Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Category Archives: Fintech Opinions
Let’s protect investors from risky startups: Roseman
Toronto Star by Ellen Roseman | December 9, 2013
The Ontario Securities Commission wants to let you invest in startup firms over the Internet. But its embrace of crowdfunding has risks.
In the 1990s, many Canadians were urged to put their retirement savings into labour-sponsored venture capital funds.
It seemed like a no-brainer to receive $1,500 back on a $5,000 purchase because of federal and provincial tax credits. And the RRSP tax deduction reduced your cost even further.
The only thing wrong with this scenario was that labour-sponsored funds had mediocre results. Only a handful made any money at all, even over the eight-year holding period required to avoid repaying the tax credits.
And many funds suspended redemptions after the 2008 stock market crash, leaving investors on the hook for an even longer period.
Related: Saskatchewan Approves Equity Crowdfunding on December 6, 2013
Labour-sponsored funds flamed out once the provincial tax credits vanished. But a new venture capital idea is making the rounds – one with the potential to part people from their savings in an equally devastating way.
It’s called equity crowdfunding – and it’s different from the crowdfunding you find at portals like Kickstarter and Indiegogo.
When you pledge money in a crowdfunding campaign, you get rewards, such as a newsletter or a new product when it’s commercially available.
But with equity crowdfunding, you get securities. You become an investor in a startup company.
Here’s the problem: These firms are still searching for a market niche and a pathway to profit. Since their shares are not traded on stock exchanges, they can be hard to sell in a crisis.
The Ontario Securities Commission wants to make it easier to raise capital among small to medium sized enterprises. It plans to release new rules in the first quarter of 2014, with a 90-day comment period before taking effect.
“It will happen,” OSC vice-chair James Turner said in a speech last week to the CFA Institute. “There is a new generation that expects to invest on the Internet. They want regulators to get out of the way.”
The OSC is suggesting possible ways to limit losses for participants:
Your investment is capped at $2,500 in a single issuer or $10,000 in a calendar year.
You have a cooling off period of two business days to withdraw from your investment decision.
You have to go through a registered investment portal to invest, instead of dealing directly with the issuer.
You must sign a form, acknowledging that you understand you may lose your entire investment and you can bear that loss.
“This is extremely high risk capital,” Turner said. “Ninety-nine per cent of startups won’t succeed. You’re not investing for your retirement. We want people to know that.”
In an OSC survey, 12 per cent of respondents who identified themselves as “low risk investors” expressed a strong interest in crowdfunding. This raised concerns about vulnerability to losses and fraud.
Related: NCFA Canada: Equity Crowdfunding Principles & Response to OSC Staff Consultation Paper 45-710
Marian Passmore, policy director at FAIR Canada, listed other ways to protect investors in her speech at the same event:
Limit crowdfunding investments to five per cent of a person’s income or financial assets.
Give investors a statutory right to sue for misrepresentation against the issuer and the registered investment portal. This includes the right to start a class action to seek recovery for losses.
Require issuers to use any capital they raise to expand their business or create jobs within Canada.
Require issuers to supply audited financial statements and tell investors if they plan to use the money they raise in a different way than disclosed in the information statement.
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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 eBrochure | Prezi or contact us at casano@ncfacanada.org.
SEC crowdfunding rules: An example for Canada?
Canadian Bar Association - National Magazine | Yves Faguy | October 30, 2013
A week after the SEC proposed rules to govern crowdfunding, Brian Korn at Pepper Hamilton LLP worries instead about the startups themselves:
The proposed rules are extremely impractical because of the restrictions and procedural hurdles a crowdfunding issuer, investor and funding portal will have to endure to raise capital. Compared to other forms of crowdfunding and capital raising, equity crowdfunding to the public has the worst “bang for your buck” in all of corporate finance.
One might expect that many of the investable start-ups who do not seek or obtain venture capital financing will resort to crowdfunding to accredited investors – which are generally people with at least $200,000 of gross income per year–$300,000 for a married couple or $1 million net worth. Web sites are already lined up to facilitate this process. Another provision of the JOBS Act that went into effect Sept. 23 enables advertising and “general solicitation” of accredited investor transactions.
Let’s not forget costs, too. To produce an offering disclosure document, enlist a funding portal, run background checks and file an annual report with the SEC year after year might well cost upwards of $100,000. The high expenses compared to the low maximum amounts that can be raised by a company and invested by an individual make public equity crowdfunding one of the costliest forms of (legal) capital raising.
