Category Archives: Crowdfunding Opinions

A U.S. Perspective: Can Canadian Alternative Finance Contend?

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NCFA Canada | John Neal | July 6, 2016

As an intern from the States I have had the pleasure of living in Toronto for the last month while working for NCFA Canada under a study abroad experience. While adapting to Canadian culture is simple, you learn to navigate the subtle differences such as use of metric system, reading temperatures in Celsius, the typical American adjustment.

Canada vs the U.S.

When I think of U.S. Canada relating to each other I think similar lifestyle, similar culture and perhaps similar economic activity just proportionate to each other’s respective size. Yet, while learning about the Crowdfunding industry in Canada compared to the UK and the US there seems to be major disconnect.

For example, the U.S. outweighs Canada in Crowdfunding numbers by $36,000,000,000 to 190,000,000 in 2016. Let’s put this into perspective Canada’s numbers are 0. 00000527% of the United States. That’s 5 one millionth of the U.S.’s numbers (Download:  2016 Alternative Finance in Canada report).

Source: NCFA 2016 Alternative Finance Industry Report

Alternative Finance Crowdfunding and FinTech are common global trends spreading like wildfire internationally but at a much slower pace here in Canada (from what I can see). I’m aware of the innovation in Canada and the willingness to be a catalyst for change. However, in the States there are two cities that champion FinTech, San Francisco (Silicon Valley) and New York. These two global hubs amass for a large portion of the technological innovation within the U.S. To grow Canada’s Alternative Finance sector, there must be some form of change soon of how these portals are regulated.

See:  Competition Bureau suggests Canadian FinTech sector’s slow growth due to regulation, consumer complacency

In 2015 S.E.C. in the United States adopted rules to permit crowdfunding on a larger scale. Proactive measures have taken place States side, the question remains can Canada essentially foster the innovation that is present South of the border and nurture Alternative Finance to become a viable source of financing for Canadian companies and likewise an opportunity for domestic and global investor?  The power of alternative finance, evolving digital platforms and online digital trends is becoming an authentic form of raising capital.

New forms of finance have been empowered by consumer driven online marketplaces (i.e. Crowdfunding) which has led to the creation of countless new opportunities in the financial sector.” – Cato Pastoll, Co-Founder & CEO of Lending Loop.

U.S. ability to adapt to change

United States crowdfunding has shown promise according to the dollar $ numbers raised, however there are continued measures to fix bugs and strengthen regulatory actions. For instance, the “H.R. 4855 Bill “Fix Crowdfunding Act” passed by the house in the States on July 6th, 2016. We can see that in the U.S. there are continued efforts to alter regulations in favor for efficient crowdfunding. Another significant modification that separates U.S. and Canada is the use of advertising for crowdfunding. In Canada, there are restrictions for crowdfunding advertising and solicitation (Read more here!) while  in the United Sates advertising is allowed for crowdfunding for issuers. Limiting crowdfunding offer distribution channels can be seen as hindering education, and impeding the growth of the Canadian industry.

Funding options for a new generation

I have noticed University students in the States are quickly evolving and many of my colleagues are currently using or thinking about relying on Alternative Finance portals to provide them with adequate capital to take student innovation to launch new businesses to market. Innovation is what drives millennial students at American Universities. Fortunately, the concept of crowdfunding in the States is welcomed, and my fellow peers are benefiting from its rewards while investors are simultaneously gaining access to great new investment opportunities.  I can envision Canada eventually adopting some regulatory changes to encourage market development to ensure Canadian companies have equal access to new financing models. This would be exceptional for business of all kinds, due to simpler Alternative Finance access. Canada deserves to be among the top leaders in Alternative Finance-Crowdfunding and I am confident over time they will.

While the United States and Canada remain strong economic partners, when it comes to crowdfunding there currently remains a massive void for the Canadians. Ultimately, can Canada adopt enough change for alternative finance – crowdfunding to allow it to contend in 2017?  Get our your crystal ball and let me know what you think the results will be??  email:  john@ncfacanada.org

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John Neal, a NCFA Canada Marketing Intern from Michigan State University. John focuses on business/marketing development for NCFA Canada. Increasing awareness for Canadian Crowdfunding Industry by way of online and offline outreach.

 

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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ICOs: New Model of Blockchain Capitalism

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The Cointelegraph | By Wassim Bendella | June 19, 2017

ICOs are the hot new thing in the Blockchain community. The idea behind an initial coin offering is that a company promises to build a Blockchain-based product or service.

To raise the funds necessary to the execution of its roadmap, the company issues digital tokens and sells them to contributors, usually all at once.

Contributors can then use these tokens to run the service when it is up and running, hold them or sell them for profit.

