Equity Crowdfunding – All You Need to Know
Equity crowdfunding is gaining popularity with SME’s and investors, but what exactly is it?
This four-part series will cover all you need to know about Equity Crowdfunding. Click to read the previous or next article:
- Part One – What is Equity Crowdfunding.
- Part Two – Whether Equity Crowdfunding is right for you as an investor.
- This article is Part Three – Five ways to reduce your risk in Equity Crowdfunding.
- Part Four – Whether Equity Crowdfunding is right for your business.
As aforementioned, Equity Crowdfunding can impose risks onto an investor. Here are 5 easy ways to mitigate such risks.
1: Research different platforms
Each equity crowdfunding platform differs in the way they vet offers. Research different platforms to determine how extensive their vetting process and requirements are to pick the most suitable one for you. This will also give you an idea of the types of information each platform requires investees to provide and maintain to investors.
2: Use a licensed Equity Crowdfunding platform
In New Zealand, there exists 7 active licensed crowdfunding platforms. These platforms can be trusted as they are regularly checked by the Financial Markets Authority and must comply with extensive regulations under the FMC 2013 Act which benefit the investor (such as ensuring that the necessary information is provided to facilitate investment decisions).
3: Protect your shareholding at the outset
It is important to protect yourself from dilution. Dilution occurs when you buy shares in a company, and thereafter, the company issues more shares. As a result, your proportionate shareholding of the company is reduced i.e. your shares are “diluted”. This can affect the value of your shares and dividends and impact your voting rights. To protect yourself against this, invest in A-Ordinary shares that include pre-emption rights. Such shares entitle their owner to buy first the additional shares being issued by the company so they can maintain their shareholding.
4: Diversify your portfolio
Having a diverse investment portfolio can help mitigate risk. This is because it involves spreading out your money across many investments, rather than putting your eggs all in one basket. Being able to balance an equity crowdfunding investment with less risky, liquid investments will mitigate financial risk.
5: Do your own due diligence
It is important to conduct your own research also. Having a good understanding of the company and its directors will provide a good insight into how the company is led and how capable and effective its management is. Researching the offering, the market and competitors will provide an indication of how viable the offering is and its potential for success.
Equity crowdfunding can impose risks onto an investor. The most important thing is to do is mitigate these risks, use your own judgement, support ventures that align with your personal values, and have fun!