Steven M. Davidoff wonders whether the trend will thrive or turn out to be a complete disaster...
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Crowdfunding may not be all it’s cracked up to be
FAIR Canada | Ermanno Pascutto | October 25, 2013
Crowdfunding is an innovative idea. But like anything that promises to be a game-changer, it has both benefits and drawbacks that need to be considered.
On the plus side, many people would like to be able to assist a friend or neighbour launch a new business, product, or idea, help someone in need, or pre-purchase the latest innovative product, such as the Pebble smartwatch — and crowdfunding can do just that. These are all examples of good crowdfunding.
Related: Canadian Crowdfunding Directory (over 65 portals + 12 service providers)
However, the deregulation of securities laws to allow anyone to make investments via equity crowdfunding is a like the Titanic heading into iceberg alley. Equity crowdfunding abandons fundamental principles that have made Canadian markets among the most successful at raising risk capital, including full disclosure, due diligence, insider regulation and the role of a professional financial advisor. These are the negatives of crowdfunding.
Crowdfunding combines the ease of technology with the promise of potential lottery-sized winnings. However, in a lottery, there is a regulator that ensures the integrity of the system, including money coming into the lottery and money paid to vendors and to winning players. Deregulated securities rules will not prevent crowdfunding from being a rigged game.
Equity crowdfunding through a “portal” will expose thousands of individuals to investments in startup businesses through the Internet. With crowdfunding, investors send money in exchange for an intangible right — and they will not know what happens to their money. Will the company use the money for the purpose for which it was intended, or will it end up sending the funds offshore or moving it to another project? Will the company simply pay its executives’ and friends’ large salaries or fees? How will the investor or the regulators ever know?
Regulators are proposing investment limits of $2,500 per investment and $10,000 in a calendar year per person. Although these limits may be small by Bay Street standards, they’re quite high for the majority of Canadians. Recent statistics show the median individual income of Canadians at $27,600 and the median family income is $76,000. Given the very high risk and illiquid nature of any crowdfunding investment — even if the investment limits are complied with (and regulators have not proposed robust measures to ensure they will be) — many investors may lose much more than they can afford to.
Instead of seeking professional advice and putting their money into lower-risk investments that will allow them to accumulate savings for their retirement or other financial goals, investors will be gambling with high-risk speculative investments. Not only is a return unlikely; there is also a high probability that they will lose their entire investment.
Many consumers will not understand the high risk of failure and fraud, or the fact that they cannot resell the investment. They will not have sufficient skepticism of the unrealistic returns touted by promoters — and there will be “promoters.”
A recent investor survey commissioned by the Ontario Securities Commission demonstrates that people interested in equity crowdfunding do not know how risky it is. (Only 52% deemed it high risk while 45% thought it was medium risk.) Even more disturbing is that 12% of the respondents who identified themselves as having “low-risk” tolerance were strongly interested in equity crowdfunding.
Related: OSC Approves Equity Ontario only crowdfunding portal for accredited investors
Proponents of equity crowdfunding suggest that the crowd will be able to detect fraud and weed out the bad actors. Experience and research clearly demonstrate that this is not the case. Instead, investors become victims of fraud at an alarming rate.
Regulators are likely to proceed with implementing an equity crowdfunding model. Although the Canadian Foundation for Advancement of Investor Rights does not support an equity crowdfunding exemption, we have suggestions to limit fraud and potential losses including:
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The Biggest Crowdfunding Criticisms
Forbes by Ryan Caldbeck | October 20, 2013
While crowdfunding has received considerable positive fanfare since the JOBS Act was passed in April 2012, there has also been considerable criticism leveled against the industry covering both the companies trying to crowdfund and the investors funding them. Below are the three concerns that I hear most often as CEO of CircleUp, and what we do as a platform to mitigate these concerns.
Concern 1: Companies that use crowdfunding are weak.
At CircleUp, we accept a small (low single digit) percentage of companies that apply to be on our platform—truly the best of the best among early stage consumer and retail businesses—and our platform is curated by former private equity and other investing professionals who have substantial experience investing in consumer and retail businesses. We recently examined the performance of companies before and after raising money on our platform. The companies that we have raised money for since we launched in April 2012 have grown at an average of over 80% per year (average revenue growth, 2012-2013). [These investments, it should be noted, are high risk and illiquid.]