More and more Blockchain startups are organizing token sales as a way to raise money upfront in ICOs, a nod to the traditional securities’ IPOs. When last year, these companies raised $260 mln according to the research firm Smith + Crown, they have already raised over $560 mln since the beginning of 2017.

ICOs are considered an alternative to crowdfunding and are transforming the way startups capitalize themselves. It's basically a way for Blockchain startups to raise money outside the accredited system.

While tokens operate in the same way equity stakes do, they cannot be considered the same. Indeed, for securities to be sold, they need to be registered with the Securities and Exchange Commission. That is absolutely not the case for tokens, which are more like licenses people use to access a particular application on the Blockchain.

Breaking records

In 2013, Mastercoin organized a token sale to raise funds and was one of the first projects to use this new type of capitalization. Despite warnings that Mastercoin might just be an elaborate scam, investors braved the risk and contributed what was the equivalent of $500,000 at the time.

Ethereum followed the trend in 2014 and managed to raise $18 mln, although the project lost millions after the Bitcoin price crash that year. From there, ICOs started breaking records little by little, until a decentralized venture capital firm entered history by raising $150 mln in 2016. This firm is the infamous The DAO, which was hacked shortly after and lost $50 mln.

See: How The Blockchain Alliance Helps Law Enforcement With Bitcoin Crime And Developments Like The DAO

Since these ICOs are not regulated by the SEC, nothing can be done by authorities after such events. Startups that issue tokens become self-regulating entities that are independent of third parties, but contributors cannot be guaranteed that the roadmap promised by the founders will be respected. This dubious legal status makes ICOs a particularly risky investment.

No rules

The SEC is currently examining this capitalization method but until something is decided, contributors cannot enjoy any protection on their investment.

Aaron Ting, VP of the Malaysian Investors’ Association, believes:

“It is an investment option for those who have a high risk, high reward appetite.”

“Even though the white paper claims that by purchasing ICO tokens, investors own part of the start-ups’ assets and liabilities and have a claim on its profit, there is nothing much you can do if the project does not materialise and the people behind it take your money and run. There are no rules and regulations to govern the space,” explains Matthew Tan, founder, and CEO of Etherscan.

See: Ethereum's Double-Edged Sword: Will a Rising Price Hurt Users?

Risk appetite

By examining the developments of previously ICO-funded startups, one can argue that not many can be categorized as complete projects today. There is no doubt more time is needed to grow into a successful global company, but big wins in this field could bring more confidence to investors.

Adding to the difficulty of the exercise, it is not easy to distinguish between the genuine projects and the scams. For this reason, industry experts insist that contributors do their due diligence before investing and get deeply familiar with the project founders, its realizability and its potential for mass usage.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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COMMENTARY: SEC rightly concerned about ‘so-called SAFE’ securities in crowdfunding

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ReutersJoe Green | June 1, 2017

Traders work on the floor of the New York Stock Exchange (NYSE) February 24, 2016.

NEW YORK (Thomson Reuters Regulatory Intelligence) - The U.S. Securities and Exchange Commission, released an investor bulletin earlier this month (here) cautioning retail investors about the risks of purchasing a particular type of security known as a Simple Agreement for Future Equity, or SAFE, in investment crowdfunding offerings. The commission acted following concerns raised by two of its commissioners and its Office of Investor Advocacy. It was right to do so.

INVESTMENT CROWDFUNDING

Regulation Crowdfunding — the SEC's rules allowing startups and small businesses to raise just over $1 million of capital from non-accredited, retail investors through online crowdfunding portals — became effective a year ago this month. These long-awaited regulations implemented the crowdfunding provisions of Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012. Unlike popular crowdfunding platforms like Kickstarter, through which participants can make donations to for-profit businesses in exchange for rewards, investors participating in offerings under Regulation Crowdfunding receive securities (such as equity or debt) in exchange for their investments in fledgling companies.

See: SEC Approves Title III of JOBS Act, Equity Crowdfunding with Non-Accredited

The SEC's Division of Economic and Risk Analysis (DERA) has published a white paper analyzing all offerings launched under Regulation Crowdfunding from its May 16, 2016, effective date through the end of that year. To give a sense of the types of companies that have tried to raise capital using investment crowdfunding, according to DERA, the median issuer under Regulation Crowdfunding was incorporated within the last two years and had only three employees, no revenues and around $5,000 in cash and $10,000 in debt on its balance sheet. About 60 percent of crowdfunding issuers showed no revenues and 91 percent had yet to earn a profit.

When the SEC analysts looked at the types of securities that Regulation Crowdfunding issuers chose to offer to prospective investors, they found that common and preferred equity were most frequently offered, accounting for more than a third of the offerings. However, the next most commonly offered security, accounting for just over a quarter of the offerings, was the SAFE.

