Crowd Funding – Time for Canada to Get Involved

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Pivot Magazine by John Wires | Posted on July 11, 2013

crowdfunding-canadaCrowdfunding is becoming all the rage and so it should, its a game changer.

It started with micro-financing for charitable purposes on sites like Kiva.org, moved to aiding artistic, gaming and technology projects like those on Kickstarter.com but last year the US JOBS Act, (specifically Title III, the Crowdfund Act) was signed by President Obama allowing start-ups to crowd fund their ventures online in exchange for equity positions.

The power of online crowdfunding is nothing short of amazing. On Kickstarter for example, some projects are raising over $1.0 million (without giving up equity) from thousands of “funders” in less than 30 days. Funding initiatives are all based on a profile video and project descriptions.

This project by Double Fine raised $3.3 million from over 87,000 people to develop a new computer game and again, gave up %0 equity. Crowdfunding poses as a massive disruption to the traditional models of funding business and its only going to grow as a means of raising capital now that “funders” can take an equity share.

To me it’s exciting, and for entrepreneurs, it should be liberating.

How The Act Plays Out & the Implications for Canadian Start-ups

The big question is how will crowdfunding play out under the new legislation? In particular, what does it mean for Canadian start-ups?

The mainstream media highlights that the new legislation allows “emerging growth companies” to raise up to $1.0 million from up to 2000 investors online with limits on the amount each individual can invest.

What isn’t mentioned is that the new ventures looking to crowdfund must do so through what the Act defines as “funding portals” or funding websites. Funding portals will be heavily regulated and must be registered with the US Securities Exchange Commission (“SEC”).

It’s not simply a matter of popping online and asking people to fund you.

While crowdfunding will be closely watched and regulated by the SEC, there may be very few measures to stop Canadians from incorporating in the United States to be listed on the coming wave of funding portals.

For that reason, David Geertz, the Vancouver based founder of a Canadian crowdfunding site called SoKap, sees a brain drain full of Canadian start-ups heading south.

Now that the Act is signed, the SEC has 270 days to put together the rules and regulations for funding portals, aside from those already specified in the Act.

For example, the Act requires funding portals to provide certain disclosure information to investors and investors will be forced to acknowledge the risk of investing in growth companies. Portals will be responsible for collecting information about the businesses they list on their website, including:

  • business plans;
  • income tax statements;
  • financial statements;
  • target offering amount;
  • deadline to reach the funding goal;
  • how the shares are valued;
  • how much equity is being offered;
  • the names of shareholders with over 20% of shares;
  • the risk of the company issuing more shares;
  • the risks of being a minority shareholder
  • the physical address;
  • names of directors; and
,
  • how much money has been invested in the company to date.

Perhaps the most interesting issue moving forward will be who jumps on the opportunity to establish funding portals. Under the Act, funding portals, which in essence are intermediaries, cannot offer investment advice, pay anyone to promote the investments or handle the investor funds. That takes the appeal away from Wall Street and the big banks, although traditional “brokers” may still have a place in establishing funding portals.

While the fear of an increase in fraud is likely legitimate, it will be interesting to see if the SEC can find the right balance in drafting the rules and regulations between promoting growth and discouraging fraud.

It will also be interesting to see whether the online power of what Rachel Botsman coined “reputation capital” and “trust mechanics” can keep company directors in line.

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