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
Investment Crowdfunding – “A great idea whose time has come!”
Special post to NCFA Canada | Brian Koscak | Sept 3, 2013
On July 13, 2013, Professor Jeffrey Macintosh lambasted investment crowdfunding in his commentary “Extraordinary popular delusions and the madness of crowdfunding” in the National Post. Professor Macintosh evoked visions of dusty old-fashioned securities lawyers clutching at their hearts when the word ‘crowdfunding’ is mentioned. Professor Macintosh argues that investment crowdfunding is a bad idea and is likely to hurt investors. So why is investment crowdfunding such a hot button and getting certain individuals so exercised? Unfortunately, it’s not as straightforward as Professor Macintosh suggests. To borrow from Facebook, “it’s complicated”.
Let’s examine some of the arguments put forward by Professor MacIntosh.
Many, if not most, crowdfunded endeavours will head straight for the scrap heap
It’s true that many investment crowdfunding endeavours will not work out for many reasons that have nothing to do with investment crowdfunding. No one said all crowdfunded investments would succeed. Many, if not most, will fail ― just like traditional investments. However, just because businesses fail does not mean that investment crowdfunding is a bad idea. Businesses need access to capital, especially in today’s tough economic climate. Investors want greater access to investment opportunities and believe, with more information, they can fend for themselves and make informed investment decisions. So let them. Remember, many regulated dealers and advisors have recommended various investments that have not worked out. Think no further than Sino-Forest.
What is wrong if some investors want to democratize investment opportunities and access private deals like pension funds or private equity and venture capital firms? Obviously, I am not recommending that it be done blindly, but when jurisdictions around the world are doing it, including the United States under the JOBS Act, we better pay close attention or risk having our best and brightest flock south of the border to finance their businesses, a fact politicians in Canada worry about. Think of Pebble Watch and how a University of Waterloo graduate could not find any financing in Canada and had to go to Silicon Valley where he raised over $10 million in a matter of weeks from his campaign on Kickstarter (a non-investment crowdfunding site).
No one is advocating a regime where many businesses will fail and no one is advocating ‘widows and orphans’ pouring their life savings into crowdfunded companies. We believe the right balance needs to be struck between protecting investors and fostering fair and efficient capital markets. Readers are encouraged to review the Ontario Securities Commission’s (OSC) December 2012 and August 2013 proposals which examine new capital raising exemptions, including investment crowdfunding. The OSC’s concept crowdfunding proposal includes caps on investments (i.e., an investor cannot invest more than $2,500 per issuer/$10,000 per annum and issuers cannot raise more than $1.5 million in any 12-month period). Rather than sitting on the sidelines and crying the ‘sky is falling’ with investment crowdfunding, we commend the OSC for engaging in a dialogue with investors and capital market participants to strike the right balance. Even FAIR Canada, who has publicly come out against investment crowdfunding, set out what it believes to be a viable investment crowdfunding regime in its comment letter to the OSC in response to its concept proposal.
Investment crowdfunding is the precursor of investment scams and fraud
Professor MacIntosh raises the spectre of fraud with investment crowdfunding. Fraud concerns everyone, whether you are for or against investment crowdfunding. Unfortunately, no one can prevent or eliminate fraud on the Internet. Think of debit and credit card fraud despite all the measures designed to prevent it. That experience has not stopped financial institutions or governments from the use of debit or credit cards. Instead of shutting it down, they built it up and introduced more processes and safeguards to reduce the risk of fraud.
At a recent crowdfunding conference in Orlando, Florida, sponsored by the Crowdfunding Professionals Association, Paul Niederer, the C.E.O of the Australian Small Scale Offerings Board (ASSOB), discussed ‘fraud and the crowd’ in his presentation. His thesis was simple, investment crowdfunding will not stop fraud; however, a properly managed crowdfunding portal will lessen the chance of fraud. ASSOB is the granddaddy of investment crowdfunding which has been legal in Australia for years. To date, Mr. Niederer stated, ASSOB has raised over $135 million with no incidences of fraud.
There are many ways to mitigate fraud. For example, there are companies such as U.S. based Early IQ, which is in the fraud detection business. It offers a service to help issuers and portals weed out the rogues and con-artists by doing background checks. A Canadian company, Boardsuite Corp., also offers a crowdfuding infrastructure platform (CfIP) whose purpose is to manage the crowd and introduce various corporate governance tools for private companies. These types of investor protection safeguards are critical components in the development of any investment crowdfunding regime. Some might even say that the use of the Internet, with its transparency and the electronic record generated through online access, may actually make fraud easier to detect and monitor, particularly if the activity is channeled via portals.
Can we seriously expect the hoi polloi to do better than the pros (e.g., venture capitalists)?
