We have all done it – gone onto Kickstarter or Indiegogo and thrown some money at some project we think will change our lives FOREVER (I am sure this app that I have purchased will get me speaking Spanish in 6 months. Que Bueno!)
This great concept has been taken to investing and is known as equity crowdfunding – for as little as $50, you can own a percentage of a company you love. Sounds pretty sweet….right?
What Exactly is Equity Crowdfunding?
Since Sept-2017 Australians have been given the ability to own a percentage of a company that is not listed on the Australian Stock Exchange (ASX). This is known as equity crowdfunding and is made possible through equity crowdfunding platforms.
What Are Equity Crowdfunding Platforms?
Much like traditional crowdfunding, equity crowdfunding is done through platforms which match the companies trying to raise money with the investors (that’s you). All equity crowdfunding platforms operate in a similar manner – the company looking to raise funds pays the platform a fee and it’s free for you to make investment. Below we provide a breakdown of the 7 companies that have secured a license to operate platforms in Australia:
|Platform||No of Live Deals||Differentiator|
|Equitise||2||Equitise completed the first Aus based crowdfunded deal. Has been operating equity crowdfunding in NZ since 2015. Have got "Syndicates" which will allow you to follow famous investors.|
|OnMarket||1||Have raised $60m in non-crowsourced funding over past 10 years.|
|Enable Funding (Formerly ASSOB)||0||Have raised ~$148m in non-crowdsourced funding over past 10 years.|
|Billfolda||0||Billfolda takes a share in the company alongside you.|
|Capital Labs||0||Crowfunding specifically for "biotech & life science" companies.|
|Birchal||1||Best looking crowdfunding platform launched.|
|Big Start||Big Start were given a license however there is very little information out there on them.|
Which Platform Should I Use?
When making an investment through crowdfunding you want to make sure the platforms run a thorough due diligence processes on the companies they select. Your rights are not as well protected as when you invest in a company listed on the ASX so you need to be confident in the platform.
Since Australia’s equity crowdfunding market is so new we don’t yet have the luxury of say, the US, where there were close to 500 available deals on crowdfunding platforms in 2017 and there are clear “winners” in the platform space. In Australia, the first few investments made will need to be made without a great deal of track record for the platform. Having said that – Equitise, Onmarket and Enable Funding have all been operating in a similar space for years now and are more established than the others.
What is the Difference Between Equity Crowdfunding and Buying Shares on the ASX?
While both methods allow you to own a share of a company, there are some big difference between the two:
- Liquidity – When you buy CBA shares you will be able to sell those shares (hopefully at a higher price!) at any time in the future. With Equity Crowdfunding there is no secondary market, so you won’t be able to sell anytime soon.
- Risk – Buying shares through crowdfunding is far riskier than through the ASX – this is a result of the fact that companies raising funds through crowdfunding are far smaller and less well-established. But with higher risk comes higher potential gains.
- Ongoing Disclosure – Shares listed on the ASX are required by law to publish ongoing financial statements and make material announcements to the market – this is not the case with equity crowdfunding.
- Investment Size – To date, the minimum investment on most equity crowdfunding platforms has been $250 per deal (the companies advertise $50 but none are accepting investment that small) and the maximum you can put into any one company is $10,000. This compares to an “initial public offering” on an exchange which has a minimum of $2,000 and no maximum.
How Do I Actually Sell My Investment?
Early stage investors usually realise a return on an “exit”, these exits can be:
- Initial Public Offering – if the company you invested in does list on an exchange (likely to be the ASX) you will be able to sell them (you are also likely to be a lot wealthier!).
- Trade Sale – If a larger company decides to buy your investment you will be paid for your stake at the purchase price.
- Share buyback – far less likely, but company management may decide to buy back your shares (this would require shareholder approval beforehand).
The returns from these exits can be very high but they are also very high risk.
Should I Buy Into the Hype?
One of the biggest selling points of crowdfunding investing is that it gives you exposure that “only the very wealthy and venture capitalists could get involved in”. Venture Capitalists (VCs) certainly do invest in these types of businesses however, it is worth understanding that a typical VC will make multiple investments because they realise that over 90% of their returns will be generated by about 10% of the portfolio (i.e there will be 1 BIG winner and a lot of failures). A VC’s investment portfolio might look like this:
What this means for you is that a prudent investment strategy for these types of investments is spreading money across multiple smart bets. This may be limited by:
- Your Capital – the amount of money you have to invest may not make it feasible to invest in multiple of these businesses
- Opportunities – at present across all 7 businesses that have licenses to operate equity crowdfunding platforms there are only 4 live deals to invest in which means even if you liked them all (unlikely) the market may not be wide enough to formulate a smart investment strategy.
So What Should I Do?
Equity Crowdfunding certainly gives a great opportunity to invest in things you care about BUT exercise extreme caution. The Australian Bureau of Statistics reports that over 60% of small businesses fail in their first 3 years while other reports suggest 9 out of 10 startups fail. Whichever way you look at it, the company you invest in has long odds of making it. What this means is you shouldn’t invest any money you can’t afford to lose – equity crowdfunding should make up a part of your overall portfolio.
At Plenty we may not advise on crowdfunding, but we can help you decide not only where to invest your money, but how much you should invest. We also show you ways to save money through many avenues (budgeting, lower fees, lower interest rates etc.). These savings can be put towards your next crowdfunding investment. It’s easy to get started. The best news is that the advice is free – get started now.
Josh is the co-founder of Plenty. Along with being a mortgage broker, he spent 5 years in banking and has an honours in Finance from UNSW. He loves all things tech and finance.
The information contained on this page is of a general nature and may not be appropriate for your personal circumstances. You should obtain personal financial advice before acting on this information.