Equity Crowdfunding 101

By Nicholas Fiori - January 29, 2018

Crowdfunding has turned the start-up and entrepreneurial scene on its head, offering new ways for people to pool small amounts of money to get a venture off the ground.

It’s the principle behind groups like Kickstarter, which is credited with raising more than $US3.4 billion for more than 137,000 projects.

But Australia has been slow to embrace another kind of crowdfunding — equity crowdfunding — in which the money put forward by contributors is exchanged for equity in the business. That kind of crowdfunding has been restricted in Australia, given our tough regulations for investments, limiting equity crowdfunding to so-called ‘sophisticated investors’ with net assets of $2.5 million. But that has just changed.

The Australian Securities and Investment Commission has now made it easier for small and medium sized public companies to finance their business and raise equity through crowd-sourced equity funding, granting licences to seven platforms. Investors can now use these platforms: Big Start, Billfolda, Birchal Financial Services, Equitise, Global Funding Partners, IQX Investment Services and On-Market Bookbuilds, to buy a stake in the company and, in turn, receive securities in the form of shares. 

As with all shares, the value of the investment has the potential to grow or shrink, depending on the profitability and value of the company. The legislation came into effect in November, making it legal for unlisted public companies and proprietary owned businesses worth less than $25 million, to raise funds in this way.

What does this mean for companies?

Equity crowdfunding offers an alternate source of capital that can assist company start-ups, the growth of a business, paying off debts or raising capital for other business ventures. It allows small businesses to have access to funding that wasn’t readily available before. However, it is not a perfect solution. Companies can raise up to a maximum of $5 million per year through a registered equity crowdfunding platform, but there a number of structures that must be put in place before a business can reap the benefits. These include having a minimum of two directors, complying with auditing requirements, and reporting finances in accordance with accounting standards.

What does this mean for investors?

Gone are the days where crowd-sourced equity funding was only available to investors from the top end of town. Now a much larger pool of investors can buy shares in promising prospects. Investors can contribute up to $10,000 per company, per year, with no limitations on the number of companies they can invest in.

What’s been the experience elsewhere? 

As Australia is a little late to this party, it is worth looking at how this has worked overseas — and lessons that can be learned. In the United Kingdom, crowd-sourced equity funding kicked off as a concept several years ago and deal numbers have risen at a rapid pace, particularly in the technology sector. It still makes up only a small part of the overall equity investment in the UK, but the use of this funding vehicle is growing stronger by the year. Success stories include Scottish craft beer company BrewDog, which used equity crowdfunding to raise $31 million, and recently raised $8.7 million from 9,000 Americans to expand overseas.

What if equity crowdfunding is not right for you?

Crowd-sourced equity funding remains just one method of crowdfunding to build company capital. Other ways include peer-to-peer lending, short-term lending and general crowdfunding.  Peer-to-peer lending is when an investor is matched with a person or company looking for a loan. This method of lending typically cuts outs the middleman, such as a bank or credit union. Short-term lending is a one-time loan that is scheduled to be repaid in less than a year. Some companies in Australia have developed other ways of obtaining investor contributions, such as property investment company BRICKX, which buys a property, splits the value into 10,000 bricks and sells the bricks to investors. If the house is worth $1 million, each brick is valued at $100, for example.

What’s the key message?

After many years of Australian small enterprises and start-ups struggling to crack the investment conundrum, equity crowdfunding offers new opportunities for entrepreneurs to bring in investors, raise awareness, secure funds and share the risk. Whether the new system delivers on that promise, however, is yet to be seen.

If you have a small or medium sized business and are looking to raise equity, contact Pitcher Partners to further discuss your options.


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