Professor MacIntosh posits that if venture capitalists (VCs) cannot pick great investments a majority of the time, how can we seriously expect the “hoi polloi” (the common investor) to get it right. No one doubts that VCs have excellent processes for finding winners and do this for a living. However, investment crowdfunding is not all about picking the hot technology company poised to be the next big thing. It is about start-ups and small and medium-sized enterprises helping their communities and, yes, making money for investors. Read Amy Cortese’s book on ‘Locavesting’, which discusses the revolution in local (i.e., community) investing. Crowdfunding also involves finding capital for public companies. Many reporting issuers in Canada listed on the TSX-V or CNSX, for example, are looking for capital but cannot raise it under existing securities laws since many investment dealers cannot do it in today’s tough economic climate. Maybe it is time for the crowd to help!
Investment crowdfunding is not looking to replace VCs. Rather, it seeks to embrace VCs as an important but different part of the investment ecosystem. In fact, some of the highest profile VCs in the world, such as Union Square Ventures, Google Ventures, Maveron and Rose Park Advisors have been quietly making investments in ― you guessed it ― crowdfunding platforms, such as U.S.-based Circle-Up. Fundamentally flawed business models are rarely successful. If VCs are investing in crowdfunding platforms, we should be paying attention.
VCs won’t invest in companies with many small and unknowledgeable outside investors
The idea of having hundreds of investors is daunting for any company unless they are somehow managed. Although this is a common criticism of investment crowdfunding, it is not an insurmountable hurdle. For example, investors in Symbid, a Dutch investment crowdfunding portal, invest in a co-operative which in turn makes a single investment in the crowdfunded issuer. Similarly, Seedrs, a United Kingdom investment crowdfunding portal, holds securities for investors through a nominee structure. Similar structures should be contemplated for Canada. Thought leaders, such s Professor MacIntosh, should consider the preferred legal structure to group investors, rather than dismissing investment crowdfunding outright because of a perceived challenge in managing the crowd.
Securities laws need to evolve in step with the Internet and social media
Most of our securities laws dealing with private investments were written before the Internet became ubiquitous. Human beings have a natural tendency to understand new technologies not as “new things” but as tweaked versions of the technologies that preceded them: a car is a “horseless carriage”; movies are “moving pictures”. In this way, our current securities laws treat the Internet and social media as simple advertising vehicles – like the TV, radio and newspaper – and users as passive recipients that need to be protected from hyped investments. The fact is the Internet and social media are radically different channels that allow users to create, curate, vet, question and critique content. Given this, does allowing investors to learn about opportunities over the Internet really create risks? Or does it reduce risks by exposing companies to scrutiny by an engaged audience – the crowd? The answer depends on whether you think Internet users are capable of sorting out credible content (like analyst reports) from useless dreck (like stock message boards, which have lost all credibly and power to influence markets). To those who oppose change like those “dusty old securities lawyers” referred to by Professor MacIntosh, it reminds us of the Luddites – the 19th-century English textile artisans who were against newly developed labour-saving machinery during the Industrial Revolution and who destroyed factories that introduced such technologies. Now ask yourself, is this “dusty old securities lawyer” the Neo-Luddite of the 21st century?
The borderless Internet
Other countries, including the United States, Australia, Italy and the United Kingdom, have taken steps to open up investment crowdfunding. In fact, come September 23, 2013, the United States will be eliminating the prohibition against general solicitation and general advertising in certain types of U.S. private offerings; provided that all purchasers of the securities are accredited investors (AIs) and the issuer takes reasonable steps to verify that such purchasers are AIs. Although Canadian AIs will not be permitted to invest unless the issuer complies with Canadian securities law, there is nothing stopping Canadian investors from turning their eyes to a U.S.-based crowdfunding platform. This creates a potential cross-border enforcement nightmare for securities regulators. If we take a hard line against investment crowdfunding, we may also have to live with draconian measures to stop cross-border activity, such as requiring investment crowdfunding platforms to block IP Canadian addresses. If so, is Canada keeping abreast of capital raising developments to remain competitive and relevant in the world capital markets or is it marginalizing itself further by comforting itself in the world of the nanny-state?
Little or no mandatory disclosure
Professor MacIntosh states that investment crowdfunding will have little or no mandatory disclosure. This is incorrect. Investment crowdfunding will likely involve a mandatory disclosure document, a video presentation about the offering and responses from management to comments from investors on blogs hosted on the portal’s website. Just look at Crowdcube, a United Kingdom funding portal, and see how it works. The OSC concept proposal suggests that the required amount of disclosure is that set out in the summary pages of a prospectus subjecting an issuer to a claim of misrepresentation if they get it wrong. Professor MacIntosh is welcome to comment on the amount of disclosure that sufficiently protects investors while fostering fair and efficiently capital markets. However, does that 200 page prospectus really protect investors as Professor MacIntosh suggests? Or is it unintelligible to investors, their advisers, and, perhaps, to the people who wrote and reviewed it? Over the years, prospectuses have grown much longer and much less useful while at the same time our collective attention span has diminished. Perhaps we should be striving for disclosure that is more useful and understandable, not just more detailed and exhaustive. In other words, in the case of disclosure, ‘less’ may actually be ‘more’, and too much may be the same as not enough. Perhaps the simpler disclosure model facilitated by investment crowdfunding platforms is not so bad.
