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What is equity crowdfunding?

Crowdfunding generally 

Crowdfunding is the broad concept of raising funds from a "crowd" of individuals for a common purpose. Originally crowdfunding was used to raise funds for creative and philanthropic purposes, but now the concept has been extended to the investment sector.

 

Equity crowdfunding

Equity crowdfunding is the crowdfunding of equity capital (ie shares) for (mainly) startup and high growth companies requiring capital. Equity crowdfunding is conducted by a Crowdfunding platform.

 

Why?

For investors, Equity crowdfunding has many advantages over other traditional forms of investment;

• You can buy shares in companies which are not accessible to the general public, like startups;

• An investment for a smaller $ amount can be made (from as low as $500), rather than the large amount needed to directly invest in shares in privately held companies;

• You can choose the individual companies that best suit your investment objectives, risk profile and interests;

• Investments are vetted or screened by the platform provider for their suitability;

• There is no cost to invest in a crowdfunded equity investment.


For companies considering raising capital, equity crowdfunding can be a quicker, cheaper alternative to other methods of raising capital.


Is Equity Crowdfunding legal?

In Australia, the  Corporations Amendment (Crowd-sourced funding) Bill 2016 was passed by the Australian Senate in March 2017. This Bill specifically addresses Equity Crowdfunding, and among other things sets out the eligibility, sponsor requirements and investor safeguards required to conduct Equity Crowdfunding. 

We’ll post a separate blog on this topic in the near future.


What do I get for my investment?

When you invest in crowdfunded equity, you invest in the shares of a private company and thereby become a part owner of the company. Most often you will receive Ordinary shares, however the form the investment can vary with each individual investment.


Do I get dividends?

Each investment opportunity is different, so the payment of dividends will vary from company to company. However, as most equity crowdfunded companies will be at an early stage in their development, they will not yet be paying dividends.


Can I easily sell my shares?

Equity crowdfunded shares will usually be in unlisted companies, and will therefore only be able to be sold in the event of a major transaction taking place (ie like a capital raising, takeover etc). It is sometimes possible to sell the shares directly to another party, but this is less common.


Are crowdfunded equity offers vetted?

Yes. In most instances, the platform provider will perform some level of checking or Due Diligence before listing an investment. 

This may include;

• The Company sponsors’ previous experience; 

• The length of time the Company has been in business

• Key personnel;

• The Company’s financial history;

• The reasonableness of the proposal;

• The potential for the Company to generate a high return for investors.


How and when does a crowdfunded equity investor receive a return?

Each investment proposal is unique, so returns or distributions will depend on each individual investment proposal. 


Risk

Crowdfunded equity investments are speculative and therefore very risky. They are best suited to investors who can withstand a significant investment loss. Of course, the corollary is also true that high returns may also be achieved.


Disclaimer

Sharequity is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice relative to your unique circumstances.

You must consider the offer document in its entirety and the prescribed risk warning before investing.

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