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Equity crowdfunding – the risks and rewards for entrepreneurs looking to raise money

This article explores the new and innovative funding source now available to business start-ups - equity crowdfunding. We offer advice on the risks and rewards for entrepreneurs keen to explore equity crowdfunding.
minute read
Chief Executive Officer and Managing Director of BlueRock Law
(
Law
)

It’s an exciting time for entrepreneurs. Equity crowdfunding has opened up the possibility of a new and innovative funding source and the process seems to be working.

The World Bank forecasts that global crowdfunding will reach $90 billion by 2020, cementing it as a gateway for new services and products to be introduced to the market.

The Corporations Amendment (Crowd-sourced Funding) Act 2017 enables unlisted companies to offer ordinary shares to everyday Australians for a relatively small cash investment. It allows businesses to seek out investors on licensed crowdfunding portals to raise up to $5 million.

The benefits of this are numerous.

Rewards of equity crowdfunding

  • Crowdfunding campaigns generate large amounts of free publicity.
  • Businesses gain a large number of financially and emotionally invested members of the community to advocate on their behalf.
  • Crowdfunding opens up entrepreneurs to new networking opportunities.
  • A crowdfunding campaign will provide entrepreneurs with invaluable market feedback. It will quickly establish whether people want or value a product or service.
  • Proof of market will provide traditional investors with an incentive to invest.

For an entrepreneur, the appeal of moving away from traditional venture capital raising strategy may sound enticing but it’s important to weigh the rewards against the risks.

Risks of equity crowdfunding

  • A company that fails to raise capital is likely to lose public and investor confidence. Not only do entrepreneurs risk losing their financial investment they also risk serious damage to their reputation.
  • Are you prepared to surrender ownership? Every investor is a partial owner and managing hundreds of inexperienced shareholders can be time consuming.
  • ASIC requires you to convert existing proprietary companies to public companies. This means more responsibilities and greater levels of regulation, such as maintaining and lodging financial reports, which are complex financial documents.
  • Crowdfunding is not always considered a prestigious asset to your business. Many venture capitalists regard it as an unstable structure, so it may turn off large and experienced investors.

After considering these risks, if equity crowdfunding sounds like a good fit for your product or service, it’s certainly worth pursuing. It may be the difference between getting your business off the ground or not.

But before jumping into equity crowdsourcing, we recommend you take the following advice.

Advice for entrepreneurs keen to explore equity crowdsourcing

  • Understand your target market and how to communicate and engage with them.
  • Establish a solid network before launching and get commitment from targets.
  • Make sure you can deliver on the promises you make during your campaign.
  • Set realistic budgets and timelines.
  • Protect your intellectual property by getting advice about copyrights, trademarks or patents before taking your campaign online.

Most importantly, invest in professional advice before deciding which form of funding best suits the unique needs of your business.

Feel free to contact our specialised legal team if you’d like some help sourcing funding for your entrepreneurial enterprise.

Bruce McFarlane is the managing director of BlueRock Partners and an expert in the legal aspects of helping entrepreneurs to grow their business. He loves nothing more than building opportunities for the BlueRock community…and a long ride with the Dendy Riders.

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