How crowdfunding works

Numerous companies approach an equity crowdfunding platform to raise funds. The platform (which must be licensed with ASIC) assesses these companies and ensures they satisfy a range of obligations set under the regulations. These obligations are to limit the likelihood of fraud or misrepresentation and/ or ensure that investors understand the risks. Some platforms may also undertake additional diligence on the information published about an offer.

If a company satisfies these requirements, it is eligible to be funded on the platform. Here investors can see the company’s offer and are provided with the information needed to make their decision.

A successful raising entails “the crowd” or investors providing funds to collectively reach the company’s targeted amount, and as a result, receive part ownership.

Investors in equity crowdfunded companies that then successfully “exit”, either through an initial public offering (IPO), trade sale or share buyback at a higher value than what was initially invested, will receive a positive return.

If a company does not raise the minimum target, then the offer is cancelled and the funds are returned to investors.

It’s important to note that investing in early-stage businesses is high risk, but there can be high rewards. Investors must be willing to take a long-term view and invest in businesses they believe will benefit from equity crowdfunding.