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Crowdfunding hits the Toronto restaurant scene

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Toronto Star by Lisa Wright | March 12, 2015

Owners of Fonda Lola got in hot water with the Ontario Securities Commission when they first tried to issue shares in a second location.

Toronto restaurant - Crowdfunding hits the Toronto restaurant scene

Andres Marquez, co-founder of Mexican restaurant Fonda Lola: restaurants searching for new types of funding. (Photo by Bernard Weil, The Toronto Star)

As the owner of a bustling Queen St. W. restaurant, Andres Marquez is used to juggling difficult phone calls and a variety of problems.

“Usually it’s ‘Hey boss, the pipes are frozen’, or ‘Some drunk guy came in here and we have to throw him out’,” he says.

But when the Ontario Securities Commission called last month, things turned pretty loco for the Mexico City expat.

“It was the most shocking phone call. I almost peed my pants,” says Marquez, co-owner of Mexican bistro Fonda Lola.

Though he can giggle about it now, it was no laughing matter when the 33 year old unexpectedly found himself on the market regulator’s radar last month, after he and his business partner sent out a press release seeking investors for a second location with a link to crowdfunding website Indiegogo.

They first said they were offering 1,000 shares at $75 each in a restaurant IPO — an initial public offering — which is the official term for a stock market launch in which a private company becomes publicly traded. The shares, which they said represented 20 per cent of the company’s market value, were to help build capital for a new location with a tequila tasting room.

Related: OSC pitches Internet crowdfunding for small business

“Stocks will retain their full value for 12 months (stockholders can redeem 100 per cent of their stock value in restaurant credit during the first year) and can be cashed out in restaurant credit or cash at market value after the initial 12 months. Projected sales for 2015 are $600,000 and the share value growth is estimated at 11 per cent,” said the initial release.

But what Marquez says was an innocent attempt at trying to jazz up a press release and get some buzz around his business got the unwanted attention of the OSC.

“We stepped into some hot water there. We were all on the phone — the securities commission, their lawyer, my lawyer, my business partner, my public relations people — and it was pretty intense at first,” he recalls.

“They were very firm saying change the wording. Within 20 minutes we changed the press release,” says Marquez, who is now offering memberships in the new restaurant instead, with various perks for customers who purchase them.

Related: 5 Tips For Food Companies Preparing To Equity Crowdfund

Crowdfunding is becoming a growing avenue to raise capital for ventures by seeking monetary donations over a set period of time from a wide group of people over the internet. It was even urged last week at Toronto’s annual prospectors’ convention as a way to help struggling mining firms raise capital to stay afloat in a dismal market.

But it’s relatively new to the restaurant scene, particularly in Toronto. Last November, Hamilton foodies successfully backed a $100,000 crowdfunding campaign for a new taco, bourbon and tequila restaurant, also through Indiegogo. And analysts say it’s been done on a small scale in the U.S. and the U.K.

“It’s not unheard of but it’s new in this market,” says James Rilett, vice-president of industry association Restaurants Canada.

He says restaurateurs are increasingly looking for new ways to raise capital because “more and more, banks are not willing to lend money to small businesses.”

“It’s an interesting approach,” says Brian Stanford, national managing director of PKF Consulting Canada.

“The concept of creating a bit of an elite status to get priority access or restaurant benefits has been done in New York and L.A. but it’s not something we’ve seen much of in Toronto,” he says.

“It’s probably more about marketing, and the fundraising would be secondary,” Stanford adds.

Douglas Fisher, president of food service consulting firm FHG International, sees it mainly as a gimmick that won’t have legs in the uber-competitive industry.

“I think restaurants are using crowdfunding as a last resort to finance or help finance their business. Small business loans that are guaranteed by the Canadian government are readily available for qualified restaurants to take advantage of,” he says.

“Those using fundraising are generating publicity more than raising funds, and I would be concerned that such investment is highly speculative on the part of those that contribute,” Fisher notes.

Related: How Crowdfunding Is Changing The Way Startups Raise Money

So far, the Fonda Lola crowdfunding campaign has only raised $1,525, or two per cent of its $75,000 goal on Indiegogo. One-year memberships start as low as $40. The Amigo membership, for example, costs $3,750 for equal value in restaurant credit or catering and priority reservations, plus they would receive margaritas for six during each visit that year.

or $7,500, the El Patron member would get the same in restaurant credit plus a personalized tequila tasting and a premium bottle of tequila that is a master blend of that person’s favourite tequila suited to their palate and always available in the “tequila library.”

The person who would actually want to buy all 1,000 memberships at a price of $75,000 (known as the El Jefe or “chief” membership) is being promised the same amount in food and beverages, their own custom-made dish and drink on the menu plus a trip to Mexico City and Acapulco for one week, all inclusive.

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