second only to private equity and venture capital. An exciting indication of what could await the younger Australian and New Zealand markets.
Risks Of Equity Crowdfunding
As there is more uncertainty with early-stage businesses there can be greater risk however there can also be greater return as you’re getting in on the ground floor when the share price is low. As with any equity investment, there is the chance of losing part or all of your investment if a company fails to grow or survive and because of this we ask you only invest what you can afford to lose and where you can, diversify your investments. The industry is heavily regulated by key government authorities to protect investors as much as possible, largely through the role of intermediaries such as Equitise. We also have our own standards in place and our analysts work hard to provide a flow of high-quality, vetted companies. Investments are also illiquid which means they can’t be sold yet. This means it’s often a longer term investment until a potential exit opportunity occurs. Learn more about the safety of equity crowdfunding here.
How Will I Make A Return On My Investment?
There are several ways in which you can make a return on an investment including IPOs, buybacks and dividends.
The exciting thing about investing in private companies is the potential for high returns as the company grows. There are a number of ways you can make a return that you can learn more about here. Since these companies focus on growth, it might take a little longer for an exit opportunity to arise compared to buying public stocks.