Nearly 18 months have passed since a new equity crowdfunding market opened up with great fanfare, allowing retail investors to back a wide range of start-ups and early stage companies. But since then few deals have been done.
Licensed crowd sourced funding (CSF) intermediaries allow retail investors to back a myriad of start-ups, such as breweries and fintechs, with investments as low as $50.
CSF is an inexpensive way for investors to get into private equity without investing in venture capital or private equity funds. But the small investments and limited investor knowledge may be holding back the growth of this type of investment.
According to chair of the Crowd Funding Institute Australia (CFIA) and chief executive of platform Billfolda, Matthew Pinter, investors prefer to back consumer facing businesses as they are easy to understand, are more accessible and recognisable. Business to business deals struggle to get as many retail investors.
Co-founder of Equitise Jonny Wilkinson agrees: “Investors are getting something out of it, it’s more so a business that they know, they like and can understand easily and some of the business can reward the investor with discounts.”
Equity crowdfunding is a high-risk investment – an opportunity to participate in the early stage of a business and gain exposure to new business models that may or may not produce results in the long term.
Equitise’s Wilkinson says: “The typical investor is a professional or semi-professional investor between the ages of 25 and 40 who might be passionate about the business, or a customer or even related to some people involved in it and will invest couple of thousand dollars.”
The Australian Securities and Investments Commission surveyed the CSF sector’s activity between January and June last year, and found that of the 14 offers to retail investors, only half were successful.
In total, there have been an estimated 33 successful deals since the scheme started.
Some of the successful raises include female ride sharing app Shebah at $3 million, Endeavour Brewing Co at $556,700 and pub Sporting Globe Plenty Valley at $1.2 million.
CSF relies on a large number of retail investors investing small amounts. Investors can only invest a maximum of $10,000 per year in a company. The companies must have less than $25 million in assets and annual revenue.
Wilkinson says: “CSF is providing investors access to certain companies and new industries that they most likely won’t be able to access to as an everyday investor without investing in venture capital private equity fund.”
The platforms manage the investment until the raise is completed and there is no formal ongoing arrangement between the investor and the platform after that.
The ASIC survey found that completed CSF offers raised a $7.04 million, contributed by 17,457 investors during its six-month survey period. This raise is low considering the maximum raise for each CSF is capped at $5 million per company in a 12 month period.
ASIC Commissioner Danielle Price says: “The crowd-sourced funding industry is in its early stages and is expected to grow further with the recent expansion of the crowd-sourced funding regime to proprietary companies.”
The number of licensed platforms has grown from 7 to 16 in since January 2018. The regulator is worried this is too many.
Price says: “The number of CSF intermediaries is large when compared with the number of CSF offers and the actual amount of capital raised. We are concerned whether the CSF industry can continue to support this number of CSF intermediaries, as well as any new entrants.”
The most successful platforms are Equitise, Birchal and OnMarket. Some of the platforms that have not yet completed a CSF raise include Billfolda and AgCrowd.
ASIC’s tight regulation of this new industry may a negative for the platforms and dictates the conversation of investing differently to other investment vehicles.
Pinter says at this early stage ASIC governs the conversation of the platforms through regulatory warnings shown to investors compared to other investment vehicles.
Pinter says: “It’s a very challenging environment, whether that’s the regulatory settings or the cost of maintaining the platform in a manner that the license dictates. The investment warning message isn’t particularly convincing for investors about to spend money.”
Equitise’s Wilkinson says: “The way the regulations work is there’s a reasonable amount of emphasis and onus placed on the platforms to control and be responsible for the offers.”
Equitise has one-third of the market share for CSF issues and has undertaken 12 CSF deals, eight of which have been successful. Their most successful raises were for neobank Xinja, at $2.41 million, and boutique distillery The West Winds Gin, at $933,500.
Some of the platforms have not had any successful deals and the money has been returned to investors.
Billfolda’s Pinter says: “Crowdsourcing does not work for every business and the ideal candidate to suit the landscape is going to be a consumer facing business.”
Wilkinson says: “It’s definitely a huge opportunity for this to help not only gain access to capital but allow a lot more companies to get the funding they require and stay private a little bit longer rather than force themselves to list on the ASX.”
According to the CFIA, the complete list of CSF platforms in Australia includes: AgCrowd, Big Start, Billfolda, Birchal, Credit Crowd, Crowd88, Crowdfunding, Enable, Equitise, Galaxy Crowdfunding, iQX Investments, Joey Crowd, OnMarket, PledgeMe, Pulse Markets, SME, CrowdFunder and VentureCrowd.