Can investors protect themselves?
Selling securities over the Internet or otherwise can only be done by registered securities dealers and advisors. Registered dealers and advisors need to carry out know-your-product, know-your-client and suitability reviews when they sell securities to Canadian investors. These reviews are designed to protect investors by preventing dealers and advisors from selling investors unsuitable products. Unfortunately, jurisdictions around the world are still trying to figure out how to carry out these reviews for an investment crowdfunding platform without completely losing the efficiencies that make on-line investment crowdfunding attractive.
All this begs the question: what do Canadians expect of securities dealers and advisors? Should you rely on someone who is selling you a product to safeguard your interests? The CSA has posed this question in a concept proposal and is considering whether securities dealers and advisors should have a ‘best interest’ duty to investors. Perhaps this needs to be examined more closely in the context of investment crowdfunding, especially when low dollar amounts are involved (see reference to investment caps above) and arguably investors can fend for themselves and have the ability to withstand the loss of their entire investment. Moreover, certain existing investment crowdfunding portals educate investors about how investment crowdfuding works, the risks of investing and that investors can lose all of their money through videos, tests and self certification. Surely, with this much education, the “hoi polloi”, as the crowd is called by Professor MacIntosh, can make their own informed decisions to some extent, perhaps even more informed than investors are in the traditional investment system. Either way, there is always the option not to invest!
What level of regulation facilitates capital formation?
In theory, a tightly regulated market reduces investment risk, which in turn attracts capital and results in capital markets growth – in other words, a virtuous circle. Conversely, you can have a vicious circle: A loosely regulated market can result in the funding of weaker companies, reducing confidence in the markets and ultimately reducing available capital. On the other hand, overly heavy regulation stifles innovation and risk-taking. Achieving a correct regulatory balance requires constant recalibration.
Investment crowdfunding does not mean less regulation. It means different and proportionate regulation based on new technological capabilities and methods of communicating. True, this is a less sexy and a more complex message than simple fear-mongering around ‘fraud funding’, ‘widows and orphans’ losing all their money or, to quote Professor MacIntosh, “the madness of crowdfunding”. However, it is time the public looks beyond the salacious story headlines and educates themselves.
Is there a need for defibrillators for our wheezy old securities lawyer? Probably not. But there is a need for serious intellectual inquiry into investment crowdfunding and related issues – and for that we commend Professor MacIntosh and everyone contributing to the debate.
Brian Koscak is the Chair of the Exempt Market Dealers Association of Canada, a member of the Ontario Securities Commission’s Exempt Market Advisory Committee and a Partner at Cassels Brock & Blackwell LLP. Brian can be reached by telephone at 416-860-2955 or by e-mail at bkoscak@casselsbrock.com.
Resources and Links:
Canadian Crowdfunding Directory
Canadian Active Crowdfunding Polls – Vote Today!
National Post article: Let the Crowd Raise Capital
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.
Let the Crowd raise capital
Financial Post | John Wires and Craig Asano, Special to Financial Post | 13/08/29 | Last Updated: 13/08/30 11:59 AM ET
How do we justify the unqualified crowds who invest in penny stocks?
Crowdfunding refers to raising small amounts of capital from a large number of people by leveraging the internet and social media. It is becoming all the rage largely because the venture capital industry is broken. In fact, in 2011, the Business Development Bank of Canada retained McKinsey & Company to draft a report which concluded just that.
According to Industry Canada, in 2011 there were only 176 venture capital financings under $1-million, of which the bulk were made with government funds, making them the largest gatekeeper to accessing capital and spurring economic development.
Aside from friends and family, the only other real hope for raising equity financing is to turn to public markets. But with our existing securities laws, even raising small amounts of capital is a complex and costly process. As a result, small businesses are often precluded from raising equity financing to expand.
For entrepreneurs, equity crowdfunding provides a real chance at financing their business from a new source of capital investors – “the crowd.” However, for Bay Street securities lawyers, crowdfunding represents a shift towards deregulation of the securities market and an open door for investors to lose their shirts.
