Canada: Equity crowdfunding source of innovation, capital for startups

Quentin Casey | Oct 22, 2012 8:18 AM ET More from Quentin Casey

1022asano - Canada:  Equity crowdfunding source of innovation, capital for startups

Craig Asano, Executive Director and Founder of the National Crowdfunding Association of Canada, is pushing
for a 'made-in-Canada' approach to equity crowdfunding. (Tyler Anderson/National Post)

Last fall, shortly after his business turned four, George Christakos decided it was time to expand. He wanted to boost the seating capacity of Brooklyn Warehouse, the north-end Halifax restaurant he co-owns with his father, Leo. Renovation plan in hand, the pair visited their bank to seek a loan. The request was rejected.

“They didn’t believe in us,” Mr. Christakos recalled. “So we decided to go to those who do believe in us — our regular customers.”

Putting their frustration aside, the father-son duo launched a crowdfunding campaign — a capital-raising technique that draws small contributions from a large number of people. (Mr. Christakos first heard about the concept from a friend, who produced a movie with $5,000 raised through Kickstarter, an online crowd-funding platform.)

With the proper regulations, crowdfunding is a new source of capital for innovation and new ideas. It gives the small guys a chance

Mr. Christakos’ crowdfunding effort was different but achieved the same result. Instead of asking for donations, he pre-sold meals at his restaurant. For $50, a contributor was promised lunch for two and two T-shirts. The most popular offering was a four-course dinner for two from a custom menu for $100. And for $1,500, Mr. Christakos offered two dinners a year for the rest of the restaurant’s life.

“The idea was to create these no-brainer deals,” Mr. Christakos said. “It wasn’t charity.”

In 60 days, the campaign raised $23,000 from 115 contributors, 80% of whom were located within the same postal code as the restaurant. “It involved people who truly care about having a neighbourhood restaurant,” he said.

Crowdfunding campaigns can take many different forms. Some involve donations, while others, such as Mr. Christakos’ effort, involve the pre-purchase of goods or services. Either way, the goal is the same: to raise capital from a large pool of contributors.

The model is unique because crowdfunding participants are not investors; Their contribution does not secure a stake in the project or company. Increasingly though, Canadian entrepreneurs are calling for special regulations to enable so-called equity crowdfunding, where many investors each hold a small stake in an enterprise.

It’s a concept already established in countries such as Australia, Sweden, the United Kingdom and, soon, the United States.

In April, President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. The act, when fully implemented next year, will allow companies to raise up to $1-million a year from small investors, without having to make an initial public offering. The act is intended to aid small businesses, increase startup funding and encourage more people to invest.

Craig Asano, founder and executive director of the National Crowdfunding Association of Canada, is pushing for this country to move in that direction. He wants to expand the “power and range” of local crowdfunding by pushing beyond the traditional donation and reward-based models and develop a “made in Canada” approach to equity crowdfunding. Otherwise, he said, Canada risks losing its best crowdfunding minds to the United States.

“With the proper regulations, crowdfunding is a new source of capital for innovation and new ideas. It gives the small guys a chance,” Mr. Asano said. “This has game-changing potential for our whole economy.”

One of the most vocal proponents of equity crowdfunding in Canada is the Canadian Advanced Technology Alliance. Equity crowdfunding would greatly benefit the technology sector by increasing the number of investors available to cash-hungry startups, said Gary Stairs, a CATA board member.

“There’s going to be a lot of what I call ‘Main Street’ investing,” he said. “Equity crowdfunding is going to be a good alternative for the micro investor and for the bootstrapping startup.”

So what’s not to like?

Rick Hancox, executive director of the New Brunswick Securities Commission, said equity crowdfunding is not without risks, which is why provincial securities commissions across Canada are studying issue.

“It presents a legitimate and valid way to raise money from a broad spectrum of investors. But it also presents an opportunity for fraudsters to raise a lot of money from a lot of people with very little protection,” Mr. Hancox said.

“If you’re a fraudster, here’s a great way to make a lot of money without really rocking anybody’s boat. Who’s going to complain because they lost 100 bucks?”

Such concerns are valid, but not worthy of derailing the spread of equity crowdfunding, said David Marlett, who founded the U.S.-based National Crowdfunding Association in March. The group already boasts 800 members and Mr. Marlett expects that number to rise swiftly by the time equity crowdfunding is finally rolled out across the U.S. — likely in mid-2013.

“There’s always going to be fraud,” he said from Dallas. “We all have to put on our big-boy britches and realize this isn’t an absolutely protected space,” he said, pointing to the existing use of donation and reward crowdfunding, which have no oversight. Existing crowdfunding models have a 2% fraud rate, which Mr. Marlett said is better than that of most credit card companies. “Will there be fraud? Yeah. Will it be to the extent that some people are worried about? Probably not,” he said.

“It’s an exciting industry. We encourage everybody to stick their toes in.”

Back in Halifax, Mr. Christakos said he would consider using an equity crowdfunding model for any future expansions of the restaurant.

As he sees it, equity crowdfunding provides one more option for small businesses cut off from traditional lenders. “Let’s not snuff this idea out,” he said. “It’s good for economic growth.”