Equity Crowdfunding for Investors

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NCFA Canada | Alixe Cormick | Feb 2016

The National Crowdfunding Association of Canada (NCFA Canada) does not offer legal advice, and nothing in this frequently asked questions webpage should be construed as offering advice legal or otherwise. You are strongly encouraged to consult a securities attorney regarding any equity crowdfunding opportunity you are considering as an entrepreneur, investor, or funding portal.  In addition to the standard FAQs available below a set of ‘add value’ premium FAQs (content) will be made available via eBook (link to be provided shortly).

Prior to submitting a question, please review all FAQ sections including Equity Crowdfunding RegulationsGeneral, For Entrepreneurs, For Investors and For Portals.

 

FAQ QUESTIONS FOR INVESTORS

Why should I invest in a small business' equity crowdfunding campaign?  Answer

There are several reasons you may want to invest in a small business’ equity crowdfunding campaign:

  • to make a return on your investment;
  • to help a friend or acquaintance launch their business;
  • to support a business or industry you believe in or want in your community (also known as “locavesting”);
  • to diversify your investment portfolio;
  • to benefit from tax credits if an investment has associated tax credits such as flow-through shares if in the mining industry or an eligible small business tax credits under the British Columbia Small Venture Capital Act;
  • to potentially be involved in the next big thing;
  • to put something back or pay it forward if you yourself were successful;
  • to support a new creative business idea by providing financial support, general support, feedback and guidance;
  • for the perk offered in addition to the obtaining an equity interest; and
  • for the fun of it.

The reasons for investing are unique to each individual investor and equity funding campaign.

How is equity crowdfunding different from angel investing? Answer

Angel Investing

Angel investors are high net worth individuals who meet the definition of an accredited investor. They tend to invest in business sectors they are familiar with and on founders/teams they believe are coachable. Angels find investment opportunities through memberships in angel groups, angel forums, pitch days, tech forums, word-of-mouth and blind luck.

Angels take a lot of time to conduct due diligence on the business, the competition, industry and the team involved.  Getting to know the team and watching how they perform over time is the key determination Angels use to decide whether to invest or not. Angels negotiate the valuation of the business and the terms of their investment with the founders, often pushing the pre-money valuation downwards.

Angels tend to be active shareholders. They often open up their business contacts and share their personal knowledge and experience with the founders of the businesses they invest.  They also tightly monitor their investment and expect regular updates and phone calls from founders.

Equity Crowdfunding

Equity crowdfunding investors are not necessarily high net worth individuals, but are likely comfortable.  They tend to make their investment decision based on whether they like the product or service of the business and the perceived size of the market. Crowdfunding investors find investment opportunities on online funding portals, which appeal to their interests or location. Crowdfunding investors seldom meet the founder or team behind a business.

Their due diligence activities is focused on the information and interactions on the funding portal. Any due diligence conducted off the funding portal is limited, as the size of the investment rarely justifies a more extensive due diligence process.  The founders of the business set the pre-money valuation of the business and terms of investment.

Crowdfunding investors only choice are to walk away from an investment if it is over-valued or over pay for the investment.  Crowdfunding investors tend to be passive shareholders.  Crowdfunding investors are likely to have limited input into the business or ability to monitor their investment or get information from the businesses they invest after the offering closes.

What benefits could equity crowdfunding offer me as an angel investor? Answer

As an investor, you are looking for good investments.  Equity crowdfunding expands the number of deals you see beyond local angel group presentations and random introductions. Equity crowdfunding portals offer the potential of high quality deal flow amongst the noise with built in due diligence materials available on the portal. The funding event itself offers you the added opportunity to join an online funding syndication for popular investments.

How much can I make in investing in equity crowdfunding campaigns? Answer

Equity crowdfunding investments are high-risk investments.  There is no guarantee you will ever make any money or even see the return of the money you invest.

Crowdfunding investors can make money in four ways:

  • Dividends or interest payments – rare, as all cash generated is usually pushed back into the business;
  • Capital gains on sale of business to another business – most likely if the business is successful, investors may receive cash or shares or both from an acquiring company;
  • Initial public offering – rare, as a buy-out offer likely to be received prior to the business being attractive enough to take public; or
  • Selling securities to another investor in a private sale transaction – rare in Canada, investors can sell their shares to another investor for a profit but they must rely on an securities exemption for the sale. This type of transaction occurs most often when a lead investor wants to strengthen their position in the company or a private share secondary market is available, like Sharepost or Secondmarket in the United States.

Investing in start-ups is a high risk, long-term investment which you should expect will take an average of eight years, if successful, to generate a significant return/exit for an early stage seed capital investor holding an equity stake. 

 

Source:
Alixe_Cormick picAlixe Cormick is the founder of Venture Law Corporation in Vancouver, BC. Alixe concentrates her legal practice in the areas of initial public offerings, follow-on offerings, reverse takeovers, capital pool corporations, qualifying transactions, mergers & acquisitions, secondary listings and exempt market financings (more).

 

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization’s profile and gain access to a dynamic group of industry front runners. Learn more About Us | Prezi or contact us at casano@ncfacanada.org.

 

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