What is crowdfunding?
Crowdfunding is a way of raising money for an idea, a project, or a business by promoting it to the public. The concept has been around for years but has gained much more prominence recently.
There are four different types of crowdfunding:
Donation-based crowdfunding: Contributors do not expect anything in return for their donation.
Debt-based crowdfunding: Borrowers need to repay their investors at a predetermined time with a set interest rate. This type of crowdfunding is also known as peer-to-peer lending.
Reward-based crowdfunding: Contributors receive a reward, e.g. a new product, in exchange for a predetermined contribution amount. Such campaigns often use a tier-based donation system.
Equity-based crowdfunding: Companies raise capital by issuing shares to a crowd of retail and sophisticated investors through a crowd-sourced funding (CSF) intermediary, such as StrideEquity.
How to qualify for equity crowdfunding?
Companies need to meet the following criteria to be eligible to make an offer under the CSF regime:
Be a proprietary company (with a minimum of two directors) 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 (including the assets and revenue of its related parties);
Not be listed on a financial market in Australia or overseas (including its related parties);
Not have a substantial purpose of investing in other companies, entities or schemes;
Make an offer for the issue of fully-paid ordinary shares;
Comply with the issuer cap (offers to raise no more than $5 million in any 12-month period).
Please read our article about the key requirements of ASIC's Regulatory Guide 261 to learn more about the legal aspects of equity crowdfunding.
How much money can I raise with equity crowdfunding?
Australian businesses can raise up to $5 million within any 12-month period through a retail CSF offer. The issuer cap does not apply to an offer only available to sophisticated or professional investors. Please contact us to learn more about our wholesale offer process.
How does equity crowdfunding work in Australia?
Founders should allocate around eight to sixteen weeks for an equity crowdfunding campaign. The duration depends mainly on how well prepared a company is and how quickly the expression of interest (EOI) and the offer campaign can be closed. Companies that manage to create fear of missing out (FOMO) from the start are likely to achieve their funding goals early. Equity crowdfunding can be broken down into the following steps:
Application: Every CSF intermediary has a slightly different application process. We ask founders to submit their pitch deck and business plan.
Due diligence: CSF intermediaries are required by law to perform certain checks. In addition to these mandatory checks, every platform conducts additional due diligence.
EOI campaign: The campaign's objective is to evaluate investors' interest before launching the offer campaign through digital marketing.
Offer campaign: Companies and the CSF intermediary promote the offer to potential investors.
Campaign success: Before the funds can be transferred, the company and CSF intermediary need to wait until the five-business day cooling-off period for retail investors is over.
What are the pros and cons of equity crowdfunding for companies?
Equity crowdfunding has, like every fundraising strategy, its pros and cons. Some of the benefits are:
Companies can reach investors they would not otherwise have access to by advertising their CSF offer to the public and their network.
Equity crowdfunding campaigns increase the public profile of participating companies. This often results in the attraction of new customers, increased brand recognition and can lead to wider media coverage.
New investors are likely also to become brand advocates. This can result in additional long-term positive network effects.
It is a faster and potentially less expensive method compared with raising funds from venture capital firms that may also want preferential treatment, or complex investment instruments applied.
Funding raised through successful crowdfunding campaigns can accelerate the growth or scale up of a business without compromising control of the company and using relatively simple ordinary equity issues.
Some of the potential disadvantages are:
It requires companies to invest resources otherwise spent on the business into fine-tuning their business plan and communicating their value proposition to a wider audience. This, of course, would be true for any third-party capital raising.
An unsuccessful campaign will not only take resources away from the business without the benefit of additional funding in the end, but it may reduce the confidence of potential investors in the company.
There is a risk of mispricing a company participating in a CSF offer, whether it is over or undervaluation. Undervalued companies face greater dilution at an early stage of their growth phase while overvalued companies risk campaign success. Again, this is a risk with any form of capital raising.
Ideally, companies choosing to take part in a CSF offer would already have some exposure to the market with a captive audience. An entirely ‘cold’ campaign has a higher risk of failure.
Equity crowdfunding may allow companies to accelerate their growth journey by accessing funding not otherwise available to them. With the right partner, networks and planning the benefits can be leveraged, and the risks managed to increase the chances of a successful campaign.
