Kickstarting the new era of equity crowdfunding

Blog Post: 07th Apr 2016
Guest Author: Rob Nankivell, CEO – VentureCrowd

Make no mistake, equity crowdfunding is not the same as donations-based fundraising.

With the popularity and phenomenal growth of Kickstarter and other donation and rewards based fundraising websites, other forms of crowdfunding often fall victim to this success.

Everyone seems to know that on sites like Kickstarter, just about anyone can raise money for just about any kind of creative idea or cause. Backers get a feel good glow and possibly a t-shirt or their name in the credits if it’s a movie they’ve backed.

It’s on this premise, that many people mistakenly believe that equity fundraising is just the same and often confuse donation based platforms with equity crowdfunding.

With equity crowdfunding, rather than donating money to a cause and getting a t-shirt, investors buy shares in companies seeking funds, as part of an online crowd. Importantly, not everyone is eligible to invest.

When businesses make an offer of equity to the crowd they do so without going through the traditional and complex process of preparing a prospectus.

Only sophisticated investors

As such, in Australia current laws allow only accredited – or sophisticated – investors to take a seat at the table. So that means you need an income of around $250,000 or have net assets amounting to $2.5 million. That’s hardly anyone and everyone. In fact, around 200,000 people in Australia are eligible to engage in equity crowdfunding.

That said, once you’re confirmed as an accredited investor and have registered on a crowdfunding website like VentureCrowd, you can invest as little as $1000 or as much as you like in as many opportunities as you wish.

And this is important. Investing in startups is incredibly exciting, but inherently risky. Of course, those risks come with exceptional opportunities. With a seat at the table, you get the chance to invest on the ground floor, when the upside is much greater than later on. In the past, these kinds of opportunities have largely been inaccessible to anyone but institutional investors or incredibly well heeled individuals.

“Crowdfunding, if done properly, is the future for how most small businesses in this country are going to be financed.”

 Duncan Niederauer, CEO, NYSE Euronext

The future of SME financing

Equity crowdfunding is here to stay. Even four years ago, Duncan Niederauer, CEO of NYSE Euronext was predicting that equity crowdfunding would be the future of financing for most small businesses.

Indeed, if equity crowdfunding continues to double in size annually over the next few years, it will overtake venture capital as the largest source of startup funding.

Equity crowdfunding has certainly found a niche in tackling the startup business funding gap head-on. And Interestingly, while crowdfunding may have been looked down upon by professional investors not so long ago, this is no longer the case.

Working in tandem with VCs

In a sign of the times, many angel investors and venture capital firms have begun integrating equity crowdfunding as an important step in their investment strategy. Over in the US, institutional investors have already earmarked crowdfunding as an important new investment channel.

Of course, as the equity crowdfunding model matures, investment opportunities will only increase as more growing businesses and entrepreneurs turn to the crowd first for early stage funding.

And it’s not just for startup funding. Real estate crowdfunding is resonating with investors who are pooling funds for specific property trades.

Growing interest

While interest in crowdfunding is growing from investors, entrepreneurs and developers alike, at this point in time only unlisted public companies with assets of up to $5 million (or an annual turnover of up to $5 million) are allowed to participate. There’s also a $5 million a year cap on fund raising through the crowd.

Yet, with appropriately vetted opportunities, equity and real estate crowdfunding open up a smart way to diversify your portfolio and offer real opportunity to generate sizeable returns.

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Equity crowdfunding sophisticated investors