Investing through Crowd Funding
What is Equity Crowdfunding, what is the investment timeframe and return of investment, and what to consider before making an investment
In 2018, equity crowdfunding was officially legislated and regulated in Australia, with ASIC granting the Australian Financial Services licenses to several platforms.
This change marked a capital funding milestone and it followed legalisation changes in many developed countries including the United Kingdom, United States, Italy and New Zealand.
What is Equity Crowdfunding?
Officially known in Australia as crowd-sourced equity funding (CSF), equity crowdfunding allows private companies (and public unlisted companies) to source funding by offering a stake in their business to public investors.
Eligible Australian companies can now source up to $5 million a year through the process. Traditionally, these companies, startups and brands pitched for investment primarily to venture capitalists, high net worths and angel investors to raise capital, but now everyone is able to participate in the capital raise by investing from $50 and up.
Buying shares through crowd-sourced funding
MoneySmart (the website is run by the Australian Securities and Investments Commission (ASIC) to help people make the most of their money) created an article on buying shares through crowdsourced funding.
Original article on MoneySmart: https://www.moneysmart.gov.au/investing/shares/how-to-buy-and-sell-shares
How do I make a return on investment?
Companies using Equity Crowdfunding include new or rapidly growing ventures. Returns are gained if a company ‘exits’ through a trade sale, Initial Public Offering (IPO) or share buyback. Investments in these types of ventures are speculative and carries higher risks but also present opportunities for much higher returns.
Medium to Long term investment
Investing in private and unlisted companies is typically a medium to long-term investment, and shares in these companies are unlikely to be liquid. Shares in these companies are not trade-able through public exchanges (ie. ASX). This means you are unlikely to be able to sell your shares quickly or at all if you need the money or decide that this investment is not right for you.
A company must prepare an Offer Document (CSF Offer Document) for each offer it makes under the new Equity Crowdfunding legislation. The Offer Document must contain certain minimum information, which is prescribed under the law. In addition, the offer document must be worded and presented in a ‘clear, concise and effective’ manner (see ASIC RG 261 for more details). You must consider the Offer Document before investing.
A Portals Obligations
Before publishing an Offer Document (or a supplementary or replacement document) on a CSF platform, the platform must perform certain checks to a reasonable standard. The intention of this regulatory requirement is not for the platform to conduct comprehensive checks on the company making the Equity Crowdfunding offer, but rather to ensure the platform does not publish, or continue to publish, the CSF offer document in specific circumstances. See ASIC RG 262 Table 2 for a list of these checks. It also explains what a 'reasonable standard' is.