Equity Crowdfunding, also known as Crowd-Sourced Funding (CSF), allows everyday individuals to invest in early-stage and growth-stage businesses. Unlike platforms like Kickstarter (which gives you rewards or gifts in return for your investment) or GoFundMe (which is a crowdfunding platform for donations), equity crowdfunding enables a large group of individuals (known as ‘the crowd’) to invest in early-stage businesses in return for part-ownership of the business (equity).
These investors are either retail investors, who invest less than $10,000, or sophisticated investors, who invest more than $10,000. The group of investors become shareholders in the business and share in the potential success of the company.
Historically, only sophisticated investors could invest in early-stage or growth-stage businesses. To be classified as a sophisticated investor you must earn over $250,000 in gross annual income or own over $2.5m net in assets. As the average annual income in Australia is significantly lower than $250,000, this limited the opportunities for everyday investors and small businesses looking to raise capital.
In a capital raising space that was traditionally dominated by wealthy individuals, venture capitalists and angel investors, equity crowdfunding and intermediaries such as OnMarket have democratised investing by enabling anyone to handpick investment opportunities, gain a stake and become a part-owner in start-ups, early-stage and growth-stage businesses.
Although legislation for equity crowdfunding was only passed in Australia in 2017 (Crowd-Sourced Funding Act 2017, amended and expanded in September 2018), it has successfully grown into a go-to avenue for growth funding in Australia, with over $240m raised for more than 325 businesses.