Crowdfunding 2.0 will turn customers into shareholders

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The Globe and Mail  |  JACOB SEREBRIN  |  Oct 16, 2013

Jayesh Parmar and PicaticPopular crowdfunding websites such as Kickstarter and Indiegogo have enabled Canadian companies to solicit donations, but there’s a push to take the process a step further and allow the general public to use the portals to buy equity stakes.

Known as equity crowdfunding, investors would receive shares in a business rather than a reward or early access to a product. The U.S. Securities and Exchange Commission (SEC) last month opened up the process to accredited investors, and extending it to ordinary investors is on the political agenda.

Several securities regulators in Canada have equity-based crowdfunding under consideration.

The Financial and Consumer Affairs Authority of Saskatchewan this month announced it will begin public consultations into a proposal to allow equity crowdfunding in the province. The proposal would enable businesses to raise up to $150,000 in equity twice a year. Any individual could invest up to $1,500 in an offering.

The Ontario Securities Commission (OSC) is conducting a similar review, which could lead to equity crowdfunding in the province. “Crowdfunding makes sense for companies that have limited funding needs,” says Huston Loke, director of corporate finance at the OSC. And it’s not for every investor either, he says, it’s geared toward those willing to take on the extra risk of investing in early-stage companies.

According to a 2012 report from Statistics Canada, more than 30 per cent of small and medium-sized businesses fail in their first two years.

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That high rate is one of the risk factors being considered by the OSC in its review, which also warns of the possibility of low or negative returns and the fact that these investments will be “highly illiquid.”

To help protect against these risks, regulators are generally looking to limit the amount that individual investors are allowed to invest.

The OSC is still considering that maximum, Mr. Loke says. It’s also developing a process for approving online investment portals to mitigate the risk of fraud. The OSC will be closely watching other jurisdictions, he adds, including the United States.

The U.S. securities market is familiar territory for Gil Michel-Garcia, a Montreal-based entrepreneur who also practises securities law south of the border (he was called to the bar in the state of New York).

“Why can’t I deepen my relationship with my customers by making them my shareholders?” asks Mr. Michel-Garcia, who raised more than $200,000 on a U.S. equity crowdfunding portal for his company, Wafu, which makes Japanese-style dressings. “There’s no better shareholder than someone who’s a fan of my company.”

But, he adds, equity crowdfunding in the United States still doesn’t go far enough. It’s open only to accredited investors – people with a net worth of more than $1-million (U.S.) or who make upward of $200,000 a year in personal income. “It’s not a game changer if you can only raise money from accredited investors.”

He says crowdfunding can help companies in the “most critical stage,” after they’ve received money from friends and family but before they have enough sales to qualify for business loans from commercial banks or to be of interest to traditional private-equity firms.

According to Mr. Michel-Garcia, Canadian companies can begin fundraising in the U.S. without having to register with the SEC, or having to incorporate there.

Other Canadian startups are taking advantage of recent changes to U.S. securities laws, allowing companies not just to raise money but to advertise that they’re looking for investment. More than 50 Canadian companies are publicly fundraising on the popular equity crowdfunding site AngelList, where companies can market the fact they’re raising money, how much they’re looking for, and connect with investors.

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Uniiverse, a Toronto-based startup whose app allows users to advertise and sell off-line activities and services, began promoting a $900,000 equity offering on AngelList on Sept. 23, when the U.S. law changed, company co-founder and CEO Craig Follett says. Uniiverse is currently about halfway to its goal.

For Mr. Follett, advertising on a site such as AngelList acts as a “social proof,” allowing investors to see when others are putting funds into a company.

Uniiverse also used the site to get in touch with its primary investor, Montreal-based Real Ventures, which invested $1.25 million (Canadian) in Uniiverse in late July. Mr. Follett adds, however, that the deal was made offline.

For Vancouver-based Picatic, using crowdfunding to raise investment funds made sense – the startup is also a crowdfunding platform. Picatic allows venues, concert promoters and performers to essentially presell tickets for performances. The company is approximately three-quarters of the way toward raising $750,000 on AngelList.

Jayesh Parmar, Picatic’s CEO and co-founder, says public fundraising not only sends a signal to investors, but companies can also use it to get background on investors, establish a sense of credibility and see whether competitors have received funding from the same source.

Mr. Michel-Garcia warns that Canadian companies have to be careful when they fundraise south of the border.

Having more than 50 investors exposes any Canadian company to stricter disclosure requirements when it’s put up for sale because it’s no longer considered private.

One Canadian company is turning this Wild West-like situation into an opportunity. Toronto-based BoardSuite has expanded its board-management software to turn it into a compliance engine for companies that want to access crowdfunding portals.

Oscar Jofre, president and CEO of BoardSuite, says 70 per cent of companies that apply to crowdfunding portals “are getting turned down because they’re not ready.”

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