Investing in businesses can be a good way to build wealth. But the barriers to entry have historically been high, making ‘equity crowdfunding’ an attractive alternative.

The concept isn’t dissimilar to the more conventional crowdfunding that artists and charities routinely organise through social media, asking followers to contribute what they can – sometimes for rewards such as T-shirts or exclusive access to art or music, or simply to support a cause.

It’s a model that has helped countless charities, creatives and even ordinary people with a dream achieve things they never would have previously. One man in the United States even managed to raise $US55,492 ($79,649) to make a bowl of potato salad, drastically outstripping his initial $US10 goal.

More recently though, enterprising businesses have used a more mature version of this funding model to sell small ownership stakes (equity) in their companies, allowing anyone who’s able to contribute to become a part-owner and share in the business’s success (or failure) and, ideally, profits.

Equity crowdfunding in Australia

Equity crowdfunding in its current form has only been a legal means of raising money in Australia since January 2018, and is mainly aimed at smaller start-up businesses not listed on the ASX.

While investors in an equity crowd-funder receive equity in the way a stockholder might, those two systems are very different, says Canstar group executive of financial services Steve Mickenbecker.

“It’s appealing to a different market. It’s an easy, low-cost way for people to raise money without going through intermediaries or prepare a prospectus,” he said.

“All those requirements and restrictions are eased up to give people a clearer passage to equity raising, but that’s why they put limits on it.”

Those limits are pretty significant – backers can’t contribute more than $10,000 annually, and in that same period, an individual business can’t raise more than $5 million. Equity crowdfunding isn’t available to businesses with an annual turnover of $25 million or more, or the same value in assets, either.

Those rules might seem restrictive, but people seem happy to invest regardless, with the amount of funding raised through equity crowdfunding more than doubling in the March quarter of 2019 – from $2.7 million to $6.9 million.

Dan Norris, co-founder of Gold Coast-based Black Hops Brewing, is one of the model’s success stories.

After he and two friends – Eddie Oldfield and Michael McGovern – started experimenting with an eggnog-flavoured stout, the three found themselves with an up-and-coming brewery, almost by accident.

The trio raised $18,000 through an initial round of normal crowdfunding to cover the costs of starting their business. But a few years on, and with ambitions to open a proper brewery, the friends turned to equity crowdfunding.

“I’d been following equity crowdfunding for a long time and thought it would be good for a brewery,” Mr Norris told The New Daily.

“Once it was legalised, we were in the process of building ours, so we decided to go through equity crowdfunding at that point.”

Black Hops Brewing raised $400,000 from 550 backers in less than a week after opening its campaign through crowdfunding business Birchal.

Tweet from @blackhopsbeer

Not every business is as successful in their efforts to raise money, however.

Jonny Wilkinson, the co-founder and director of crowdfunding platform Equitise, said there’s always a possibility businesses won’t meet their minimum funding target.

“Since we launched in Australia last year, we’ve raised approximately $8.2 million for eight companies,” he said.

“That’s approximately two-thirds of companies which have been successful with their crowdfunding.”

Risky business

Mr Mickenbecker said he’s positive about the idea of equity crowdfunding, but cautioned that anyone thinking about slinging their cash towards small, start-up businesses needs to remember these are high-risk investments.

There’s no guarantee a business will be successful, and even if it is, the return on investment could be much smaller than anticipated – something made more difficult to predict given these businesses tend to be newer and have scant historic performance.

Mr Wilkinson agreed, and said investors should take the time to research before taking a chance with their money.

“This is obviously at the riskier end of the market,” he said. “So the sorts of things you need to think about are ‘Who are the people involved in the business, and do they have the experience and capabilities to run this business going forward?’

“You need to look at the market it’s involved in – will it be viable in a few years? Someone coming up with a new concept doesn’t necessarily mean people will need that in the future.”