What is Equity Crowdfunding?

Equity Crowdfunding is a process where individuals can invest in a business in exchange for equity, or shares.

Traditionally, investing in a private company, start-up or small business is restricted to High Net Worth, Institutional investors, Private Equity or Venture Capital or affluent individuals and syndicates due to the high barrier to entry and large investment size required. Equity crowdfunding breaks down those barriers and enables everyday retail investors the opportunity to invest in a business for a much smaller figure (usually starting around $250 AUD).

For the business raising funds through equity crowdfunding, it allows them an opportunity to invite brand ambassadors, supporters, advocates and members to become closer to the business than ever before and share ownership in the companies success. It fosters community engagement and a support network to help sustain growth and development of the business as well as provide an additional source of funding outside of traditional methods (Private Equity, Venture Capital or Institutions).

For the investor, equity crowdfunding not only presents the opportunity for a financial return on investment, but enables a genuine sense of ownership by buying into the companies mission values and potential for future growth.

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How does Equity Crowdfunding work?

To engage in an equity crowdfunding campaign, you will need to sign up with a registered equity crowdfunding platform, completing an investor profile and completing the appropriate disclaimers and declarations. It's important to note investing in equity crowdfunding is high risk, and all of your investment can be lost.

Once you have signed up to a platform, you will be able to review 'campaigns' where companies are raising funds, and engage with the campaign in two ways, either 'Express your interest' or 'Invest'.

Equity crowdfunding campaigns usually follow a linear process of;

Expression of Interest (EOI)

This is where a company will launch a test campaign, and open up the opportunity to their followers, supporters and advocates to 'express their interest' in investing. The company will receive EOI's which will indicate if they will successfully be able to raise their target amount of funds, to fuel growth or achieve their desired outcome.

Investment

If the EOI phase has been successful, the company will progress to the investment phase, where investors will commit funds and make their investments. It's important to note that any equity crowdfunding campaign must set a Minimum and Maximum limit on the funds being raised. If the Minimum subscription is not met, the funds are not taken from investors and are refunded back, alternatively if the company reaches the Maximum subscription, the campaign will close and no further investments can be made.

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Why Invest in Equity Crowdfunding?

Investing in private companies attracts investors due to the potential for substantial returns and the chance to back businesses they genuinely believe in. However, it's crucial to approach these opportunities with a clear awareness of the risks and challenges involved.

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The risks

Most companies raising through equity crowdfunding face risks, as most businesses do. Key risks to always be aware of are:

High Risk of Failure

Startups are more likely to fail than publicly traded companies, meaning there’s a considerable chance of losing your entire investment if the business doesn’t succeed.

Long-Term Investment Horizon

Equity investments in early-stage companies typically require patience, with returns often taking over five years to materialize. Since most startups don’t pay dividends, investors shouldn’t expect regular income.

Limited Liquidity

Selling shares in private companies can be difficult. Unlike publicly traded stocks, there’s no assurance of finding a buyer when you want to sell, and you cannot simply withdraw your funds.

Valuation Challenges & Ownership Dilution

Determining the value of private shares is complex, making it difficult to assess your investment’s worth at any given time. Additionally, if the company issues more shares in future funding rounds, your ownership percentage may decrease.

Investor Due Diligence

It is the investor’s responsibility to assess the potential risks and rewards of an investment. Thorough research and understanding of each opportunity are crucial before committing funds.

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Exits and Investment returns

For equity crowdfunding to make an investment return, the company needs to encounter a liquidity event such as a share buy back, offer dividends, acquisition, listing on a public stock exchange or an IPO. These events are milestones, crucial for rewarding the founders and early investors with the financial value of their equity, while also potentially providing investors with substantial returns. In the United Kingdom where equity crowdfunding has become a conventional route for raising capital, global brands including Nestle, Europcar and Diageo have acquired companies which raised via equity crowdfunding.

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Considering Equity Crowdfunding for your business or as an investor?

If you'd like to learn more about the equity crowdfunding process, reach out to the team at Social Startup Labs to start your journey.
Before investing in any campaigns please always consider the Risk Disclosure and Offer Document, in accordance with ASIC's guidelines.