Equity Crowdfunding - What is it?
Equity crowdfunding is a fast-growing segment of the alternative finance industry. It enables individuals to invest in early-stage and scale-up businesses. Traditionally such opportunities were mainly accessible to wealthy people, angel investors and venture capitalists. However, in 2017 legislation for equity crowdfunding was passed in Australia. The industry has grown significantly since then. As a result, platforms such as Stride Equity present you with vetted investment opportunities previously not accessible to the public. But how does equity crowdfunding work in Australia?
Equity Crowdfunding in Australia
Crowd-sourced funding (CSF) is a financial service. Therefore, intermediaries such as Stride Equity must hold an Australian Financial Services Licence (AFSL). The licence allows us to present potential investors like you with vetted investment opportunities.
Most Australian residents who are 18 years and older can invest in startups, scale-ups and other growing private Australian businesses presented by us. We will guide you through the process when you create a profile.
Investors are categorised into two groups:
- Retail investors : Can invest up to $10,000 per company per 12-month period. Retail Investors have a 5 business day cooling-off period. During this period, they can cancel the investment for any reason. After the cooling-off period, retail investors are unable to withdraw their investment.
- Wholesale Investors : Can invest more than $10,000 per year per company in Australia. Investors need to provide evidence to confirm their wholesale investor status and have no cooling-off period. Wholesale investors will need to provide an accountant’s certificate confirming they have income of at least $250,000 for each of the past two years or have or control more than $2.5 million in net assets.
All companies who want to raise funds and publish their CSF offer must meet the following criteria:
- The company must be a proprietary company or a public company limited by shares;
- Have its principal place of business in Australia;
- Have a majority of its directors ordinarily residing in Australia;
- Not exceed the assets and annual revenue caps of $25 million;
- Not be listed on a financial market in Australia or overseas;
- Not have a substantial purpose of investing in other companies, entities or schemes;
- Must not raise more than $5 million in any 12-month period through CSF offers.
If you are a company interested in raising capital, please submit your application. We will get in touch with you shortly.
What are the benefits and disadvantages of equity crowdfunding?
Pros and cons of Equity Crowdfunding for investors
Investing in startups and scale-up companies is exciting. However, you should be aware of the risks and rewards before investing. Some of the upsides are:
- The next big thing: Many of the companies we present you challenge the status quo by innovating and disrupting industries. Who knows, you may be backing the next Aussie Unicorn!
- Invest in the things you love: As part of the crowd, you can invest in the businesses you believe in and love.
- Investing for everyone: The minimum investment amount varies for every opportunity. However, the lower investment minimums make opportunities more accessible to the public and allow you to build a more diversified investment portfolio.
- Access to investment experience and expertise: We must conduct certain due diligence checks. We, however, go beyond the basic checks and use our over 30 years of experience and expertise to dive deep into every business before publishing their offer on Stride Equity. As a result, we only present you with opportunities we think have the potential to succeed.
- Potential high returns: Investing in early-stage companies is risky but with high risks come potential high returns if the business is successful.
As you can see, investing in startups and scale-ups can lead to significant gains. But, as a responsible investor, you should also consider the risks. Some of the downsides are:
- Greater risk of failure: Keep in mind that not every business will be successful. Investments in early-stage companies are at high risk due to a high degree of uncertainty. That is why you may lose all invested funds. Therefore, always read the general CSF risk warning and the provided Offer Document.
- Illiquidity: Investments in startups are considered illiquid since it may take years until you make your return on investment. Illiquid assets are, in general, harder to sell.
- Limited information: The company and we provide you with all required information and additional insights. However, we do not provide you with any financial, investment, legal or tax advice or recommendations. Therefore, you should conduct your own assessments of any investment opportunity and seek independent legal and financial advice before committing to any investment.
- General CSF risk warning: Crowd-sourced funding is risky. Issuers using this facility include new or rapidly growing ventures. Investment in these types of ventures is speculative and carries high risks. You may lose your entire investment, and you should be in a position to bear this risk without undue hardship. Even if the company is successful, the value of your investment and any return on the investment could be reduced if the company issues more shares. Your investment is unlikely to be liquid. 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. Even though you have remedies for misleading statements in the offer document or misconduct by the company, you may have difficulty recovering your money. There are rules for handling your money. However, if your money is handled inappropriately or the person operating the platform on which this offer is published becomes insolvent, you may have difficulty recovering your money. Ask questions, read all information given carefully, and seek independent financial advice before committing yourself to any investment.
How can you make a return on investment by investing in early-stage businesses.
Return on investment for investors
Every startup has its own exit strategy. Furthermore, the strategy may change over time. However, the most common strategies are:
- Merger, acquisition or disposal: A merger is when two businesses decide to merge both entities into a single entity. The objective is often to benefit from a greater scale. If a business chooses to purchase a majority stake in another company and takes control, that's called an acquisition. Many startups exit via merger or disposal.
- Initial public offering (IPO): IPOs are also a popular exit strategy once a company has reached a certain size. Many Australian startups want to list on the Australian Securities Exchange (ASX). After a business is listed, existing shareholders can easily buy and sell their shares.
