The Basics of Equity Crowdfunding
Equity crowdfunding is getting super popular. You might be here because a brand you love is running a campaign. Or maybe you just love investing in things and you want to try this crafty new instrument.
Whatever the reason, we hope that this article is helpful in getting you to understand equity crowdfunding (and maybe try your hand at it!)
We’re an Australian equity crowdfunding platform. Equity crowdfunding has only been in Australia since 2017. We got our headstart equity crowdfunding in New Zealand in 2014 (where we’ve also been doing project-based crowdfunding since 2011).
This article isn’t specific to Australian equity crowdfunding but it will have that flavour (G’day, cobber). Australians who love their specifics: We promise we’ll cover the technical stuff in future articles.
Today, we’re going to explain the basics of equity finance (I’ll try to ELI5 as much as we can) and the basics of crowdfunding. Once we’re on the same page about those two concepts, we’re going to tell you why equity crowdfunding is so important. We’ll go on to tell you why companies do this and why individuals invest.
Sound good? Onward.
The basics of equity finance
Equity finance is when someone who owns a company gives bits of the company (shares) to investors in exchange for money.
eq·ui·ty fi·nance ˈe-kwə-tē fə-ˈnan(t)s
Equity financing is the process of raising capital through the sale of shares in an enterprise. Equity financing essentially refers to the sale of an ownership interest to raise funds for business purposes.
Thanks, Investopedia. Unfortunately, that explanation isn’t clear enough for most people.
Equity finance means that a person who started a company is selling off a piece of that company. Every time they shave off a chunk of the company, it’s called a share issue. The bits of that chunk are called shares. Some shares in the company have special powers [1].
Someone who buys these bits of the company becomes a part-owner. In some cases, this means they get some say in how the company operates. This also means there is the potential to make money off of the investment. If the company is profitable, that some of those profits might be paid to the owners (a dividend). If someone is interested in buying in, an existing part-owner can sell some or all of their shares to them. If the business is ever sold, any part-owner receives part of the sale price based on what shares you own.
There are different kinds of investors. Venture capital firms make a whole business out of investing. Angel investors are high-net worth individuals. Other individual investors might buy publicly traded shares here and there. Founders of a young company might ask their friends and family to invest privately.
[1] Financial instruments like preference shares, options, debentures, convertibles are what I’m talking about. Most equity crowdfunding doesn’t do this but you can Google them if you’re curious. “Special powers” isn’t a technical term.
The basics of crowdfunding
Crowdfunding is when someone who needs money for a something (projects, travel, growing their company) asks their community and the general public for that money.
crowd-fund·ing ˈkrau̇d-ˌfən-diŋ
the activity or process of raising money from a large number of people, typically through a website, as for a project or small business.
(Source: Dictionary.com)
Crowdfunding usually has a minimum amount, an expiration date, and perks.
If the minimum amount is not met by the expiration date, no money is taken at all. Expiration dates can be extended in some circumstances.
Perks are provided to supporters with different tiers of perks provided based on the size of their support.
The basics of equity crowdfunding
Equity crowdfunding is when someone who owns a company asks their crowd and the general public to financially support the growth of the company. They offer bits of the company (shares) in exchange.
A company creates an official offer. This usually means creating an offer document and a pitch video. They’ll set a minimum. If they don’t reach this minimum, the offer is withdrawn and no money is taken. If they do reach the minimum the campaign is called successful when it ends. Once the offer closes, all of the money will be taken. The company will issue shares and the money will be handed to them.
In most countries, a company like PledgeMe acts as an intermediary (that’s what ASIC calls it — we prefer crowdfunding platform) between the company who is raising and its investors. This includes:
- making sure the offering company is capable of holding up their end of the bargain and have their paperwork in order
- supporting them through gathering their crowd and marketing their campaign
- being the public address where the company has the offer listed and taking pledges for investment from the investors
Crowdfunding platforms are just the place where the campaigns are hosted and the organisation that processes the money once the campaign ends.
If you support a company through a crowdfunding round, that company will be in contact with you directly (rather than updates via the crowdfunding platform) after the round is over. You’ll be a shareholder after all!
Companies participate in equity crowdfunding for various reasons including keeping their customers in control of what they produce, involving their customers in the future of the business, avoiding debt, or avoiding the downsides of angel/VC investment.
Individuals participate in equity crowdfunding for various reasons including the supporting a brand they love, having a say in how a brand they love operates, or seeking potential financial returns.
Here’s a screenshot from our Angel Food equity campaign that we ran on our NZ platform:
Why equity crowdfunding is so important
We’ve got a few reasons:
- It will attract new investors (maybe like you!) who can get educated around investment (like this!) and can invest in a protected, streamlined and clear way.
- It moves investment from just a strategic play for the angel investors, venture capitalists and ballers of this world to a version of voting with your dollar that hasn’t been seen before. The crowd gets to decide what’s worth investing in and we’re going to see those ivory tower barriers turn into bridges.
- Smaller ventures, which previously may have been overlooked by investors will now get the support of their networks — which might grow into towering support of its own. And it doesn’t stop them from getting angels and VCs onboard later down the track.
- It’s going to make those initial smaller raises from family and friends a lot more transparent and a lot easier — you can actually publicly share it even without the insane process of going to IPO, and everyone can see Uncle Jim got on board (and follow suit). Everyone has 50 friends, and a personal base of passionate people who really believe in a fledgling business will want to help out. It’s about more than just the money.
Got more reasons? Share yours.
We think this is the way of the future — a form of exchange that incentivises consumers to support their brands and brands to keep their customers at the heart of what they do.
A final note
Always read the risk statement before investing: https://www.pledgeme.com.au/warning-statement
TL;DR
Equity finance is when someone who owns a company gives bits of the company (shares) to investors in exchange for money.
Crowdfunding is when someone who needs money for a something (projects, travel, growing their company) asks their community and the general public for that money.
Equity crowdfunding is when someone who owns a company asks their community and the general public to financially support the growth of the company. They offer bits of the company (shares) in exchange.
Companies participate in equity crowdfunding for various reasons including keeping their customers in control of what they produce, involving their customers in the future of the business, avoiding debt, or avoiding the downsides of angel/VC investment.
Individuals participate in equity crowdfunding for various reasons including the supporting a brand they love, having a say in how a brand they love operates, or seeking potential financial returns.
Equity crowdfunding is super important because it brings new investors into the landscape, it gives the crowd the power to decide what’s worth investing in, supports smaller ventures, and makes raising from friends and family easier.
