Crowdfunding – the basics
Crowdfunding is the practice of funding a project by sourcing money from a large base, or crowd. It has been around for decades, but the arrival of web-based platforms and payment methods have sparked a boom.
A more conservative lending environment post-GFC also makes it an attractive option for business without runs on the board.
There are four key crowdfunding models:
- Donation-based – money is given to a social cause with no expectation of any return. This is commonly used to fund medical treatment or support families after bereavement or accident.
- Reward-based – money is given for a range of promised rewards such as merchandise, experiences (such as business tours) or future discounts. This approach is favoured by hospitality or businesses with innovative products looking for funding to manufacture a first run.
- Debt-based – money is given in the form of a loan repayable with interest.
- Equity-based – money is exchanged for interest or equity in the business. Projects are hosted on crowdfunding websites. Some of the major players in the business sphere include Equitise, Pozible and Kickstarter, with the latter reporting 36 per cent of projects had been successfully funded since it started in 2009.
If you do not reach your specified funding target within the timeframe you do not collect any money.
The host sites make money with fees of around 3-5 per cent on money raised. Get professional advice on whether you need to declare any crowdfunded monies as assessable income.
Wind in their sails
WA company West Winds Gin was one of the first companies in Australia to use new public equity crowdfunding platform Equitise after ASIC issued the first seven licences to crowd-sourced funding intermediaries in January 2018.
West Winds Gin raised more than $900,000 with investors acquiring a minimum $500 stake in the company.
“As one for the first ones off the rank, we’re happy with it,” co-founder and CEO Paul White said, with the capital raising to fund the company’s expansion plans domestically and overseas.
“The benefit for investors is having a stake in the company as we grow,” he says.
“The ideal end state is that everyone makes a return on their investment and has some fun in the process. It’s $500 minimum, so it’s not an overly expensive way to have a play in a gin business.”