Equity Crowdfunding investing – an introduction

What is Equity Crowdfunding?

Equity Crowdfunding enables a large group of individuals (‘the crowd’) to invest in early-stage businesses in return for part-ownership of the business (equity).

The ability for everyday investors to gain part-ownership of early-stage businesses in Australia was enabled by legislation in late 2017. Traditionally, this space has been dominated by wealthy individuals, venture capitalists and ‘angel investors’. Today, everyday investors can handpick, invest and gain a stake in businesses they feel passionate about. Investors can invest from $50 and up, with a $10,000 cap per retail investor per company in any 12 month period. The $10,000 limit does not apply to sophisticated investors.

What are the benefits of Equity Crowdfunding for investors?

Equity Crowdfunding enables investors to:

Get involved in the next big thing and share in the success – Equity Crowdfunding enables investors to choose businesses they feel passionate about and be part of a business’s progress as it grows.

Gain part-ownership – Equity Crowdfunding is the simplest way to gain part-ownership of a business. Since it involves investing in return for equity, if the business invested in succeeds, the value of the company increases and the shares owned will be worth more than what investors initially put in. If the business makes an ‘exit’ at a higher value than invested, investors receive a return on their investment.

Invest as little as they want – a low minimum investment threshold allows investors to participate from as little as $50. This means that investors don’t take on as much risk as they would if they were to invest a hefty amount in only one business.

What are the benefits of Equity Crowdfunding for companies?

Equity Crowdfunding enables companies to:

Access funds easily – for businesses, especially start-ups, 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.

Gain awareness amongst investors – by gaining access to thousands of small investors, that is, the ‘crowd’, businesses can increase awareness about their product offering to a ready-made database of engaged and knowledgeable investors.

Build social proof – Equity Crowdfunding provides an avenue for a firm to confirm that people believe in what they’re doing, providing an important insight into what customers think about their product.  

What are the different types of crowdfunding and how does Equity Crowdfunding fit in?

Broadly, crowdfunding involves a large number of people raising funds for a project or a business by contributing small amounts each.

There are 4 main types of crowdfunding:

Equity Crowdfunding

This involves investing in businesses – specifically, it is the process of investing in early-stage, growing businesses. In exchange for helping a business raise funds, investors receive a portion of a business’s equity, meaning that investors become part-owners in the business. Up until September 2017 in Australia, only venture capitalists and accredited ‘angel investors’ could invest in unlisted businesses at this stage.

Donation-based crowdfunding

This involves donations by a large number of people directed towards a charitable cause (think of donation-based crowdfunding platforms such as gofundme). Those that raise funds do not receive any ownership rights, they simply donate to a cause they are passionate about.

Rewards-based crowdfunding

With rewards-based crowdfunding, funds are also directed from a presumably large group of investors toward a cause. However, in this case investors receive a tangible good or service in return for their funds (think of rewards-based crowdfunding platforms such as Kickstarter). Usually, the main purpose of such platforms is to assist in increasing market knowledge about a new product launch.

Debt-based crowdfunding

This involves individuals lending money to businesses or other individuals with the expectation that it will be repaid over a determined timeline, together with interest added. Forms of debt-based crowdfunding include peer-to-peer (P2P) and peer-to-business (P2B) lending.

What types of companies can I invest in via Equity Crowdfunding?

At OnMarket we are primarily open to growth-focused businesses, as well as seed and early-stage businesses, provided they pass our screening process. By welcoming businesses from seed to growth stage, OnMarket is empowering everyday investors to play a part in businesses with a point of difference – that is, businesses that are aiming to, or currently are, making an impact from a local to a global level, and seeking change for the better.

What industries do the businesses that raise capital on OnMarket come from?

OnMarket provides opportunities to invest in businesses from all industries and sectors.

As a common theme, the businesses that tend to raise funds through our platform are those that have a product offering that seeks to make a point of difference in the world, whether on a local or a global scale.

What is the difference between Equity Crowdfunding and the stock market?

Equity Crowdfunding differs from investing in the stock market in four key ways:

Unlisted vs listed companies -– investing through Equity Crowdfunding involves gaining part-ownership of an unlisted company, often at an early stage of its growth. In contrast, investing in the stock market involves investing in a listed company which is trading on the ASX, NYSE, NASDAQ or a similar exchange.

Liquidity and investment horizon – unlisted Equity Crowdfunding investments are less liquid than listed stock market investments, because there is no active secondary market for them. The implications of this liquidity constraint means that investors tend to invest for a longer amount of time (or ‘investment horizon’). This differs to the stock market, where investors have high liquidity and can, in most cases, sell a company’s shares at any time after purchase.

Low minimum investment threshold – Equity Crowdfunding has a very low minimum investment requirement. The minimum investment is $50, and the maximum is $10,000 per company per year for a retail investor. Investing in an initial public offering (IPO) on the stock market has a much higher investment threshold, that being $2,000.

No fees – unlike the stock market, there is no broker acting as an intermediary between an investor and a business. At OnMarket, this means no brokerage fees for the equity crowd funding investor. We are a completely free platform for investors to connect with businesses that are making an impact. Instead, we charge the businesses raising capital a fixed percentage of the amount of capital they raise.

What can we learn from Equity Crowdfunding internationally?

Whilst Equity Crowdfunding has only recently been enabled by legislation in Australia, it has been booming overseas. In 2015, the amount of capital raised via equity crowdfunding stood at $2.5bn (according to AIG UK).

In contrast, Australia has been late to the party, with the Crowd-Sourced Funding Act 2017 allowing this innovative type of funding from the end of September 2017.  Where investing was previously restricted to wealthy investors or institutions, Equity Crowdfunding opens up a myriad of prospects for everyday investors to gain an equity stake in a company.

UK

In the UK alone, the equity crowdfunding market saw rapid growth of 295% in 2015, according to the University Cambridge Centre for Alternative Financing and Nesta. In 2016, 31 campaigns raised more than £1m each.

US

With the enactment of the Jumpstart Our Business Startups (JOBS) Act 2012, the US equity crowdfunding market has flourished; $1.2bn was raised through Equity Crowdfunding in 2015.

NZ

The NZ equity crowdfunding market raised $10.8m in 2016. Snowball Effect, the largest Equity Crowdfunding platform in NZ by market share, raised $7m of this.

There is massive potential for the Equity Crowdfunding market in Australia – the opportunity presented by democratising the investment process for everyday investors and early-stage start-ups is an exciting one. With these prospects, a report published last year by Goldman Sachs labelled Equity Crowdfunding as “potentially the most disruptive of all the new models of finance”.

Early-stage start-ups are increasingly interested in this new avenue of funding – small- to medium-sized businesses are a leading source of innovation in our economy, but many experience difficulty accessing capital. Equity Crowdfunding opens another gateway for these business to access capital.

Investor interest is high and millennials care about what they invest in – according to the Millennials Impact Investment Survey 2016, 76% of millennials describe themselves as impact investors seeking both financial and social return. Many of these investors today are heavily inclined to be part of entrepreneurial endeavours, with 50% of 18-29 year olds aspiring to own their own business.  In addition, the ASX Australian Investor Study by Deloitte in 2017 suggests that investor interest for this market is high in Australia, with the number of 18-24 year olds investing in shares doubling in the last 5 years.

Crowdfunding is transitioning from an ‘alternative’ form of finance to a mainstream one – with the successful operation of Equity Crowdfunding in the UK and US for the past 5 years, it is predicted that Equity Crowdfunding models may surpass venture capital models by 2020.