THE SIMPLE AGREEMENT FOR FUTURE EQUITY

As I described at length in a 2014 Hastings Law Journal article on contractual innovation in venture capital (here) that I co-authored with John Coyle, an associate professor at the University of North Carolina at Chapel Hill, the SAFE is a relatively new startup financing instrument developed and popularized by the influential Silicon Valley startup accelerator Y Combinator. The SAFE was designed to facilitate investments by wealthy, sophisticated angel investors in early-stage technology startups that were expected to raise institutional venture capital (VC) in the near future.

A type of deferred equity contract, SAFEs entitle investors to receive a company's equity securities upon certain triggering events, such as a subsequent VC investment. Unlike their close cousins, convertible notes, SAFEs do not accrue interest while outstanding and have no maturity date. The percentage of the company's equity a SAFE investor may eventually receive upon a subsequent financing is a function of the amount invested and the valuation of the company that is negotiated by the later VC investor. Conversion of the SAFE into equity depends upon that future VC financing actually coming to fruition.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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Equity crowdfunding is 1 year old today, Wefunder is top platform

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VentureBeat | | May 16, 2017

Since Regulation Crowdfunding began on May 16 last year, 335 companies have filed offering documents with the Securities and Exchange Commission (SEC) to fundraise on securities-based crowdfunding platforms. Of those companies, 43 percent were funded, 30 percent failed, and the remainder are still open and trying to get funding.

The total capital committed to date on these platforms is in excess of $40 million, with the average successful crowdfunding campaign raising around $282,000 from about 312 investors. The most recent quarter saw the greatest number of companies file with the SEC. This signals that issuers might finally be catching on to the opportunity that Regulation Crowdfunding holds.

And what about the portals that have emerged to host these fundraises? Of the 26 portals registered with FINRA to help companies sell Regulation Crowdfunding securities, nine have already closed, gone out of business, or been shut down. Of those remaining, Wefunder (based in San Francisco and Massachusetts) is leading the pack both in the number of deals and total dollars raised. They have been in business since Regulation Crowdfunding went into effect and have helped 63 companies pull in almost $18 million. Start Engine (in Los Angeles) ranks second with 27 campaigns funded, and Microventures (Austin), NextSeed (Houston), SeedInvest (New York), and Republic (New York) rank third through sixth. Interestingly, the location of these platforms also matches the states that have raised the most capital.

Several platforms (both old and new) have only funded a handful of campaigns. This may signal that brand awareness and marketing by the larger incumbents is driving both companies seeking capital and investors looking for deal flow.

See:  Are Overseas Portals the Next Big Thing in US Equity Crowdfunding?

However, If you dig a little deeper and look at the capital raised during the last three quarters, you will see in that while Wefunder is leading in overall dollars, both Microventures and Start Engine are not far behind in terms of quarterly commitments (see Orange bar to compare Q1, 17 results).

"I expect to see Indiegogo put more time and energy into converting its most successful rewards campaigns into equity campaigns on Microventures."

Microventures, the offshoot of rewards-based crowdfunding platform Indiegogo only launched at the end of last year and is already showing strong results, with 100 percent campaign success. While the platform hasn’t run many campaigns, the campaigns it has run have raised slightly more success than those on Wefunder.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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A British firm plans a secondary market for crowd-funded shares

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The Economist | May 17, 2017

Everyone would like a piece of the next Google or Facebook. But the big venture-capital (VC) firms do not usually raise money from small investors. And some entrepreneurs complain that it is hard to get noticed by the hotshots in the VC industry. Hence the enthusiasm for crowd-funding, where small investors can buy a stake in startup companies.

Seedrs, a British crowd-funding firm, was set up in 2012, and has backed 500 firms so far, raising a total of £210m ($271m) from more than 200,000 users. But there are two big problems with crowdfunding. First, it is risky: most startups fail. Second, investments tend to be illiquid—shareholders have to wait for a takeover or a stockmarket flotation to recoup their investment.

See:  Seers Announces First-ever Portfolio Results With Overall 14.44% IRR (Annualized Rate of Return)

Seedrs is trying to solve the illiquidity problem by setting up a secondary market, where buyers and sellers can exchange shares. The new market will start operating this summer, and will allow trading for a week every month, starting on the first Tuesday. The price at which investors can deal will be set by Seedrs itself, based on a valuation mechanism in line with industry guidelines. But there are some restrictions: only current investors in a firm will be allowed to buy shares. And, to the extent that investors make a profit, Seedrs takes a 7.5% cut of the gains.

"An obstacle to crowdfunding is that investors have to wait so long to sell their shares"

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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As countries develop strategies, we need a fintech champion

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The Globe And Mail | By Michael King | May 14, 2017

Most commentators agree that Canada has many of the elements required to support a vibrant financial technology sector, notably a stable and secure financial system, a high concentration of financial institutions, access to a large pool of talented employees and expertise in the underlying ABCDs: artificial intelligence, blockchain, cryptography and data science.

