In September last year ASIC legislation opened a whole new world of funding for Australian business, legalising publicly unlisted companies to raise funds from the ‘crowd’ in order to support their business ideas.
With eligible companies now able to raise up to $5 million dollars a year, it could be a game-changer for the Australian business sector. So how does equity crowdfunding really work, and what are the rules?
Like traditional crowdfunding, equity crowdfunding collectively raises funds, but rewards investors with a slice of the business’ equity (and a share of their profits) in lieu of a product or service.
In Australia, there is lack of funding for early stage emerging companies, so for entrepreneurs, equity crowdfunding significantly reduces capital-raising obstacles. For investors, it provides new opportunities to take a stake in unlisted companies.
Historically, the capital raising space has been dominated by wealthy individuals, but since the new legislation has come into operation, equity-based crowdfunding has become increasingly popular among everyday mum-and-dad investor.
Since the new legislation, a number of Australian crowdsourcing platforms have arisen, with Equitise, Birchal and Enable Funding being the most popular. These have the ability to host multiple start-ups who pitch their business ideas to investors.
The process of investing is quick and easy. Entrepreneurs call for funding via a crowdfunding platform which provides facilities such as a standard investment contract, settlement mechanisms and due diligence.
Potential investors register via an equity crowdfunding platform, discover the available opportunities, decide to invest and pay seamlessly online.
By nature, start-ups are much riskier investments than established entities, yet they also offer the possibility of getting in on an idea before it becomes too successful or out of reach.
Given the high risk of early-stage start-ups, safeguards are in place including a $10,000 investments limit per company per year for retail investors, and a cooling-off period of five working days for each investment.
In the US and UK, crowdfunding markets have experienced massive growth in capital raising after enabling regulation were passed. Industry observers believe that Australia will follow similar global trends.
As a last note, investors should not look at equity crowdfunding as a get rich quick scheme; they’re much more likely to be long-term, high risk investments and as such, investors should take care when committing any significant portion of wealth or income.
Read the full story in unisabusiness magazine.