When non-alcoholic craft beer company Sobah needed cash to expand, they turned to equity crowdfunding.

The Indigenous-owned company raised $1 million from 580 investors.   

"It's a range of people, from a whole bunch of different backgrounds. We got a good handful of First Nations peoples who have signed up to be an owner, which is awesome," says Sobah business owner Clinton Schultz. 

What is equity crowdfunding?

Equity crowdfunding — or equity crowd-sourced funding — is when unlisted start-ups or small-to-medium-sized companies raise money through a licensed equity crowdfunding platform.

It's been legal since 2018 and there are now 15 platforms with financial services licences. 

The platforms must run some checks on interested companies and they make their money by charging eligible businesses fees and a commission, which is a percentage of the funds raised. 

Companies can raise a maximum of $5 million a year. Retail investors can contribute as little as $50 or a maximum of $10,000 per company in exchange for a proportional shareholding in the business.

There is a five-day cooling-off period if you change your mind. 

Funds can be raised from an unlimited number of investors who usually contribute small amounts of money in exchange for a proportional shareholding. 

If the campaign target is not reached, the money is returned to investors.   

"There's essentially two game-changers," says Birchal co-founder Matt Vitale, which is one of the biggest platforms.    

"The first is that a Proprietary Limited Company can now have an unlimited number of investors.

"Whereas, previously, you'd need to convert to a public structure once you've got over 50 shareholders.        

"And the second is that we can advertise these offers online, so social media, email, anything really. It's really exciting."

The hype around equity crowdfunding is growing. Last financial year, Australian platforms raised a combined $46 million, according to an industry report by licence holder Equitise.

That's a 125 per cent increase on the previous 12 months.

Recently eco-cleaning product company Zero Co raised $6 million in just six hours. 

Globally, the industry is worth around $2 billion, according The Cambridge Centre for Alternative Finance.  

The United Kingdom and the United States were the biggest markets for equity crowdfunding in 2020, while Australia ranked seventh.

A lower investment threshold — investing in a publicly listed company will set you back a minimum of $500 — and slick marketing campaigns mean equity crowdfunding is attracting a lot of first-time investors.   

"There are a number of groups of investors out there, like the millennials, who are looking for something different, rather than traditional investment options," says PwC financial services leader Tom Gunson. 

"And that is attractive to them, because it does allow them to specifically align their purpose or values to [those of] small-to-mid-sized companies."

What do investors get out of it?

Becky Smallchua is one of 1,600 investors who raised $2 million for ethical cosmetics brand Kester Black. 

The business will use the cash to scale-up and expand into new export markets.

"They're leading in the beauty industry, changing up the way things are done, using business as a force for good. And that's something that my both my husband and I really believe in," she says. 

About half of Kester Black's investors contributed the campaign's minimum amount of $250, and 70 per cent of those who contributed to the campaign are women. 

"And they're literally just customers, loyal followers of the brand. We had a couple of high net worth [individuals who] came in, but we didn't know them, they are also customers of the brand," says Kester Black owner Anna Ross.   

None of the companies that have raised cash through equity crowdfunding have delivered a return to investors yet. 

"We told everybody before we did the raise that they would not be getting dividends for at least the next five years. So they are supporting us, they get to feel really good about it," Anna says.

In the shorter term, Kester Black investors receive product and vouchers, and will be included in product development.

However, Tom Gunson says, not all businesses will bring investors into the decision-making process. 

"As a crowdfunder, you have no or little influence over the management of the company. And, therefore, effectively what they choose to use their funding for, and how long and where they direct it, is pretty much up to [the company's] direction."

Investors who back the next big company could find themselves cashed up if a takeover occurs or it is listed on the stock exchange. 

What are the risks?

Equity crowdfunding is considered a high-risk investment. That's because start-ups and less established businesses have a higher failure rate. 

While crowdfunding platforms are required to run checks to a "reasonable" standard if fraud or insolvency occurs, you may not be able to get your money back.

Dr Angel Zhong, a senior finance lecturer at RMIT University, says you should be prepared to lose your entire investment. 

Although equity crowdfunding platforms are required by law to explain the risks, Angel is not convinced that all retail investors take notice of the warnings. 

"You need to do your due diligence, do as much research as you can. Look at the business model, find out what they're going to use your money for. And, second, be realistic about the chances of winning."

And, even if the company is successful, the value of your investment — and any return on that investment — could be diluted if the company issues more shares. 

Because there is no secondary market — such as buying shares in a publicly listed company — you may not be able to sell your shares quickly, or at all. 

Some of equity crowdfunding's early success stories have not worked out.

Female rideshare company Shebah, which raised $3 million in 2019, is in voluntary administration.

The company is seeking a sale or a restructure after losing money during COVID-19 lockdowns. 

Neobank Xinja collapsed in December after raising $5 million in two equity crowdfunding raisings.  

Kai Ansaari maxed out his retail investment cap and put $10,000 into Xinja after first hearing about the fundraising campaign through platform Equitise.

"I am disappointed, I've lost money."

Since Xinja's collapse, Kai has invested in medicinal cannabis company CDA Health's equity crowdfunding raise, albeit a much smaller amount of $500. 

"$10,000 isn't a small amount of money. But, you know, you've got to risk it for the biscuit, which is probably not what a sophisticated investor would say," Kai says. 

"The big lesson for me is really just capital allocation. So how big do you go? What sort of size depending on the risk? So and that's something I think that Mum or Dad investors probably need to understand. You don't go all in," Kai says.

While acknowledging the risks for investors, those involved in equity crowdfunding argue it democratises capital-raising for businesses and investors: You don't need to have wealthy connections or be rich to get involved.

"Investment can be tricky. And it can be difficult and [it] can be expensive, not just [for people] wanting to invest, but also being a company or being a small entity that wants to start raising capital," Clinton says.

"I think it'll be a very inviting platform for many First Nations businesses to be able to get the guidance and the support that they need." 

Sobah is using the money raised through equity crowdfunding to build a brewery, which will triple the company's production. The business also plans to deliver a return to investors within five years.

Tom Gunson is also positive about the future of crowd-sourced funding. 

"Crowd-sourced funding is a really great example of what we're going to need in the future, which is a community of solvers, coming together in different, unexpected ways to solve some of the world's biggest problems."