In 2018, equity crowdfunding was officially legislated and regulated in Australia, with ASIC granting the Australian Financial Services licenses to several platforms. Birchal is one of these platforms.
This change marked a capital funding milestone and it followed legalisation changes in many developed countries including the United Kingdom, United States, Italy and New Zealand.
In this article you will learn about:
What is Equity Crowdfunding
Things to consider before investing
Risks of investing in Equity Crowdfunding
Return on Investment
1. What is Equity Crowdfunding?
Officially known in Australia as crowd-sourced equity funding (CSF), equity crowdfunding allows private companies (and public unlisted companies) to source funding by offering a stake in their business to public investors.
Eligible Australian companies can now source up to $5 million a year through the process. Traditionally, these companies, startups and brands pitched for investment primarily to venture capitalists, high net worths and angel investors to raise capital, but now everyone is able to participate in the capital raise by investing from $50 and up. As a retail investor (ie, anyone over the age of 18), you can invest up to $10,000 within a 12 month period in a company and in exchange you'll receive securities in the form of shares. If you are looking to invest more than $10,000 in a company through CSF, you will need to provide evidence of wholesale status at the time of your investment.
Buying shares through crowd-sourced funding
MoneySmart (the website is run by the Australian Securities and Investments Commission (ASIC) to help people make the most of their money) created an article on buying shares through crowdsourced funding.
Crowd-sourced funding of shares is different from "Crowd Funding"
Crowd-sourced funding of shares is different from the donation-based crowd funding typically used by artists or entrepreneurs to raise money for one-off projects.
If you want to invest in a company offering shares through a CSF website, you will be asked to acknowledge that you have read and understood the risk warning (see screenshot below) listed on the website and in the offer document.
You have a cooling-off period of 5 business days to change your mind if you decide the investment isn't for you. During this time, you can withdraw your application to invest and receive a full refund.
2. Things to consider before you invest
Check the intermediary is licensed
Ensure the company has listed their offer on a website that is run by a licensed intermediary. Check ASIC Connect's Professional Registers to see if the website operator has an AFS licence that allows it to legally provide CSF services. If they do, the information will be listed under the section called 'licence authorisation conditions'.
The obligations of Birchal and other licensed intermediaries
Before publishing an Offer Document (or a supplementary or replacement document) on the Birchal platform, the platform must perform certain checks to a reasonable standard. The intention of this regulatory requirement is not for Birchal to conduct comprehensive checks on the company making the Equity Crowdfunding offer, but rather to ensure the platform does not publish, or continue to publish, the CSF offer document in specific circumstances. See ASIC RG 262 Table 2 for a list of these checks. It also explains what a 'reasonable standard' is.
3. Risks of crowd-sourced funding
Some risks of crowd-sourced funding include:
Lack of company track record - Some businesses that raise money through crowd-sourced funding are new or in the early stages of development, so there's more risk that the business will be unsuccessful and you may lose all the money you invested. Read all the information available on the CSF website to check specific risks associated with each business, as well as doing your own research on the company.
Shares may fall or be hard to sell - Even if the company is successful, the value of your investment might fall, and the return you receive could be reduced if the company issues more shares. Your investment is also unlikely to be 'liquid', so if you decide you need the money you've invested, you may not be able to sell your shares quickly, or at all.
Risk of fraud or insolvency - If your money is handled inappropriately or the intermediary operating the website becomes insolvent and hasn't met its obligation to keep your money separate, you may lose all the money you've invested.
Read all Risk Warnings & Offer Documents
Before investing, read the offer document issued by the company and use the portal on the CSF website to ask questions about the company or investment.
We've provided basic information on the offer document in an article here.
A company must prepare an Offer Document (CSF Offer Document) for each offer it makes under the new Equity Crowdfunding legislation. The Offer Document must contain certain minimum information, which is prescribed under the law. In addition, the offer document must be worded and presented in a ‘clear, concise and effective’ manner (see ASIC RG 261 for more details). You must consider the Offer Document before investing.
Risk Warning (on Birchal)
It's OK to ask questions!
You have the opportunity to ask the business anything you might have questions on the discussion board located on the company page.
4. How do I make a return on investment (ROI)?
Companies using Equity Crowdfunding include new or rapidly growing ventures. Returns are gained if a company ‘exits’ through a trade sale, Initial Public Offering (IPO) or share buyback. Investments in these types of ventures are speculative and carries higher risks but also present opportunities for much higher returns.
We encourage you to think of this as a medium to long-term investment
Investing in private and unlisted companies is typically a medium to long-term investment, and shares in these companies are unlikely to be liquid. Shares in these companies are not trade-able through public exchanges (ie. ASX). This means you are unlikely to be able to sell your shares quickly or at all if you need the money or decide that this investment is not right for you.
For information on dividends, exit opportunities and further ROIs associated with specific deals, please refer to the Offer Document presented by the issuing company when available.
Birchal Trade - EXAMPLE
In a crowdfunding-first move, Birchal is soon launching a pilot, Birchal Trade, to create a means for CSF investors to sell or buy shares in a secondary market. Birchal Trade will be a service for CSF companies to provide additional opportunities to investors following a CSF offer.
Currently, investors are unable to sell their CSF shares in an organised market after investing. This service will enable CSF companies to operate a low-volume secondary market for up to 100 transactions and $1.5 million every 12 months.