Traditionally, the private market was only reserved for high-net-worth investors and venture capital (VC) firms. However, now with platforms such as Leet Capital, everyone can get their foot into the private market with Equity Crowdfunding (ECF).
ECF has grown traction in recent years, which has in actuality been catalysed by the pandemic. With the global pandemic, there is now a newfound thirst for innovative solutions that can help transition us into a post-pandemic world. ECF certainly has the potential to cater to this thirst by providing an alternative and more contemporary approach to private equity that is more accessible than its traditional alternatives.
Thus, this article seeks to explore what ECF is and how investors and startups or small to medium-sized enterprises (SMEs) can use and benefit from it.
Equity Crowdfunding (ECF) occurs on an online platform, such as on leet.capital, and serves as a marketplace that bridges together startups or small to medium-sized enterprises (SMEs), also known as issuers on the platform, to investors from a wide range of backgrounds. Issuers are given the opportunity to raise capital through selling securities to a ‘crowd’ whilst investors of all economic backgrounds are given the opportunity to invest into the private market.
It is a relatively new method of private equity that has already begun to change the landscape of investment, and it still has yet to reach its peak. As a platform it helps provide new opportunities to both its investors and issuers due to its low barrier of entry, thus enabling wider accessibility to the private market. This is a complete game changer for the ordinary person looking to invest, especially in the midst of the global pandemic.
Who are the players?
As mentioned, the platform mainly involves two parties, the issuers and the investors.
The issuers consist of startups and SMEs who are looking to scale up and accelerate. Issuers of any industry can participate, however, they have to either be a locally incorporated private company or a limited liability company. Companies that are publicly listed or intend on raising funds to make further investments or issue loans are not eligible to register as issuers of ECF. These issuers can raise up to RM10 million across all ECF platforms and cannot participate in two or more campaigns simultaneously.
The investors on the other hand, come from a variety of backgrounds. As mentioned, ECF provides the opportunity for ordinary people or ‘retail investors’ to invest up to RM5,000 in a single investment. The platform also allows for angel investors, those who have a yearly income of over RM180,000, and sophisticated investors, those who have a yearly income of RM300,000, to invest into the campaigns as well.
The playing field
The two players will meet on the platform, where issuers can market their startup or SME and investors can browse through prospective investments.
In order for issuers to list on a platform, such as leet.capital, they will have to undergo a process which begins by registering online. They will then be contacted by us and a meeting will be arranged to assess the suitability of the issuer listing onto the platform. Once it is decided whether the issuer is suited to list, we will help perform due diligence, create a term sheet and organise roadshows. Once this is done, issuers will proceed into the live period, where investors that have expressed their interest will be able to invest into their campaign. Here at Leet Capital, we want to ensure that we can support every startup in the best way we can, therefore if a campaign is struggling to obtain their target funding, the campaign can be extended if need be.
As for the investors side of ECF, investors can register on the website and will have to verify their identity for security purposes. The investor will then choose which category they will fall under: retail, angel or sophisticated. If the investor wishes to be categorised as an angel or sophisticated investor, they will have to provide financial evidence, such as a Mban ID for angel investors. Once an investor has been registered, they are then able to browse through the platform to explore the various different campaigns that have been listed. This includes analysing their pitch, talking to the founders, attending their roadshows and potentially investing into them if they are compelled by the campaign.
How the deals are made
It is worth noting that during the live period, when investments are made, the money does not get transferred to the issuer immediately. In order for the issuer to access the funding, they must reach their funding goal minimum, meaning that issuers will receive all or nothing. However, here at Leet Capital, we heavily screen and support all our issuers from the beginning to the end, therefore, the majority of our issuers are more than capable of achieving all their funding.
In addition, as ECF is a crowdfunding platform, there are many small investments made across a large group. Therefore, the equity isn’t concentrated across a few select high-net worth investors unlike the alternative methods of private equity. Due to the low barriers of entry, ECF provides a more democratised solution for investing and thus the opportunity for more diverse investors to have a slice of the pie.
When the deals are made through ECF, it should be acknowledged that unlike other forms of private equity, the founders are largely able to stay in control of their business. The valuation, offering and goals are all set by the founders, rather than the investors setting the terms. Overall, investors are unable to demand terms, since the funds are democratised as mentioned earlier, which thus also means that there is less pressure on performance by the business.
The risks and rewards for investing
Investing into the private market can be incredibly risky as these are all startups and SMEs, therefore there is a high chance that they may not survive for long. In addition, the securities being sold are illiquid and will take at least 5-10 years before any of its returns can be cashed out. However, with that being said, these risks come with potentially high rewards that go beyond financial returns.
Investing into a campaign through ECF provides investors the opportunity to be a part of a community and support the business from the beginning whilst being their customer or brand ambassador alongside. Moreover, ECF provides a platform for social entrepreneurship, which as an industry typically struggles to acquire capital due to the lack of financial returns. However, ECF can foster an environment that caters towards businesses with innovative solutions as well as investors who seek to make an impactful investment.
It is not simple to invest into or issue securities through ECF, however, with hard work it is certainly achievable. The most important thing to know about ECF is the empowerment it provides to both investors and issuers, putting them in the driver’s seat rather than leaving them in the passenger’s seat.
Interested to invest in Equity Crowdfunding? Register for an account at Leet.Capital.