Related: Let the Crowd raise capital
As I have mentioned before, while we believe (and the data prove) that the companies on CircleUp are the best in the consumer industry, there is good reason to believe that tech companies pursuing crowdfunding may be weak—70% of venture capital dollars flow to the tech space, so when tech companies are crowdfunding it’s likely because VCs up and down Sand Hill Road have already passed on their business plans. In short, it’s not unlikely that crowdfunding platforms in the tech space suffer from adverse selection. Not so with consumer, however. In consumer space there are almost no institutional investors in sub-$10 million companies. As a result, CircleUp and other consumer crowdfunding platforms get to choose from the very best young businesses in the industry.
Concern 2: Confidentiality.
I often hear the concern that companies seeking funding through crowdfunding platforms suffer from their disclosure of confidential information. As a result, anyone, including competitors, can examine what might otherwise be non-public information. While this concern matters in some industries, it is far less of a concern for consumer companies. Consumer companies flourish because of brand, the essence of which cannot be copied. For example, there are many nutrition bars and nut bars on the market, but there is a reason KIND finds itself atop one of the most crowded categories in the grocery store—the brand has the cool factor that can’t be replicated because it emanates from the people and culture behind the company. We believe this is true for the brands on CircleUp as well. Sure, a competitor can learn their revenue or margins, but at the end of the day, there’s not a whole lot they can do with this information if their own brand does not resonate with consumers. Good equity crowdfunding sites can also allow companies to put their sensitive information into private deal rooms that give the companies control over who can and cannot see their data.
Related: Dispelling Myths: “Extraordinary popular delusions and the madness of crowdfunding” (3-part series)
Concern 3: The investors will not add value.
Another criticism I often hear is that the investors on crowdfunding sites are not value add investors; They’re simply college kids sitting in their dorm rooms spending their parents’ money. At CircleUp this could not be further from the truth. Our investors are successful consumer entrepreneurs and operators as well as other entrepreneurs who have successfully started and sold consumer and retail companies. There are also seasoned private equity and angel investors from top tier firms who routinely find businesses on CircleUp in which to invest. Additionally, CircleUp has partnerships with leading CPG companies like General Mills and Procter & Gamble that give our companies access to resources from these leading brands.
Related: Investment Crowdfunding – “A great idea whose time has come!”
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Why Equity Crowdfunding Isn’t a Threat to Venture Capital
Entrepreneur | BY Scott Shane | October 7, 2013
The Jumpstart Our Business Startup, or JOBS, Act of 2012 will make it possible for companies to raise up to $1 million by tapping individuals through online portals, just as soon as the Securities and Exchange Commission has written the rules for these investments. Some observers claim that equity crowdfunding – these efforts to raise small amounts of equity from many people to finance a business – will "spell trouble for the guys on Sand Hill Road" and "quickly push aside more traditional capital providers like bad VCs."
I disagree. Equity crowdfunding is not a substitute for venture capital. Different entrepreneurs starting different types of businesses will raise money from equity crowdfunding than those who have traditionally tapped venture investors.
For equity crowdfunding to be a substitute for venture capital, entrepreneurs that would have tapped venture capital will have to bypass them and raise money from the public directly through crowdfunding portals. That's implausible for many venture-backed companies. The median venture-capital investment was $4 million in the first three months of this year, Dow Jones reports. The typical venture-backed business can't switch to equity crowdfunding to raise the money it needs because entrepreneurs won't be allowed to tap more than $1 million through that avenue.
Many startups seeking less than $1 million will still favor venture capitalists over the crowd. If additional fundraising is in the cards, having one or two large investors will prove much less cumbersome than having numerous small ones. If they aren't doing well, managing the dissatisfaction of one investor will be easier than dealing with numerous upset financiers.
Venture capitalists give entrepreneurs more than just money. Many of them understand how to build startups – more so than the typical investor providing funding through an online portal. Many VCs can provide introductions to potential suppliers and customers and give assistance rounding out a management team.
Related: The Crowdfunding Controversy
Many VCs have connections to companies that can acquire startups and ties to the investment bankers that take them public. Those connections are worth something to many entrepreneurs seeking to exit from investments in their own new companies.
Venture capitalists aren't likely to get locked out of deal flow once equity crowdfunding comes on line. VCs can easily access to all of the deal flow that investors in crowdfunding portals are tapping. While venture capitalists pride themselves on their access to the best deals, these portals will make it easier for them to learn of any opportunities they might have missed. So we should expect VCs to join these crowdfunding portals to ensure they don't miss any good deals.
