When Acorns, a heavily hyped US micro-investing app launched in Australia in February, the pitch to millennials was simple: Here is an inexpensive and relatively low-risk way to get exposure to the sharemarket and grow your savings.
Now, in the latest unorthodox capital raising by a smaller technology firm, the Acorns business in Australia is tapping its own users for up to $6 million by offering them what it admits is a “highly illiquid” and “highly speculative” investment.
Last week, the micro-investing service emailed Australian users alerting them to a new share offering.
“Many of you have asked for the opportunity to be able to invest in the Acorns business, so we decided to make that a reality,” the email, signed by chief operating officer Brendan Malone, and obtained by The Australian Financial Review, read.
These shares would not be listed on any exchange, and would therefore be “highly illiquid”, the prospectus confirms. And they would be in a holding company with “only an indirect economic interest in the owner of the Acorns product”.
Acorns, a fast-growing US fintech startup backed by payments giant PayPal and venture capital firms such as Greycroft Partners, enables users to round up purchases and invest the spare change into diversified portfolios of low-cost exchange traded funds.
For example, if a user spent spent $125.20 on a pair of jeans, this could be rounded up to $126, with the remaining 80¢ going into an investment portfolio. Acorns makes money by charging users a small monthly fee (of $1.25 per month, or 0.275 per cent for balances above $5000).
The service launched in Australia in February – its first market outside of the US – through a joint venture with Sydney-based structured products firm Instreet Investments.
The joint venture, Acorns Grow Australia, has already amassed nearly 160,000 users.
Last week, those users were invited to invest a minimum of $5000 into a vehicle called Acorns Investment Company. According to the prospectus, this vehicle was created solely to invest in another entity, Instreet Acorns, which in turn holds 50 per per cent of the consumer-facing joint venture. Acorns US, which declined to comment, holds the other 50 per cent.
“An investment company set up to invest in another investment company, which in turn invests in ETFs … seems a bit convoluted to me,” Graeme Bottrill, president of the Australian Investors Association, said. “Other than that, the structure is pretty standard.”
The raising comes amid heightened interest in technology investments in Australia, but growing uneasiness about some of the methods used by tech firms to raise capital. ASIC last year raised concerns about reverse mergers or “backdoor listings”, in which dormant mining companies reinvent themselves as technology firms.
More recently, the ASX moved to tighten restrictions on floats following a deluge of smaller technology listings. The exchange intervened to block a proposed listing by Guvera, a loss-making streaming music service, after that raising was seriously criticised by key figures in the technology industry, including Atlassian co-founder Mike Cannon-Brookes.
The Acorns prospectus acknowledges that any investment would be “highly speculative”, and that “investing in a startup company bears the highest investment risk possible”.
Acorns Grow Australia CEO George Lucas said the holding structure was chosen due to strong interest from users, and because it was the simplest and cheapest way for Acorns to raise capital in Australia.
“We could have gone and raised money by getting an institutional partner or by getting wholesale [investors] or VC, but we just thought, because our client base wants to be involved in the company, let’s do it this way,” he said.
The prospectus acknowledges that holders of shares would have no voting rights in Instreet Acorns. “As such, neither the Company, nor Shareholders (who subscribe for New Shares under the Offer), will have any influence over the Acorns Business,” it reads.
The joint venture generated a loss of $1.7 million in the 2016 financial year, on revenue of $154,236.
But even if Acorns were to become profitable in the future, and pay a dividend to Instreet Acorns, there is no guarantee that would be passed on to shareholders in Acorns Investment Company, the prospectus says.
“[E]ven if Acorns does become profitable in the future and pay a dividend to Instreet Acorns Pty Limited, there is no guarantee or assurance that Instreet Acorns Pty Limited will pass on that full dividend to the Company, nor that the Company will pass on that full amount received as a dividend to its Shareholders,” it reads.
“It’s like any venture capital [investment], you have to wait for Acorns to be listed or for a trade sale,” Mr Lucas said.
Acorns was seeking to raise a minimum of $1 million and a maximum of $6 million through the offer, which could value Acorns Grow Australia at up to $45 million.
Mr Lucas said users had registered to buy shares worth roughly $1.25 million as of Friday.
Proceeds from the raising would be used for working capital and “to pursue growth opportunities in overseas markets”, the prospectus says.
“We have only been operating for nine months and while we have gone really well with nearly 160,000 signups … we still burn cash,” he said.
“We kept getting emails everyday from people from our client base, [saying] we love the product, can we get an investment in the actual company? Our customers are asking for it, so let’s give it to them.”