- Share buyback: A business may decide to buy back shares from its investors.
- Other options: Companies that reach profitability may choose to pay dividends to their shareholders. However, it usually takes a few years until businesses start to pay dividends. Private Secondary Markets allow private company shareholders to buy and sell shares. Two individuals can also decide to exchange shares for cash privately as long as it is in accordance with the relevant shareholder agreement.
As you can see, the benefits of equity crowdfunding are pretty attractive for investors as long as you are aware of the involved risks.
That leaves us wondering why a business should choose to raise capital through the crowd?
Pros and cons of Equity Crowdfunding for startups
Building and scaling a business consists of many challenges. Raising capital is just one of the challenges you face during your journey as an entrepreneur. Some of the advantages of equity crowdfunding for founders are:
- Access to capital: Many startups fail as they can't access angels, venture capital and bank loans. Equity crowdfunding provides founders with an alternative option, the crowd. The crowd represents a bigger group of investors who generally invest smaller sums. This approach can be more efficient than convincing a few high-net-worth individuals and/or venture capitalists.
- Brand awareness and advocates: Equity Crowdfunding will require you to market your business through your channels and networks. Therefore, the campaign will increase brand awareness, is likely to attract new customers, and lead to media coverage. Furthermore, people who believe in your business and decide to invest are also likely to become brand advocates. They will often promote your business and products and services within their networks.
- Access a larger pool of potential investors: Stride Equity crowd is industry and stage agnostic. Our investor crowd is open to all sorts of businesses and always looking for the next big thing!
- Transparent costs: You can check our fees and costs online and reach out to us.
- Experience and expertise: We have more than 30 years of experience raising capital, investing in early and late-stage businesses and advisory services! This vast amount of experience and expertise is accessible to you!
The upsides of equity crowdfunding for startups are significant, but there are also a few downsides to consider. Some of the disadvantages are:
- Failure: An unsuccessful campaign may reduce the confidence of the public and investors in the business and affect your reputation. That is why we have a comprehensive due diligence process.
- Too early: You will need to build and activate your crowd before launching an offer to increase your success chances.
- Wrong valuation: Valuating a business, especially an early-stage company, is a science and an art at the same time. Luckily for you, our team has decades of experience in it!
- Wrong choice: We know that equity crowdfunding is a very tempting option, but it may not be the right option for your business.
As you can see, equity crowdfunding can help you to propel your business in many ways with the right partner and timing. The final question that remains is, how does it work?
Equity Crowdfunding for investors
Investing in startups is simple. All you have to do is:
- Check out our current investment opportunities: Feel free to explore all open EOIs and Offers. If you see one or more you like, you need to open an account with us.
- Ask questions: Now that you have a profile, you can read all provided documents and ask the startup questions. We highly encourage you to use the provided communication facility to ask questions and conduct your own research. Before investing, you must read the offer document and acknowledge all risk warnings.
- Click on invest and verify your identity: If it is your first investment on our platform, we will ask you to verify your identity and wholesale status (if applicable). After that, you can proceed and make your first investment.
- Payment: We will provide you with the details and notify you once we have received your payment.
- Campaign outcome: If the offer reaches at least its minimum target, we will declare the campaign a success and provide further information regarding your allocation and the share registry.
- Congratulations: You have become a shareholder and, therefore, a partial owner of the business. You can support the company by sharing news and updates with your networks. Furthermore, you will now receive regular updates on the company's performance.
Investing in startups was never as easy as today. You may continue to invest in more companies you believe in.
Equity Crowdfunding for startups
As you can see, it is simple for potential investors to invest in your business. We also streamlined the process for you since we know how time-consuming it is to build a successful business. All you have to do is:
- Submit application: You have to create an account and submit your application. It will take you no more than a few minutes. We then will review your application and provide you with initial feedback. If we think it's a mutual match, we will schedule a meeting with you to learn more about you, your team and your business.
- Due diligence: We will conduct a series of checks and ask you to sign a hosting agreement.
- Expression of interest (EOI) campaign: We will publish your EOI campaign once all checks and campaign preparation are completed. This campaign aims to evaluate investors' interests and get their feedback. We will analyse the outcome of the campaign and discuss it with you. If the interest is high enough, we will proceed and publish your CSF offer.
- Offer campaign: Now, you have to go out to the market and showcase your business and investment opportunity. It is your time to get into the spotlight and shine! We will assist you as much as we can.
- Campaign end: You achieved your fundraising goal! We will assist with administrative tasks and coordinate the next steps with you.
- Receive funds: Once we have received all the funds, and the cooling-off period is over, we will transfer the funds to you. You can now do what you like most, focusing on growing your business. If you need an additional capital injection later, do not hesitate to reach out again!
As you can see, launching an equity crowdfunding campaign requires a bit of work. However, you will gain much more than just additional funds with the proper preparation and team. You will have a crowd that can help you to achieve your vision! Ready to launch a campaign? Then, submit your application now.
Do you have more questions?
Below you will find some additional resources. Please do not hesitate to contact us if you have further questions.
We are looking forward to hearing from you!