Critics argue that ill-witted crowds aren’t qualified to assess investment opportunities properly. That is, reviewing investment opportunities requires the skill and expertise of a venture capitalist (VC) with well-polished shoes, and even they get it wrong the majority of the time. The irony is that VC’s are paid to figure out whether a market (read crowd) would actually buy the product or service offering being pitched. With crowdfunding, the argument goes that if thousands of people are willing to invest in a product or service, they in turn validate a demand for it and increase the prospect of a successful product offering. While this by no means suggests that all crowdfunded companies will attract success, it certainly gives them an advantage out of the gate.
Like VC’s, online crowdfunding portals offering securities have an interest in making sure that unqualified companies aren’t listed. The more companies that list and fail to raise money, or worse, raise money and then fail, the fewer prospects the portal has at surviving. For this reason, portals like CircleUp in the U.S. and Seedrs or Crowdcube in the UK report rejection rates between 80% and 98% of all issuer applications, of which only a fraction actually get funded.
In Canada, some have called for existing incubator and accelerator programs like MaRs, the Ryerson Digital Media Zone and Incubes to be involved in the weeding out process. Others have suggested incubators get involved in running portals and have successful issuers be required to work with them to properly grow their business. More importantly, under Ontario’s proposed framework, regulators will also be involved in regulating crowdfunding portals and not just the issuers.
But regardless of whether the crowd is qualified or not, the real question is what justifies limiting the crowd’s opportunity to invest in start-ups? If being “qualified” or “smart enough” to invest in a startup is the bar to entry, how do we justify all the unqualified crowds who continue to invest in penny stocks, the TSX Venture Exchange, junior mining companies and even the Nortel’s of the world?
Resources and Links:
Canada’s most comprehensive Crowdfunding Directory
NCFA Canada active Polls – Vote Today!
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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.
As crowdfunding gathers speed, financial industry changes loom
Benefits Canada by Yaldaz Sadakova | August 26, 2013
Lucrative deals might be just a click away for Canada’s pension funds and other institutional investors.
Unlike retail investors, the country’s institutional investors can now access a wider range of investment opportunities in a more immediate and transparent manner through institutional crowdfunding—a phenomenon that allows companies to raise capital from numerous investors via the Internet. This is thanks to the recent emergence of a Canadian online marketplace that matches institutional investors with issuers. This development could take away at least some business from investment banks, which are typically the intermediaries between big investors and issuers.
In early August, Optimize Capital Markets launched the first ever Internet portal in Canada, which connects institutional and accredited investors with public and private companies across the country that are seeking growth capital. On this platform, investors can either lend money to businesses or buy equity.
“Both the deals are much larger, as well as the investors, which are primarily institutions,” says Matthew McGrath, president and CEO of Optimize Capital Markets. While issuers have to pay fees to be listed on the virtual marketplace, there are no fees for the investors, who can sort through opportunities in the range of $2 million to $30 million, McGrath says. The portal expects to close its first transaction later this month for $2.57 million, he adds.
Optimize is an exempt market dealer, which means that it deals only with institutional and accredited investors, which, unlike individual investors, are able to buy securities that are exempt from disclosure requirements, according to the Ontario Securities Commission (OSC). Optimize is registered with the Ontario, Alberta, British Columbia and Quebec securities commissions.
Transparency
The main advantage of using Optimize compared to searching for deals offline is that it does a lot of initial due diligence on behalf of investors, increasing transparency, explains McGrath. The website offers a lot of data about each company listed—everything from informational videos to financial details and risk profiles.
But Avi Goldfarb, a professor of marketing at the University of Toronto’s Rotman School of Management, offers a word of caution. “It’s hard to verify the claims that you see on a website,” he says.
Optimize’s solution to this is that after investors go through the data posted on its portal, they can set up a meeting with representatives of the company they’re interested in. “Certainly, institutional investors that will be cutting checks will want to reach out to a senior director,” McGrath explains.
Risks
Apart from the potential for deceit, institutional crowdfunding poses another risk for investors. While it “might enable them to fund a wider set of projects,” many of these opportunities might be risky, says Goldfarb. The reason is that, generally, the companies listed on equity crowdfunding sites are early-stage projects, which are inherently risky. “They’re often projects that are not funded through other means,” he explains.
But Optimize says most companies listed on its portal are not new ventures. “The most typical companies looking for funding are well-established firms with skilled leadership and with good cash flow,” according to its website.
The future
So with the arrival of Optimize, what does the future hold for institutional crowdfunding in Canada? The reasonable expectation is that, over time, other institutional crowdfunding websites will spring up in the country.
But it’s unclear how many of them will survive, according to Goldfarb. “This is the kind of market that requires size,” he adds, explaining that, as the name crowdfunding implies, the success of these online venues depends on having many issuers and many investors.
“There’s likely to be some success; there’s likely to be some spectacular failures,” Goldfarb says. “How the market plays out is an open question.”
But one thing that is clear is that the growth of institutional crowdfunding will take away at least some deals from investment banks because crowdfunding platforms essentially act as investment banks, explains Goldfarb.
