Buying shares through crowd-sourced funding

There are a number of ways to buy shares, including through crowd-sourced funding.

What is a share

A share is part ownership in a company. Companies issue shares to raise money. After that, investors can buy and sell those shares to and from each other.

When you own shares, you own a small part of the company. As a shareholder, you can get dividends and other benefits.

If you're new to shares, visit the Australian Securities Exchange (ASX) investor education hub for information and online seminars.

Buying shares through crowd-sourced funding

There are several ways to become a shareholder. One way that is more niche than others is buying shares through crowd-sourced funding (CSF) via an intermediary.

Crowd-sourced funding is a financial service where start-ups and small businesses raise funds, generally from a large number of investors that invest small amounts of money. This is also known as 'equity crowd funding' or 'crowd-sourced funding of shares'.

A provider of crowd-sourced funding services (the intermediary) must hold an Australian Financial Services licence.

It's not the same as "crowd funding”

Crowd-sourced funding of shares is not the same as:

• Donation-based crowd funding — This is typically used by artists or entrepreneurs to raise money for one-off projects.
• Investment-based crowd funding — This may involve investing in a managed investment scheme. Or it could be offered by someone who doesn't need an Australian financial services (AFS)  licence.

How crowd-sourced funding of shares works

When a start-up or other small/medium sized business is looking to raise funds, they might decide to offer their shares through crowd-sourced funding. They do this by offering their shares on an online platform operated by an intermediary.

The role of the intermediary is to perform checks on the offering company, operate the online platform (through which the company offers shares and investors invest money in exchange for shares), hold investor money and pass the investor money to the company when the offer is complete.

There are a few important things to note:

There's an annual investment cap — You can invest up to $10,000 per year in a company in exchange for shares.

You need to understand the risk warning — If you invest through a CSF intermediary’s website, you need to declare that you understand the risk warning on the company website and offer document.

Intermediaries need a licence — Check that the CSF website operator has an AFS licence on ASIC's Professional Registers Search. Look at 'licence authorisation conditions' to make sure it can provide CSF services.

There's a cooling-off period — You have five business days to cancel if you decide the investment is not for you. During this time, you can withdraw your application and get a full refund.

Risks of crowd-sourced funding

Crowd-sourced funding provides a fundraising option for start-ups or small to medium-sized companies. These companies are often at an early stage of their development and may not yet have a viable or profitable business. This means investments through CSF offers may be highly speculative, with an increased risk of failure and loss to equity investors. Investments through CSF offers may also be illiquid, reducing investors’ ability to exit.

report Lack of company track record — Some businesses using crowd-sourced funding are in the early stages of development. So, there's a higher risk that they may be unsuccessful and you could lose all the money you invest. Do your own research on the company.

report Shares may be hard to sell — Selling crowd-sourced funded shares may be more difficult than selling shares listed on a public stock exchange. Your investment is unlikely to be 'liquid'. So if you need to get your money back, you may not be able to sell your shares quickly — or at all.

report Fraud or insolvency — You could lose the money if the website operator handles your money inappropriately or becomes insolvent

Finding the right investments can be challenging. If you need some help to build a diversified portfolio, talk to a financial adviser.