The rise and risks of equity crowdfunding
While equity crowdfunding is enjoying growing acceptance and momentum in Australia, UK experiences are providing some balance to the value of the investment vehicle.
Equity crowdfunding is the latest fashion in funding, enabling companies to raise funds and brand awareness at the same time.
Different to rewards-based crowdfunding, venture capital funding or a public listing, equity crowdfunding allows non-professional or ‘retail’ investors to support businesses and get a small slice of the pie in equity too.
Its popularity has been spurred by an environment where traditional lenders, such as banks, see start-up and smaller companies as high-risk.
By opening up investment to the general public, it provides businesses with an alternative investment strategy.
Following its introduction in Australia in September 2017, several brewing industry businesses have undertaken funding rounds. Black Hops successfully ran an equity crowdfunding campaign in January, followed by Dainton Beer earlier this year raising $250,000, as well as Endeavour and bottle shop Bucket Boys, which has sought to raise a maximum of $1 million via the sale of 10% of company equity.
But what are the implications of equity crowdfunding on both businesses and investors and what can we expect from the relatively young Australian market?
Using the UK market as a gauge, we’ve seen some interesting and high profile winners and losers in the equity crowdfunding game, from which Australian businesses can learn much.
Follow the numbers
Scottish brewery BrewDog and London’s Redchurch Brewing represent two ends of the equity crowdfunding spectrum.
Scotland’s BrewDog has raised £70 million ($127.6 million) over six rounds of Equity for Punks, with a campaign currently running. Another success story is London’s Camden Town Brewery, which was sold to AB InBev for a reported £85 million, after having smashed its CSF goal, raising £2.75 million.
On a smaller scale, the UK has also seen The Wild Beer Co, Leeds-based Northern Monk and East London Brewery Five Points raise millions of pounds between them.
This shows that serious money can be made with equity crowdfunding – without having to rely on an expensive flotation on a national stock market or sacrificing a major shareholding in the business to one investor.
However, these successes have not come without teething problems.
Brews News contacted the administrators of London’s Redchurch Brewery, who were appointed on 3 May 2019 and subsequently sold the business in a pre-pack deal. The collapse and sale of the business was first announced to the public, and to shareholders, on Twitter.
I’m afraid the shareholders are the unfortunate casualty of the old company going under…..However with our new investor and MD we have managed to retain all Harlow staff and look forward to a better, brighter future.
— Redchurch Brewery (@RedchurchBrewer) May 14, 2019
Despite undertaking a successful equity crowdfunding round in 2018 and raising £400,000, the administrators revealed the company had been in financial difficulty since 2017. This was not disclosed during the fundraising round when the business said it had seen a 27 per cent increase in quarterly sales and projected revenue growth of £150,00 a month.
While raising funds, businesses sell the romance of having a share of ownership of a brewery, but Redchurch highlights the reality of what that means in practice.
The administrators told Brews News that while there would likely be a distribution of funds amongst unsecured credits, shareholders of the company (including those who had invested via equity funding) would likely not receive a cent.
Hop Stuff, another London-based operation, had also raised £1.48 million ($2.71 million) over two rounds of funding but due to outstanding debts, bailiffs seized the business on April 9th. The fate of its 1551 shareholders remains unknown.
Meanwhile, despite its success, BrewDog has no plans to pay dividends to shareholders. It loudly proclaims that its earliest investors have seen their shares appreciate by 2,765% since 2011, based on the value of the investment by TSG Partners in 2017. However, Equity Punks will not receive a true valuation of their shares, or a payout, unless the company debuts on the US or UK stock market.
While the current Equity for Punks round is selling B Class shares at £25, the last share trading window for the brewery last January saw shares traded at £15 each.
These cases show that there are unique issues facing the CSF market, and any investment is high risk.
The Australian position
Matt Vitale of Birchal, the equity crowdfunding platform which has hosted fundraising campaigns for Black Hops, Dainton and Bucket Boys, said that companies need to provide thorough offer documents to ensure investors have all the information possible to make an educated investment decision.
“Companies should think hard about why they’re doing it. They should conduct a health check on their business and whether or not they’re investment-ready and have a clear message about growth plans for the company.
“That’s what investors need to weigh up and that’s what all of our warnings and communications to investors say.”
Even then, it’s not always clear whether a company will make it. Black Hops Brewery co-founder Dan Norris, who has undertaken equity crowdfunding as well as currently undertaking a $500,000 private funding round separate to crowdsourced funding, said that it is inevitable that some businesses might fail, but it’s not a reason to hold back.
“There will be some examples where it doesn’t work, and there will be failures because it’s the nature of what happens when something’s new, but I would love to see more breweries do it.
He said the Black Hops Brewery was costing $3 million in total and they had no idea how crowdfunding would go, so didn’t want to risk relying on just one platform.
“We undertook equity crowdfunding to make sure we could hit the target quickly and execute it correctly.
“We wanted to do a campaign that was a benchmark for other breweries, and there was so much potential to fall flat on your face, but we wanted to build a national brand and compete with big breweries, so we had to take risks.”
In the spotlight
If fundraising fails or if a company goes into administration company problems that were previously private will become public, and some businesses are not equipped to handle the potential backlash.
Dan spoke to Brews News about the Black Hops’ equity crowdfunding experience, and why this transparency can be a good thing.
“Other types of investment raising seem to be behind closed doors. Doing it publicly where everyone gets to see the numbers, seemed a fair and beneficial way to do it,” he said.
Vitale agrees, saying that not only does equity crowdfunding require transparency from the companies that are fundraising, it creates a more transparent investment process too.
“Equity crowdfunding has key structural advantages in that it raises funds and also creates a tribe of brand ambassadors. This is particularly relevant for breweries, which have a strong consumer proposition.
“Companies that are transparent and on the front foot of working with their community that are being open tend to do well. That’s what consumers and investors expect.”
Getting to grips with regulations
The federal government itself has been relatively nimble about changing the criteria for equity crowdfunding.
When it was first launched, equity crowdfunding legislation stipulated that companies wishing to partake in this kind of funding would have to become an unlisted public company, a considerable structural change for most businesses.
The government relaxed this rule at the end of last year.
Companies undertaking CSF are also excluded from a cap on investor numbers, which constrains other Australian private companies. However Australian companies are still limited as to the amount they can raise – $5 million – whilst retail investors total investment in a year is capped at $10,000.
Asked for advice for anyone looking at launching a fundraising campaign, Black Hops’ Norris said companies should do what works for them.
“I would look at other campaigns as a starting point. Anyone who’s built a brand that people love, its something that’s quite valuable,” he said.
“Ultimately the test is if people are investing – if they are then it’s working so don’t be afraid to value yourself highly.”
Crowdfunding has proved to be an effective fundraising method for many breweries, especially as it converts pre-existing fans into would-be brewery investors. While there’s likely to be more successes, inevitably we will also witness more failures as CSF becomes more popular.
Vitale thinks that the Australian market has been well regulated so far and is looking promising.
“Australia is on track to emulate the success of the crowdfunding regime in the UK. It’s interesting to see that over there, 50% of equity crowdfunding comes from institutional investors.
“They’ve achieved that critical mass, not only for retail investors but professional investors to invest in early-stage businesses.
“That’s what we want the Australian industry to achieve. There will be challenges but it will be exciting to see how it all plays out.”
Additional reporting Matthew Curtis