Some proponents of crowdfunding are even bolder in their prediction. “Let’s face it, crowdfunding is the new investment banker,” wrote Dan Levitan, co-founder of American venture capital firm Maveron, in a recent blog post.
No so fast, says Goldfarb. Investment banks will be able to keep certain deals because “expertise is still very valuable and most investors don’t have expertise at the level of investment banks,” he explains. “Institutional investors have expertise, but it’s still costly to search through opportunities.”
That’s why it is not clear whether institutional crowdfunding will be the next big thing in the financial industry, Goldfarb says—even though this is how many of its supporters describe it. “I have no idea,” Goldfarb admits. “I think anybody who says they know also has no idea.”
Next: the Law
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Crowdfunding — not just for early stage
VentureBeat by Jon Soberg | August 22, 2013
The long term potential of the JOBS Act looks very promising, but the implementation so far feels like watching paint dry.
Crowdfunding is getting a lot more hype in the aftermath of the JOBS Act implementation, but there’s a long road ahead.
Early stage risks
I have been on the record as a strong believer in crowdfunding for projects, causes, and pre-orders, but have voiced some concerns about equity crowdfunding. My concerns come primarily from the numbers. A large percentage of startups don’t make it — period. If we also assume that the best entrepreneurs will attract “smart” institutional money, there is an adverse selection issue. The top early stage investors see thousands of deals per year, and filter those down to only a handful of investments, and not all of those investments succeed. They say it takes a couple of years and $10M to train a new VC. Most individual investors don’t have the capital to make many mistakes, and the odds are not in their favor, especially investing in very early stage companies.
Credit to the innovators
However, some of the impressive innovators in the space are making me rethink my skepticism, I’m becoming much more bullish on equity crowdfunding. I still have some concerns about the risks, and the lawsuits that will inevitably follow the failures. However, the innovators are a step ahead. My apologies for missing some of the innovators, but I want to mention a couple in particular that I see as leaders:
- AngelList has always been a leader, but their latest innovation, allowing a lead investor to create a virtual fund and build a syndicate, is brilliant. This mechanism can allow a lead with significant expertise to vet a deal and bring in followers and build a substantial round without anyone taking inordinate risks. I am anxious to see how these syndicates form.
- CircleUp’s direct focus on consumer businesses, segments both companies and investors, building an ecosystem with consumer-focused company expertise. Their preference for at least $1M in revenue along with their specific focus mitigates some of the risks I alluded to earlier, and allows for solid due diligence, not to mention the fact that consumer businesses are more approachable for many investors.
- FundersClub co-invests with proven investors, including angels and VC funds, and they also get deal flow from the same sources. Their team vets deals and only a small portion make the cut, again addressing the risks I mentioned. One of Blumberg Capital’s portfolio companies recently completed a round and we all made space for FundersClub in the round. This approach seems solid.
And, of course, I would be remiss to exclude KickStarter and Indiegogo, who continue to blaze trails and set records. Neither is doing equity financing yet, but Indiegogo just raised over $10.5 million for Canonical’s Ubuntu Edge smart phone.
“Private IPO” platform
The most interesting platform outside of the US in my opinion is the new Bergfuerst platform in Germany. One of our portfolio companies, Urbanara, will be doing the world’s first “private IPO” in September. Bergfuerst targets later stage companies with proven track records going for growth rounds and Urbanara’s round in September will be the largest equity raise on a crowdfunding platform anywhere in the world. The process is much like one would expect, complete with the regulatory filings, prospectus, roadshow, and the actual IPO. After the IPO, it gets really interesting: investors have the ability to sell right after the IPO, so there is liquidity along with the crowdfunding. It is currently limited to accredited investors, and absolutely not available to U.S. investors due to regulatory limitations in the U.S. (As existing investors in the company, Blumberg Capital can invest alongside the Burgfuerst offering, but not in the offering itself).
Disruptions to angel and VC funding
Ryan Caldbeck, CEO of CircleUp, wrote a very forward-thinking article about this topic last year on VentureBeat where he covered some key points well. For the most part, I agree with his statement that crowdfunding will disrupt angel investing, but I also see the VC space changing and being disrupted. AngelList is enabling syndicates and significant funding rounds, along with platforms like Seedrs in the UK, FundingClub in the US, OurCrowd in Israel that act as virtual VCs; Bergfuerst in Germany is providing growth capital and liquidity. It is obvious to the casual observer that these new alternative sources of capital for entrepreneurs have already begun reshaping the landscape. The best platforms are also addressing the risks and needs at different stages extremely well. These platforms add value to the ecosystem, enable more good entrepreneurs to be funded — they work alongside great institutional investors, but also provide a level of competition.
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Will Canada make room for institutional crowdfunding?
