This has opened up opportunities that were previously closed to mum and dad investors, such as the ability to invest in the early stages of a company’s growth. However, there are a number of things to consider before deciding to invest in a company via a crowdfunding platform.
How does it work?
Equity crowdfunding allows start-ups and medium-sized companies to raise money from the public without listing on a stock exchange. Interested parties are allowed to invest up to a maximum of $10,000 a year in a company via this avenue. However, there are no restrictions for investors who have a gross personal income over the last two years of at least $250,000 or have net assets over $2.5 million.
What’s the objective of investing via crowdfunding?
Some people argue equity crowdfunding opens the way for people from all walks of life to invest in start-ups and potentially benefit from the early growth some of these businesses can achieve1. Up until recently, the ability to invest in crowdfunding was restricted to professional money managers and high net-worth individuals. It’s important to research crowd-sourced investing, starting with checking whether the platform that is being used for the equity raising has an Australian Financial Services Licence (AFSL) to provide equity crowdfunding (also called crowd-sourced funding) services. You can do that on the Australian Securities & Investments Commission (ASIC) website2.
Be aware of the risks
You also need to be aware of the risks involved in investing via equity crowdfunding, which can be significant. Many companies have limited track records and the risks are much higher than with larger, publicly listed companies. If that happens, you could lose your entire investment.
Hard to sell
Another potential problem is that your shares may be hard to sell. Since they are not publicly listed, ASIC warns it might be hard to find a buyer for your shares when you need one. It warns there is a risk the company could release more shares, which could reduce the value of your investment, even if the company is successful3.
There are many moving parts to crowdfunding investments, and they might not suit everybody. If you’re interested in exploring your options, consider speaking to your adviser.
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Important: This article has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Before acting on the information, you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. Any information used in this article is for illustrative purposes only.