What is Equity Crowdfunding?

[ And how does it work? ]
by Sally Fraser Published

It’s highly likely that you have seen crowdfunding platforms such as Kickstarter, GoFundMe and Indiegogo popping up on your Facebook page or other sites to help someone raise funds for a project. While the concept, defined as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet,” has been around for centuries, online crowdfunding became highly popular in the late-2000s. However, whilst most are now familiar if not intimate with this finance model, few know about equity crowdfunding, the extremely useful capital raising space for businesses and their investors.

 What is Equity Crowdfunding?

Equity crowdfunding, or crowd-sourced equity funding as it’s officially known in Australia, works in almost the same way as regular crowdfunding, but it allows for everyday investors, like you and me, to invest in early and growth-stage businesses. As the name suggests, equity crowdfunding gives the investor a piece of the ownership (or equity share) of the business they have contributed to. In simple terms, it allows companies to raise large amounts of capital from a wide pool of small-scale contributions.

This type of investment has disrupted the traditional, often difficult methods in which companies raise finance. The Corporations Amendment (Crowd-sourced Funding) Act 2017 (Cth) was introduced in September 2017 to provide a legislative framework to allow both listed proprietary and unlisted public companies to offer equity crowdfunding. While the market was booming in the UK and USA, Australian businesses and projects missed out on this type of capital raising until the last few years . Now, businesses and entrepreneurs that may have struggled before, have far more opportunity to stay afloat by showcasing their projects to the world. Further, from the “backer’s” perspective, the regulation brought in by the 2017 Bill means that the space previously dominated by wealthy individuals, venture capitalists and accredited investors have opened up for everyday investors to comfortably gain a stake in businesses they feel passionate about.

How does it work?

In equity crowdfunding, investors invest a small amount of capital in exchange for a small share of equity in a business or project. Goncalo de Vasconcelos, CEO of the platform SyndicateRoom explains that there are two main types of equity crowdfunding:

1. Company-led platforms, where ‘[c]ompanies will set their own investment terms and valuation after listing on a platform, offering their own class of shares to investors’; and

2. Investor-led platforms, where members can ‘invest alongside professional investors, who have negotiated investment terms to whatever price per share they are happy to invest their money at.’

What does this mean for the Investor?

Put simply, this alternative finance method means that anyone who is interested in investing in a business or project available on an equity crowdfunding platform can do so quite easily.

Equity crowdfunding enables investors to:

  • Invest as little (from $50) or as much as they want (up to $10,000 per company per year for retail investors), meaning minimal risk and the ability to invest in many different ideas.
  • Gain part-ownership. Because equity crowdfunding involves investing in return for equity, if the business or project is successful, the value increases, and the value of the shares increases.
  • Be involved in up and coming ideas and their progress and share in the success

What are the advantages for companies?

Marketing

The business-to-consumer nature of most businesses that crowdfund coupled with the varied and large number of investors make for an excellent marketing opportunity. The business can share relevant content on its website to attract investors and customers. Once they are on board, these investors and customers often act as unofficial brand ambassadors in spreading the word through their networks.

Access funds easily

Equity Crowdfunding opens up a new channel for accessing funds to help a business grow. Debt financing is an otherwise difficult, lengthy and expensive process for start-ups seeking capital from banks or from a handful of wealthy investors.

Access to many investors at once

Reaching venture capital firms and approaching them individually can be difficult and tedious. Equity crowdfunding allows access to many investors who can view and learn about a business and its projects and reach out via the same platform.

What are the disadvantages for companies?

Public exposure of ideas

The flipside of many people seeing an idea on a crowdfunding platform is the risk of that idea being copied. There are, however, many ways to remove this risk through intellectual property protections (i.e. patents and copyright).

Less knowledgeable investors

This will depend on the platform; however, often crowdfunding investors don’t have the same level of experience and knowledge that those in the industry do. What this means for the business is that they may not receive the expert support they would like and, with less liability involved, the investors may not be as dedicated to the cause.

The Future of Equity-based Crowdfunding

Whilst Australia officially gave retail investors access to equity crowdfunding last September, it wasn’t until January of this year that the Australian Securities and Investments Commission (ASIC) granted the necessary Australian Financial Services licenses to the following seven crowdfunding platforms: Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds. Through one of these platforms eligible companies, with a turnover or gross assets of no more than $25 million, are allowed to raise up to $5 million per year and small investors can provide each company as much as $10,000 per year.

In this age where technology reigns supreme, equity crowdfunding is expected to thrive. Social media plays a major role in connecting businesses with followers and generating funding momentum. Posting on sites like Twitter and Instagram have become commonplace ways that entrepreneurs and project marketers are targeting their key audience through cost-free advertising. With this, the ability to click and invest without leaving the couch has made equity crowdfunding extremely popular amongst anyone and everyone, particularly the younger generations with disposable income. One of the few challenges with this marketing strategy is getting through to the right people. It’s important that the idea to be funded makes its way through the crowd effectively and reaches those that are sincerely interested in supporting it.

Another kingpin in the mix is cryptocurrency (think Bitcoin), the virtual money that lives on the web. Using cryptography for security, cryptocurrency is highly difficult to counterfeit and is easy to purchase, transfer and make payments with and thus, is a popular means of payment on many crowdfunding platforms. However, given the constant peaks and troughs in the cryptocurrency market, like with all technology use, it will be integral for businesses to adopt risk-averse, savvy online management to be successful in their crowdfunding endeavours.

If you have any questions about Equity Crowdfunding, contact the friendly team at businessDEPOT Legal for more help. 

General Advice Disclaimer

Information provided on this website is general in nature and does not constitute financial or legal advice. Every effort has been made to ensure that the information provided is accurate, but information may become outdated as legislation and new government announcements are made. Individuals must not rely on this information to make a financial, investment or legal decision as it does not take into account their personal circumstance. Before making any decision, we recommend you consult a licensed adviser or legal practitioner to take into account your particular objectives, circumstances and individual needs.

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