Yahoo Finance Canada by Shane Shick | August 21, 2013
There was a moment a few months back when many people could not get over the gall of Zach Braff. Instead of going the usual route to make his next film, the actor-director turned to the popularcrowdfunding platform Kickstarter to raise money for the project. Though this may end up giving him more creative control, his move showed just how difficult it is to get anything financed, unless you take it to the people.
Optimize Capital Markets, which launched earlier this month, is a Canadian example of how the crowdfunding model is being applied to a more specific group of people, namely institutional and accredited investors. Though physically headquartered on Bay Street in Toronto, the company claims its Crowdfunding Portal can provide a more efficient and transparent means of exploring and evaluating investment opportunities than traditional financial systems.
Matthew McGrath, a former RBC vice-president who founded Optimize Capital Markets, said his venture is distinct from Kickstarter and other microfinancing sites in that the average deals will be much higher, and vetted much more thoroughly.
“One of the things you learn very on is that the critical success factor is due diligence, and when you start to roll up your sleeves and look at any transaction, you realize that, rightly or wrongly, deals in the $2 million to $10 million range represent terrific value for investors,” he says. “Those kind of firms are still faced with every bit of a funding gap as the smaller opportunities that are out there.”
The main challenge to this approach may be educating potential investors about the process -- and the potential pitfalls. While Canada has launched a number of crowdfunding initiatives already, the sector is somewhat scattered and fragmented. In response, an industry group called the National Crowdfunding Association of Canada (NCFA) has formed and is hosting Webinars and live events for those new to the concept.
“We’re looking at investor protection,” says Craig Asano, the association’s executive director, adding that a survey and other projects are under way to help bring Canadians up to speed quickly. “All that research and education will be useful for everyone, including the regulators and participants.”
As with anything in the tech space, there is already a worry that Canada is falling behind the U.S. and international markets, Asano adds. McGrath, however, suggests the pace of crowdfunding in Canada will happen as it should.
“If you look at when banks started to go online with services or brokers started going online with discount broker services, it wasn’t overnight that people fired their broker,” he says adding that Optimize Capital Markets is prepared for the fact that its first-mover advantage in the institutional investor niche may not last long.
“We will see a number of competitors entering the marketplace in the next six to 12 months. And there will not be one clear winner,” he says. “There will be number of very good quality firms that are in this space, with five to 10 firms that are dominating. We would expect that.”
In other words, expect the crowdfunding market in Canada to get a lot more crowded.
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What the Crowdfunding Boom Means for Franchising
Entrepreneur by Jason Daley | August 19, 2013
When Tom Perez left the Navy in 2010 after 10 years of service, he thought his experience as a military police supervisor would easily translate into a job in law enforcement. That wasn't the case. After applying for more than 100 positions around the U.S., the 32-year-old gave up on that dream and started looking at franchises. When he applied for a Meineke Car Care Center in Pensacola, Fla., he was quickly accepted. With a 25 percent discount on the franchise fee for veterans, and 75 percent funding through the company, he was in much better shape financially than most franchisees, who still struggle to find credit in the commercial market.
But Perez knew that despite his advantages, his first year in operation would be tough. Slow sales or unforeseen circumstances could easily jeopardize his new business. So he signed up with Boost A Hero, a program sponsored by the franchise crowdfunding platform Sprigster that allows friends, family and appreciative strangers to donate cash to help veterans open franchises. His Sprigster campaign helped Perez raise almost $7,000 from 34 donors in the spring and summer of 2012. While the money was not make-or-break, it did give him the confidence to go ahead with the business.
"It definitely made me feel like other people were invested in my project," he says. "I still get e-mails from people who boosted me from out of state, and donors who live nearby come to the shop for just about everything that needs to be done to their cars."
It's a nice story about how crowdfunding is coming to the franchise world's aid. It's also, so far, one of the only stories.
Crowdfunding has made a big splash in the last few years as sites like Kickstarter and Indiegogo have helped entrepreneurs launch donut shops, produce albums and create smart watches; theoretically, it's a perfect vehicle for franchising. And the franchise community, still suffering from the never-ending credit crunch, is eager to embrace it, believing it could help reenergize unit sales. But the current generation of donation-based crowdfunding platforms doesn't mesh particularly well with the franchise model. Donors are interested in funding new products and creative or cutting-edge businesses, not in subsidizing sandwich shops and quick lubes. Also, the small amounts raised through crowdfunding--typically a few thousand dollars--are not enough to replace bank loans or other financing needed by aspiring franchisees.
But equity-based crowdfunding--in which investors buy a slice of a small business--could be quite useful to franchisees. The JOBS Act, signed into law last spring, includes a provision that will make it legal for small businesses to solicit crowd-based investments of up to $1 million. The U.S. Securities and Exchange Commission is currently working out the details on how to implement the law, and the decisions it makes are critical: If the regulations are too burdensome, they could put the kibosh on crowdfunding for franchises before it even starts. If, however, the SEC's rules are reasonable, they could open up a whole new path to franchise ownership.
