Disclaimer: Crowd88 does not provide investment advice. This guide has been prepared as a support document to provide Investors with a greater understanding of Investing in Companies through Equity Crowdfunding platforms like Crowd88. It is recommended that before you make any investments you discuss these with your financial advisor
The different stages of Companies
There are four common stages a Company goes through when seeking investment;
- Seed stage: Seed stage companies are where the funding is required to finance the development of the product or service
- Early-stage: Companies that have begun operations, but are yet to produce a commercial product or service seek early stage financing
- Growth stage: Growth stage financing is often obtained through a number of financing rounds. In this stage the company’s product or service is beginning to generate cash flow but not sufficient to fund the growth the company is experiencing
- Late stage: In this stage capital is provided usually before the company goes to an Initial Public Offering (IPO)
At Crowd88, we typically will not offer companies that are seeking seed stage investment. Our focus is on Companies that are in early, growth and late stages.
Risks when investing in early, growth and late stage companies
No one can forecast with any accuracy the future of an early stage company, and that’s why investment in early stage companies involves a high degree of risk. Growth and Late stage financing presents lower risks as typically the company has a revenue stream and a proven product or service. Four common risks involved when investing in companies via Equity Crowdfunding are:
- Business risk: As many companies in Equity Crowdfunding are in early stages of development with a lack of historical business performance there is a greater risk of failure. Whilst companies in growth and late stage have generally reached a positive cash flow and profitability, valuations are typically much higher and therefore investors receive a much lower percentage of the ownership of the company.
- Liquidity risk: For equity crowdfunded companies there is currently no readily available secondary market for any of the shares you subscribe to unlike shares you may hold in a listed company. Investors who would like to sell their shares in equity crowdfunded companies, typically need to find another investor to purchase them.
- Return risk: The rate of return on any investment in early stage companies is highly variable. Whilst a good investment can provide returns commensurate with the risk taken a bad investment could see no return at all. Some companies even in growth and late stages may still not be paying any dividends to Investors. This may give rise to an opportunity cost for investors, as they could have successfully invested that money elsewhere.
- Dilution risk: This risk occurs when companies issue more shares to raise further capital where you are either not offered further shares or decide not to participate in an issue when invited thereby decreasing the percentage of ownership you have in the company.
At Crowd88 to minimise the risk when investing in early stage companies we invite companies to obtain a Cornerstone Investor from our Cornerstone Club before listing on our platform. This ensures that a seasoned Investor (High net-worth Individual and/or Venture Capitalists) undertakes extensive due diligence on the company before Investing which should minimise the risk to crowd investors.
Crowd88 recommends that Investors read all information carefully, ask questions of the Company before committing an investment.
Rewards of investing in early, late and growth stage companies
Crowd88 does not only offer early-stage companies; we also support companies that are in growth and late stages of development. However, the earlier you invest the greater chance of higher returns commensurate with the risk. Some demonstrated rewards when investing in companies include:
- Potential of very high returns: Investing in early-stage and high growth companies has the potential to deliver huge returns if the business proves successful. Whilst there is a very high level of risk in the early stage the potential for higher returns is greater.
- Investing alongside seasoned investors: Before Equity Crowdfunding the opportunity for most retail investors to invest in early or growth stage companies was low as these were typically only available to High net-worth individuals, Institutions or Venture Capitalists. At Crowd88 we have built a Cornerstone Club for this group of Investors and Companies can seek a Cornerstone investment prior to making their offer available through our platform. Once on offer the “Crowd” get primarily the same investment terms as the Cornerstone Investor/s.
- Satisfaction: Investing in early and growth stage companies can provide a great level of satisfaction. This is because the Investor is funding an opportunity to an early and growth stage company and in many cases, it is within an industry that resonates with the Investor. It can also provide a greater level of satisfaction than investing in a company that is already listed on a Stock Exchange.
- Job creation: Small, medium enterprises (SMEs) are critical for job creation and are a key factor in a thriving economy. Equity Crowdfunding has proven to create jobs and Investors in companies via Equity Crowdfunding platforms are the driving force behind this.
How the return is released
Your return will be based on the increasing value of the company you have invested in. Returns can be realised in the following way;
- Initial Public Offering (IPO): The company goes through an IPO and shares are listed on a Stock Exchange which the Investor sells at a profit on the price they paid for their shares
- Trade sale: The company may elect to sell the company at which time your shares may also be sold
- Dividends: Investors may gain dividends on their shares. Each company will have their own dividend policy so it is recommended you investigate this before you invest
- Selling shares: You can sell your shares in a secondary market (if available) or you can find an Investor to purchase your shares at a higher price than what you paid
The rights that shareholders will hold
Your specific rights will vary from offer to offer. Your rights will be detailed in the Subscription Agreement, often incorporating a Shareholders Agreement that the issuing company presents as part of its offer. As a general rule, holders of ordinary shares have rights to vote at meetings of shareholders, to receive any dividends that may be declared on the shares and to a return on capital should the company be liquidated (and should there be funds available for distribution to shareholders).
If you are unsure of your rights you should ask the company directly or seek independent advice before Investing.
Funding modelMost Countries that have legislated for Equity Crowdfunding have taken an All or Nothing (AoN) funding approach. This means that when a Company reaches the closing date of its offer funds invested will only be passed to the Company if it has met its minimum target. The minimum target is the minimum amount of money a Company is looking to raise. In most cases the company will also set a maximum target amount that can be invested. If a company does not meet its minimum target prior to its closing date the AoN approach has all investments returned to the investors.
Companies do have the option to extend their closing date with Crowd88’s approval but typically only do this if they are close to reaching their minimum target or they are expecting a sizable investment to be made that would see them meeting their minimum target.
Investors Types in Equity Crowdfunding
In financial services laws many regulators will define investors into certain Investor types. The key purpose of financial services law is consumer protection. There are various types of Investors the most common being Retail and Wholesale.
Wholesale investors are considered more financially savvy and have deeper experience and information when investing and therefore not all the consumer protections that are required for Retail investors are needed. On Crowd88 you will find our investors in Australia and New Zealand defined into these two categories; Retail or Wholesale.
We have investors designate themselves into one of these categories partly to comply with financial services law and manage our regulatory obligations eg: In New Zealand each equity crowdfunding offer is restricted to NZD2m from Retail Investors. Wholesale investors, which is a definition determined by law, can provide, in aggregate, any amount a company may offer on our website. In other Countries, there may be a cap on the total investment each Retail Investor can invest in any one offer. Another reason a crowdfunding platform will designate investors is to provide Wholesale only offers. Some offers may restrict the number of investors and some may restrict an offer to only Wholesale investors.
- Retail Investors: A Retail Investor is an individual investor who cannot be designated as a Wholesale investor. Retail investors usually trade in smaller amounts than Wholesale Investors.
- Wholesale Investors: A Wholesale Investor may also be referred to as a Professional, Sophisticated, Qualified or Accredited Investor. To be classified as a Wholesale Investor the Investor will need to meet criteria laid down in the legislation of each jurisdiction. This usually includes the total assets held or the total income received over the past two years. Each Country has their own relevant criteria to classify a Wholesale investor.