Equity Crowdfunding is a relatively new way to invest, becoming available in New Zealand in 2014, and in Australia in 2018. It allows ordinary people to invest and buy shares in smaller, high-growth, or start-up type companies that aren’t available on traditional sharemarkets.
I have personally invested a small amount of money into Equity Crowdfunding campaigns, wth companies like Zeffer Cider, Squirrel, and ParrotDog Brewery, making up around 4% of my investment portfolio. In this article, I’ll cover four things you should know about investing in Equity Crowdfunding.
1. What is Equity Crowdfunding?
Most of you will already be familiar with the concept of crowdfunding. You’ve probably heard of Givealittle, a site where people can start fundraising campaigns to gather donations from the public to pay for things like medical bills, community projects, or sports trips . You may have also heard about a chap named Israel Folau who attempted to crowdfund $3 million to pay for legal fees to fight his former employers. Essentially, crowdfunding is about raising money from lots of different people (otherwise known as “the crowd”) to fund a common cause.
Equity Crowdfunding takes this concept to the next level, allowing companies to raise “equity” or “capital” from the public – money used to run and grow their business. In return, people who give those companies money in an Equity Crowdfunding campaign will receive shares in that company i.e. they become a part owner of that company.
Equity Crowdfunding’s impact on companies
For companies, Equity Crowdfunding allows them to raise capital more easily, with less time and expense required than going through traditional avenues. It also gives companies the ability to raise money from a wide audience, including giving their own customers a chance to become a shareholder. That’s why companies using Equity Crowdfunding are usually young, small, high-growth companies, that are not ready for the time, expense and regulatory requirements of listing on a public sharemarket. New Zealand’s current regulations allow companies to raise $2 million from crowdfunding per year (although they can raise more money through other sources).
Equity Crowdfunding’s impact on investors
For investors, Equity Crowdfunding allows ordinary people to get exposure to companies that you won’t find on traditional sharemarkets, and gives them the opportunity to invest in young, high-growth companies. The high-growth nature of these companies provides the potential to achieve massive returns, although this comes with high risk – a company’s growth aspirations may not come to fruition, or they may fail completely. Andrea Moore and Renaissance Brewing are examples of companies that have raised capital through crowdfunding, but have since gone into liquidation.
2. How do I invest in Equity Crowdfunding?
- A company wanting to raise capital launches an Equity Crowdfunding campaign on a licensed platform.
- The campaign is accompanied by an Information Memorandum (IM) document. The IM contains key details about the campaign such as what the money will be used for, risks, financial statements and forecasts, how many shares are on offer, and the minimum investment amount.
- People who are keen to invest sign up to the Equity Crowdfunding platform and agree to invest their desired amount. Anyone in the public can invest, and the minimum investment amount varies for each campaign (this typically starts between $500-$1,000).
- Each campaign has a minimum target, which is the amount of money that must be raised for the campaign to be deemed successful. Campaigns also have a maximum amount that can be raised. A campaign closes when it reaches its closing date or the maximum amount.
- If the campaign meets its minimum target, investors’ money is passed to the company, and investors are issued shares in that company. If the campaign fails to meet its minimum target at the closing date, no money changes hands and no shares are issued.
3. What is it like being an investor in Equity Crowdfunding?
So you’ve become a shareholder in a company through an Equity Crowdfunding campaign. What happens next?
Firstly, the company will hopefully put the money raised to good use. Good companies will also send out regular updates to their investors, sharing their progress, achievements, challenges, and financial metrics. But don’t expect regular dividend payments from these companies, as they are high-growth companies that prefer to reinvest their profits into further growth.
One thing that won’t be visible to shareholders is the company’s current value. With companies that are listed on the sharemarket, you can see their share price at anytime, and therefore know how much your shares are worth on any given day. This is not the case with Equity Crowdfunding – similar to investing in a house, you can only estimate its current value.
A side effect of not knowing a company’s share price or value is lower volatility. Companies listed on the sharemarket have their share prices go up and down every day, sometimes by large amounts. Equity Crowdfunding stays away from the ups and downs of the public sharemarket, so these companies’ value is significantly more stable. This could serve to stabilise your overall investment portfolio during times of high market volatility.
Lastly, some companies will give their crowdfunding shareholders discounts and rewards. For example, ParrotDog and Zeffer offer shareholder discounts on their beer and cider, and Behemoth Brewing rewarded their shareholders with goodies like a t-shirt and hat (see below). You may also be invited to annual shareholder meetings, where there is sure to be free food and drinks 🙂
4. How do I sell the shares I bought through Equity Crowdfunding?
When you invest in a company through Equity Crowdfunding, prepare to hold your shares for a very long time. These companies aren’t listed on a sharemarket so you can’t juts go to a broker to sell them. Here’s the ways you might be able to exit from an Equity Crowdfunding investment:
Not all companies will offer opportunities for investors to trade their shares. Those that do might offer:
- Trading windows – a limited period of time where you can buy and sell shares to/from other investors
- Informal Marketplace – where you can register your interest with the company if you want to buy/sell, and the company will attempt to match you with a seller/buyer.
Company Exit Strategy
Even though you can’t sell your shares easily, doesn’t mean you’ll necessarily be holding them for eternity. Most companies will have an exit strategy detailed in their IM. This strategy details how shareholders might eventually “exit” out of their investment. These are typically:
- An aspiration to be acquired by a larger company (like how Instagram was bought by Facebook) or,
- An aspiration to grow large and mature enough to list on a public sharemarket
However, these aspirations don’t always work out as planned, so prospective investors should always take into account the risk of having their money locked up for the long-term.
Is investing in Equity Crowdfunding right for you?
If you have:
- A higher appetite for risk
- Money you don’t need for the short-medium term
- A desire to invest in exciting, high-growth companies
- Time to assess each company before investing,
Then Equity Crowdfunding might be suitable as a small part of your investment portfolio. Investing in the right company could see you rewarded with huge returns, and the excitement of seeing your company grow. But given the high risk and limited ability to sell your investment, I don’t think it should ever make up a large part of someone’s investment portfolio.
The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.