A Natural Fit
"We certainly believe crowdfunding has tremendous potential for franchise finance specifically," says Mark Mohler, a Florida business lawyer and CEO of Sprigster, which is currently donation-based but could convert to equity crowdfunding once the SEC releases its rules. "It provides for the true democratization of private equity."
Daniel Gorfine, director of financial markets policy and legal counsel at the Milken Institute, a Santa Monica, Calif.-based think tank that investigates innovations in capital markets, has co-authored several reports on the JOBS Act and securities crowdfunding. "There are certain things that make crowdfunding and franchising a natural fit," he says. "Number one, the size of the investment from the franchisee is not so great that it would exceed the $1 million limit. Next, most franchisees aren't interested in seeking late-stage investments like some small businesses. Having tens or hundreds of shareholders sometimes scares away venture capital groups, but that doesn't really matter here.
"But the most important thing," he adds, "is that crowdfunding creates a natural clientele. If you start out with 100 or 1,000 local investors, it might be a nice base of customer support and people invested in your success. The investors can see the property and business, and that adds enhanced credibility to the investment."
Quality Control
Despite the potential for opportunities on several fronts, Gorfine points to problems that could arise from equity crowdfunding. Franchisees might intentionally or inadvertently promote their established franchise brand as being a less risky investment than a mom-and-pop shop, putting them at risk for charges of fraud. At the same time, if crowdfunding loosens access to capital, franchisors might start to greenlight franchisees and locations that they otherwise wouldn't, creating risk and weakening their brands. And if franchisees aren't investing their own cash, there's a chance they won't take their work as seriously as people who have dumped their life savings into their businesses.
"A lot of this is going to depend on the quality control of the franchisor," Gorfine points out. "Those that operate efficiently and have good quality control will have a better chance of doing well, vs. a franchise willing to grant a store to anyone able to come up with the capital."
In other countries, including Australia and the U.K., debt- and equity-based investment crowdfunding has been implemented successfully. Sandlund's TheCrowdCafe has aggregated a global database of more than $300 million in crowdfunding transactions, across six platforms, that show no incidents of fraud.
Continue to the full article --> here
Dispelling Myths #5 and #6: “Extraordinary popular delusions and the madness of crowdfunding”
NCFA Canada | Posted on August 18, 2013
Note to readers: This post is part of a series of posts written on behalf of Canada’s leading industry crowdfunding association, NCFA Canada, its members, and affiliates. Special thanks to our sponsors Joi Media (Katipult), FundRazr, Amplifi, CNW, and Wires Law, and the following contributing thought leaders including Craig Asano (NCFA Canada), John Wires (Wires Law), Christopher Charlesworth and Asier Ania (HiveWire), and Heri Rakotomalala (Seeding Factory).
On July 31, 2013 an opinion post article in the Financial Post’s comment section highlights the wide disparity in thinking between the established finance industry insiders and the rest of the world (view article).
It appears the world can be divided into two camps:
Camp A: Those that feel the general public or ‘crowd’ should have little or no participation in private market placements because they are thought unfit or incapable of adding value to the process, and the regulations required to protect them would duly outweigh the benefits they may receive from participating in the first place. Further, investing in start-up or growth capital investments is a risky game that should be left to professional VCs and sophisticated investors alone.
Camp B: Those that feel the general public or ‘crowd’ should have the choice to participate in private market placements in a regulated capacity, and that the general public is motivated to seek returns that go beyond financial incentives alone, such as supporting innovation, regional job creation and social impact goals. Equity crowdfunding markets globally have demonstrated that crowds can play a significant role in helping small to mid-sized enterprises (SMEs) access start-up capital and the necessary support to achieve business goals that would otherwise be unavailable to them in traditional capital markets.
To assist readers in making their own unbiased conclusions, NCFA Canada offers readers a response to the myths or one-sided beliefs that were conveyed in this Financial Post article:
Myth 5: There are many exemptions that allow companies to sell securities without an expensive prospectus, such as the accredited investor offering memorandum (OM) exemption.
RESPONSE 5: Existing prospectus exemptions, such as the OM exemption are expensive and limit participation to only accredited investors (<4% of the Canadian population)
The Funding Gap
- The problem is that financial statements and investor documents involved with these exemptions are expensive and the cost of capital is beyond the reach of the majority of early stage businesses.
- This has created a well documented funding gap for Canadian small to mid-sized businesses (SMEs) to raise small amounts of capital (e.g., $1-2 million) not currently being satisfied by friends and family networks, angels, incubator/accelerator programs and venture capital (VC) groups.
