Gold mine or Wild West? Equity crowdfunding in the spotlight

Equity crowdfunding is proving resilient while other forms of start-up investment are drying up, new figures show, despite controversy over the business model and Australia’s corporate watchdog exercising its “stop order” powers for the first time.

Equity crowdfunding allows a group of individuals (the “crowd”) to invest in businesses in return for part-ownership of the business (“equity”), often with extra rewards, such as discounts or bonus items.

Rapper Ice Cube is an ambassador for MyPremo, a business that raised $1 million on Birchal.Credit: Invision

The business model has been a boon for hundreds of businesses since its legalisation in 2018. But it has also proven controversial, given regular celebrity endorsements – rapper Ice Cube is an ambassador of Birchal investment company MyPremo, for example – along with the inherent risk associated with investing in early-stage businesses, many of which will fail.

The latest figures from Australian market leader Birchal show the equity crowdfunding model is holding steady as other forms of start-up funding deteriorate amid rising interest rates and cost-of-living pressures.

Birchal’s statistics show Australia’s equity crowdfunding sector raised $64.5 million from 35,000 investments for the 2024 financial year. The numbers were slightly better than a year earlier. The number of total deals increased, but the average deal size dipped slightly.

Birchal itself was responsible for hosting 66 out of 99 campaigns in total, and raised $46.5 million from 27,000 investors. Its closest competitor, OnMarket, raised $8.2 million.

Birchal CEO Matt Vitale says he thinks crowdfunding is more highly regulated than other types of capital funding.Credit: Tash Sorensen

“It’s tough out there, but there’s so much positivity among company founders, despite the challenges,” Birchal co-founder Matt Vitale said.

“Many people haven’t experienced the bottom of the cycle and what it looks like before, so people are learning a lot and it’s made us all incredibly resilient.

“I wouldn’t say that what we’re experiencing is any different to other parts of the market.”

Vitale said about 130,000 Australians had participated in equity crowdfunding since 2018.

The top raises for the financial year were Tasmanian distillery Hellyers Road, which raised $4.4 million via OnMarket; medicinal cannabis firm Medigrowth, which raised $3.5 million via Birchal; and Naked Life Spirits, which raked in $3 million via Birchal.

Food and beverage was the top-performing category for the third consecutive year, representing 30 per cent of funding volume, followed by healthcare and sustainability businesses.

The sector faced criticism earlier this year from some members of Australia’s venture capital sector, who said the current crowdfunding model was rife with issues and was failing to adequately protect retail investors.

Cut Through Venture, which regularly publishes data on start-up capital raises, said it would stop reporting on crowdfunding campaigns due to several issues, including “inflated valuations, confusing investor materials, aggressive marketing tactics, and a failure to disclose failed prior attempts to raise capital from professional start-up investors”.

Cut Through Venture called for changes including the banning of celebrity endorsements of campaigns (except when the celebrity is a founding shareholder), along with more transparency, such as mandating crowdfunding platforms to disclose past campaign performance.

Vitale said that contrary to Cut Through Ventures’ assertions, equity crowdfunding, in his view, was more highly regulated than other types of capital funding.

“Crowdsourced funding is a regulated regime specifically permitted under the Corporations Act, and probably the only part of the start-up and innovation ecosystem that is regulated and transparent and accountable,” he said.

“There is a cop on the beat, ASIC, which has exercised its stop order powers for the first time this year, and that’s a reminder that this is a regulated regime which has a lot of benefits and robust consumer protections.”

ASIC last month used “stop order” powers in relation to a crowd-sourced funding offer for the first time.Credit: Darrian Traynor

The Australian Securities and Investments Commission last month blocked holiday equipment rental provider Hirehood’s campaign on the VentureCrowd intermediary platform over allegations the company was offering shares that were to be held by a related party of the intermediary, rather than offering ordinary shares in Hirehood itself.

“While ASIC acknowledges that the crowdsourced funding regime is designed to facilitate flexible and low-cost access to capital, ASIC reminds issuers and intermediaries that we will act where crowdsourced funding offers are not made lawfully,” the regulator said at the time.

“ASIC conducts targeted surveillances to ensure issuers and intermediaries are adhering to the legislative requirements of the CSF [crowd-sourced funding] regime.”

A VentureCrowd spokesperson said they believed the nominee shareholder option was permitted under law.

“We will work transparently with ASIC to resolve this matter and ensure the best outcomes for our investors and stakeholders.”

Vitale said ASIC’s action was proof of robust investor protections for equity crowdfunding.

“If the regulations need adjustment or improvement, then we welcome that and would participate in the process,” Vitale said. “We help companies make regulated offers of securities, and the prize that they get for that is access to an unparalleled pool of millions of investors.”

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