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Crowdfunding Higher Education: An Alternative Approach
Policymic by Dylan Cicero | September 30, 2013
With an average $26,000 in post-graduate debt saddling student borrowers, and the price of attending a public four-year college increasing at over 5% each year, affordability of higher education has been at the top of the legislative agenda. On July 5, the Oregon legislature passed HB 3472, an innovative bill called “Pay it Forward, Pay it Back,” that initiates a pilot-program to provide free tuition to students while they attend community college or public school.
The catch: students would have to pay a small percentage of their incomes (3% for public school graduates, 1.5% for community college graduates) back to the state for the next 24 years.
To me, its certainly an interesting concept. With the income gap between college grads and non-college attendees at an all-time high of 85% (this is not controlling for differences in group characteristics, but still), the plan at first glance seems like resourceful higher education financing. Allowing students to reap the benefits of higher education with zero obligation, is remarkable. And though 3% of income for 24 years might seem steep, benefits would be profound for the college graduate and for the state treasury.
Detractors of the initiative argue that the repayment scheme is unfair because future high-earners, those aspiring to be financial analysts, would pay way more back into the system than future low-earners, those aspiring to be teachers; one blogger at The Atlantic calls this “the engineer problem.” Detractors also note that logistics of the program aren't feasible — not only is$9 billion upfront needed, but record-keeping and potential for fraudulent earnings reporting could set additional hurdles.
Related: Top Talent Scholarship Crowdfunding – A Success Story
As a concept, I support “Pay it Forward” completely. But, there is certainly room for improvement. I recently stumbled upon a new venture called Upstart. The concept is simple and fascinating: Private backers invest in recent college graduates (“upstarts”) for a portion of their future earnings. Applying an Upstart framework to fund undergraduate education trumps the current “Pay it Forward” methodology. Here’s why:
First, Upstart spits out a projected future earnings for each individual based on a statistical model that accounts for educational institution, grades, major, and other academic and professional characteristics. As a Cornell University senior studying economics, the site projects that I can raise $6,000-$8,300 for every 1% of my income that I pledge for the next 10 years. Surely the model is imperfect (let's be real, I am worth at least 8,600!), but the model provides some sort of framework to ensure risk and payout are consistent among different “upstarts.” Translated to the “Pay it Forward” program, a statistical model, once refined, could help to mitigate “the engineer problem.”
Second, Upstart provides investors with the capacity to enable investee success. Through mentorship and networking, investors become intimate agents in their investee’s future. Likewise, when the investor/investee relationship becomes personal, the “upstart” will have less incentive to forge his income. Both these ideas can be readily transferred to the “Pay it Forward” program as well.
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The Crowdfunding Controversy
Huff Post - Small Business | Lee Schneider | Sept 26, 2013
First, a definition: Equity crowdfunding (see Crowdfunding models) means that you can become a partner in a company, venture or product and get "a piece of the action" if that's what the creators or founders are offering. It opens the field to both experienced and inexperienced players. It lowers the bar to entry for startup companies that once were vetted (or tortured, depending on your point of view) by venture capitalists.
Once upon a time, if you wanted to start up your start up, you needed to bootstrap it with your own cash, ask your rich uncle for funds, or trade away a chunk of your creation to venture capitalists with high expectations. Angel investors -- even their name sounds kind -- nevertheless also make demands on the startups they back. Demands are a good thing. Startups need to ship. They need to budget. They may burn cash at the start, but they need to turn it around within a timeframe specified by their investors. This is all part of being a grownup in a world currently dominated by extremely talented and extremely young people, some with little experience in running a company.
Venture capitalist board members, hired-gun CEOs, and CFOs for rent all help buffer the chaos. Some argue, that equity crowdfunding will cause the crazy making floodgates to open, the inmates to run the asylum, and startups will crash and burn.
I don't think so. For one thing, this is not a freestyle event. There are rules. There is a community. Everybody talks to everybody else. You have to apply to list your startup on CircleUp, and they say they only accept 2 percent of companies that apply. Upstart, founded by former Googlers, applies an algorithm (what else? they're from Google, after all) to determine your funding rate and, by extension, your potential for success. You need credibility to play the startup game at all -- a former position at a well-known company, a graduate of Y Combinator, a trust factor. Think of eBay, to take the example often given by Kevin Lawton, a proponent of equity crowdfunding, and co-author of The Crowdfunding Revolution: How to Use Social Media to Raise Venture Capital. Sure, there are scammers on eBay, but they don't last long because the community ostracizes them. It's a self-correcting system. (I recently did a Q&A with Kevin that we posted to SoundCloud. Have a listen at this link.)
It's a brave new world out there for startups.