- This gap is obvious when examining the landscape, with Banks requiring securitization before loaning to individuals with little to no track record, Angels looking for specific opportunities (e.g. mobile apps and telecommunication), and Venture Capitalists seeking 10x returns.
- While the OM exemption offers some relief to issuers outside of Ontario, only accredited investors can purchase exempt market securities which make up less than 4% of the Canadian populations (see OSC Exempt Market Review - Staff Consultation Paper 45-710).
Canada needs to maximize capital formation opportunities for all Canadians
- Crowdfunding and online technologies can reduce the cost of capital by opening up participation, improving financial literacy, establishing transparency, benchmarks, and streamlining the financial transaction, communications and investment administration for all participants involved.
- Equity Crowdfunding markets and services are emerging quickly in North America and Europe and is currently legally permitted in many countries, such as Australia, UK, Sweden, Germany, Netherlands and the US will soon be added to the growing list with the passing of the Jumpstart Our Business Start-ups Act (JOBS Act) last April 2012.
- Venture capital finance is moving online and if our regulations do not keep pace with international jurisdictions the economy will suffer as a result, negatively impacting job creation and our ability to innovate.
- How many entrepreneurs do you know that were forced to fund their ventures outside of Canada in countries with greater access to capital, and more supportive funding environments conducive to higher valuations? (read: inability to commercialize Canadian funded innovations)
- If we view Canada as a company, are we doing everything we can to enable our resources and employees to achieve the strategic and operational goals of the organization? How do other companies (read: countries) view ours? Are we competitive, innovative, respected? Do we challenge ourselves, lead initiatives and seek to improve what is clearly broken? Does the average Canadian even know what our company's goals are, what we are striving to achieve and where we are headed?
- As time ticks on, legalizing equity-based crowdfunding in Canada is becoming less and less of a competitive advantage and more about just 'keeping up with the times'.
The window of opportunity for change is NOW...
Myth 6: Crowdfunding promotes that all ideas are fundable and disregards the importance of management and execution
RESPONSE 6: Leading equity crowdfunding portals employ strict on-boarding processes, professional advisors and often assist businesses pre, during and post subscription to manage and execute their goals
Equity-crowdfunding deals are highly screened (incl. the management team)
- Equity crowdfunding portals are incentivized to strictly screen all prospective issuers for both their idea and ability to execute before they get listed to ensure investors are presented with high quality deal flow. Approved accredited investor equity portals like CircleUp in the US and Seedrs or Crowdcube in the UK report rejection rates of between 80- 98% of all issuer applications (view Interview with CircleUp)
- In Australia, leading equity portal “Australian Small Scale Offerings Board” (ASSOB) employs a sponsorship model requiring all issuers to pay for a professional advisor (sponsor) to assist in preparing investment related materials before the offer is published live on the primary board for investors to see. These documents may include financial projections and evaluations, marketing strategies, product/service descriptions and industry data to be used as comparative data.
- For issuers, planning and executing a crowdfunding campaign is challenging. Full stop. It requires significant focused effort and ability to develop and pitch a compelling value proposition and facilitate Q&A with investors to elicit investment dollars during an intense 30-60 day subscription period.
Crowdfunding eco-systems provide mentorship and resources
- On many equity portals, investors can participate in deal management rooms and forums that allow them to ask questions directly with issuers in a transparent way. Post funding, support is also common with portals connecting successfully funded issuers with third party partners and programs, such as incubators that can help them grow and execute their business.
- The nature of crowdfunding gives entrepreneurs a wide pool of resources to tap into that serve as company advisors. If the old adage ‘who you know’ counts, crowdfunding online networks are far reaching and clearly demonstrate the power and might of the internet.
WHAT CAMP DO YOU SUPPORT?
Crowdfunding is about providing capital to the rest of us - to that broad swath of the Canadian public that doesn’t have friends on bay street, isn’t connected to VC’s from the valley, and doesn’t have their private banker on speed dial. In fact, CAMP A sentiments simply underscore the reality that capital is constrained, and primarily accessible to a very small and select group of people.
Innovation is happening everywhere, and in every group, including those that are typically overlooked by the traditional financiers. However it is often occurring at a small and incremental level, rather than at the ‘home run’ level that CAMP A refers to.
Crowdfunding is certainly not going to be looked favourably upon by ‘wheezy old securities lawyers’ disinterested in rolling up their sleeves to innovate and change the currently expensive process that seems to benefit their practices in the first place. Change requires hard work and effort, and in this case, the beneficiary is the public and small to mid-sized businesses asking for help.
Who’s going to rescue them? Wheezy old securities lawyers; or new, dynamic online investment communities powered by crowdfunding markets and new technologies.
What do you believe is the biggest crowdfunding myth? Vote.
Links:
Dispelling Myths #1 and #2
Dispelling Myths #3 and #4
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.
