No longer just a buzzword, crowdfunding represents a game changing opportunity for startups to access capital and is redefining how companies raise money and interact with their investors.
Crowdfunding is increasingly being employed to help people and groups finance various projects by sourcing sufficient funds through an online platform. Crowdfunding can take on different forms, such as charitable crowdfunding, pre-selling products, and equity crowdfunding; however equity crowdfunding is different than the other types of funding in that it involves the issuance of securities, an action which is regulated by the Canadian securities commissions.
So, what is a security?
In crowdfunding, it is the interest in the company (a share or a bond) that an investor is receiving in exchange for their monetary contribution.
In Canada, all trading in securities is subject to regulation and all offerings must be registered, unless there is an exemption from registration and/or the preparation of a prospectus available. Not surprisingly, registration requirements and prospectus costs can run extremely high and are therefore prohibitive for start-ups and early stage businesses with limited capital. As a result, securities regulators in many provinces (including BC) have introduced “start-up exemptions” that allow businesses to raise funds without such a hefty price tag.
The start-up exemption is comprised of two separate exemptions. The first allows a start-up or early stage issuer to raise relatively small amounts of capital by distributing securities to investors without filing a prospectus and the second allows a funding portal to facilitate trade of those securities without having to register as a dealer.
How does start-up crowdfunding work?
First, a small business comes up with an idea but realizes it doesn’t have the funds to proceed. Then, it seeks investors, through a crowdfunding portal, by pitching basic information about the business and the offering, how it will use the money and any risks of the project and these details will be available on the crowdfunding site in a prescribed offering document. In the event that any information contained in the document changes or is no longer true, the business must amend the offering document.
The business is able to raise up to $250,000 per crowdfunding distribution and can participate in two crowdfunding distributions per year. It will set a minimum amount that needs to be raised in order to complete the project and if the minimum is not raised within 90 days, that money is returned to the investor. The business is also able to set a minimum investment amount per investor.
Enter the investor. An investor pursuing the crowdfunding site finds the business’s project and reads the disclosed information. After he has reviewed the materials and acknowledges the risks of his investment, the investor can invest up to $1,500. Should the investor get cold feet, he has 48 hours to cancel his investment and his money will be returned by the portal within 5 days. The investor also has 48 hours to cancel his investment after any amendment to the offering document.
The other player in this relationship is the crowdfunding platform, which may or may not be a registered dealer. The Crowdfunding platform will hold the investor’s money in trust for the business until the minimum amount needed to proceed has been raised.
Once the minimum amount has been raised and each investor’s 48 hour withdrawal period has expired, the business can close the crowdfunding campaign and the portal will release the funds to the business. Within 30 days, the business must send a confirmation notice to each investor that sets out the date campaign closed and the number, description and price of the securities purchased by the investor. The business must also disclose any fees paid to the crowdfunding portal.
Should my business consider start-up crowdfunding?
Before deciding to launch a campaign, consider:
- whether crowdfunding is preferable to other sources of funding (such as a bank loan)
- the time required to prepare for and run a campaign
- the type, characteristics and price of the securities to be offered
- whether your business has the capacity to manage a large number of shareholders.
In addition, your business needs to be prepared; financial and corporate records will need to be up-to-date and you’ll need to have a class of shares suitable for a group.
Accelerating your company through crowdfunding can be overwhelming and there are many considerations. We are here to help, from organizing your business’s legal affairs to helping find the right platform.
The information provided above is for educational purposes only. This information is not intended to replace the advice of a lawyer or address specific situations. Your personal situation should be discussed with a lawyer. If you have any questions or concerns, contact a legal professional.