Is Equity Crowdfunding Right for You?
Equity crowdfunding is growing in popularity amongst investors. Part 2 details the benefits and risks that comes with investing via Equity crowdfunding, as well as ways to mitigate such risks.
This four-part series will cover all you need to know about Equity Crowdfunding.
- Part One – What is Equity Crowdfunding.
- This article is Part Two – Whether Equity Crowdfunding is right for you as an investor.
- Part Three – Five ways to reduce your risk in Equity Crowdfunding.
- Part Four – Whether Equity Crowdfunding is right for your business.
What are the benefits of equity crowdfunding?
An investor can gain more personal satisfaction from their investment:
Rather than investing in listed blue chip companies, investors now have access to a greater variety of ventures and businesses. They can invest in small-to-medium enterprises (SMEs) whose offerings and values align with their own. Equity crowdfunding platforms provides investors this broad access to targeted investments, allowing them to back projects they are passionate about.
Investing is more accessible and liberal
Online equity crowdfunding platforms have a wide reach. Their digital nature allows for easy access to investment opportunities, convenience and support when investing. These platforms are available to everyone, meaning both experienced and novice investors can get skin in the game. Furthermore equity crowdfunding gives investors access to private, unlisted businesses.
What’s the catch?
Equity crowdfunding is still a relatively new phenomenon. The Financial Markets Conduct Act 2013 (FMC Act) governs equity crowdfunding in New Zealand. It only came into force in April 2014, and there are still many investors and businesses who are yet to participate in equity crowdfunding.
Individual offers aren’t reviewed or approved by the Financial Markets Authority.
Businesses participating in equity crowdfunding are required to comply with FMC Act, specifically its provisions on fair dealing. This in general prohibits businesses from engaging in misleading or deceptive conduct. A business’ specific offering on an equity crowdfunding platform however is not checked, approved or reviewed by the FMA. Furthermore, the standards and obligations such businesses are required to meet are not as stringent compared to other equity offers.
Investors may receive less information
Equity crowdfunding can be a risky investment as the process businesses must go through to publish offers onto crowdfunding platforms are often less rigorous than a fully regulated initial public offering (IPO). Furthermore, the information businesses are required to provide to investors is not as extensive. For example, the platform is unlikely to require the business to provide certain details or ongoing reporting, which means it is harder for investors to know how their investment is going. SME’s in their early stages of growth will only have financial forecasts to provide (rather than a detailed past financial performance record). There may be a tendency for such SME’s to be overly optimistic about future performance and the business’ value.
Investors incur the risk of investing in SME’s
Investing can be risky, as often the businesses raising money via equity crowdfunding are SME’s in their early stages of growth. They rarely have a rich performance history (like that of well established, mature firms) from which an investor can gain a thorough understanding of the business’ ability to succeed. SME’s can be unpredictable and unknown; therefore, it may take a long time to see returns (if any) and be hard to sell shares.
Equity crowdfunding can provide an investor with great benefits. It is important that investors are aware of potential risks they can incur. The next part in this series provides five ways an investor can mitigate such risks and get the most out of their investment.