But a key shortcoming is the absence of a clearly defined fintech strategy championed by the federal government.

“The Government has an opportunity – and a responsibility – to lead the way when it comes to digital innovation.”

Britain, Australia and Hong Kong have published national strategies for this key sector over the past 18 months, seeking to create jobs domestically and exports globally. But Canada has no national strategy. Instead, we are witnessing regional fragmentation, with separate reports commissioned by Toronto, Montreal, and Vancouver arguing each should be the centre of fintech in Canada. Sound familiar? We only have to look at Canada’s system of provincial securities regulations to see where this is heading.

While each of Canada’s regions has clear strengths, doesn’t this approach miss the point? Why are we competing internally, rather than co-ordinating nationally and competing globally to dominate the emerging fintech industry? The answer is a lack of federal leadership.

See:  The Age of Artificial Intelligence in Fintech

In Britain, Australia and Hong Kong, the equivalent of the finance minister has taken charge, creating a fintech advisory council with private-sector expertise, consulting with key stakeholders, co-ordinating different levels of government and publishing a national strategy. As Australia’s Treasurer stated in the 2016 report Backing Australian FinTech: “I want to help create an environment for Australia’s FinTech sector where it can be both internationally competitive and play a central role in aiding the positive transformation of our economy.” Recall that Australia has the same federal system as Canada, with a smaller population and a financial sector dominated by a few large incumbents.

In a 2014 speech, then British Chancellor of the Exchequer George Osborne said: “Key to the government’s long-term economic plan is cementing Britain’s position as the centre of global finance. It’s only by harnessing innovations in finance … that we’ll ensure Britain’s financial sector continues to meet the diverse needs of businesses and consumers here and around the globe, and create the jobs and growth we all want to see in the future.” Following the Brexit vote, Britain is highly aware of the risk of losing its dominant financial sector. In a recent speech, Bank of England Governor Mark Carney threw his voice behind fintech, noting that it will democratize financial services and contribute to a more resilient financial system.

See:  2017 Annual Alternative Finance Crowdfunding in Canada Survey - Share Your Opinion

While Canada often looks south for inspiration, in this case the United States is showing us what not to do. The U.S. fintech sector is being held back by regional competition between Silicon Valley and New York, and regulatory uncertainty. A 2016 report by KPMG ranked California and New York as distinct fintech regions alongside Australia, Germany, Hong Kong, Singapore and Britain (Canada did not make the list). A key shortcoming: Fintechs are subject to supervision at the state level and separately by the Department of Business Oversight in California and the Department of Financial Services in New York. Regional competition and regulatory uncertainty may have contributed to last year’s 50-per-cent drop in fintech investment, with KPMG reporting only $12.8-billion (U.S.) invested in 2016 versus $27.0-billion in 2015. While Canada bucked this trend with a record $138-million (Canadian) of fintech investments last year, Canada’s investments are measured in millions, not billions.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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What you need to know about launching a Kickstarter project in Montreal

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CBC | By Jaela Bernstien, Roberto Rocha | April 27, 2017

According to a CBC analysis, the majority of Kickstarter campaigns launched in Montreal are tech and video games, but the crowdfunding projects that succeed aren't necessarily what you'd expect.

CBC looked at six years of Kickstarter projects with data provided by Web Robots and HiveWire, two firms that track crowdfunding sites.

Only Kickstarter data was used since it has the largest and most representative sample of Canadian crowdfunding projects.

See: Share your opinion: 2017 Annual Alternative Finance Crowdfunding in Canada Survey

The crowdfunding data sheds light on creative trends in cities large and small, including Montreal.

As far as the total number of Kickstarter projects is concerned, Montreal is the third biggest city, after Toronto and Vancouver.

Montreal is known as a tech and video game hub, and that's reflected on Kickstarter, where most of the campaigns launched out of Montreal are in the tech and video gaming industry.

But not all Kickstarter campaigns actually succeed.

See:  What 10,000 Kickstarter projects reveal about Canada's entrepreneurs

So which projects are most likely to achieve their target fundraising goals?

In Montreal, films performed above the national average: 49 per cent of those launched here succeeded, compared to the 37 per cent success rate nationwide.

"Montreal also outperforms the country in tech projects — the toughest category according to CBC's analysis."

In Montreal, one-quarter of tech campaigns met their funding targets. In the rest of Canada, about 19 percent did.

What makes a Kickstarter campaign successful?

One key takeaway from CBC's analysis of nearly 10,000 Canadian Kickstarter projects was that crowdfunding works best on projects that already have something to show.

One of the highest fundraising goals in Canada that succeeded was for We Happy Few, a video game created by Compulsion Games.

They raised more than $300,000 through Kickstarter.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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