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January 25th, 2023
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Equity Crowdfunding Demystified: Insights from Wefunder and Equivesto
Forbes | Hessie Jones | Apr 3, 2023
Image: Johnny Price Wefunder and Alexander Morsink Equivesto
The time for startups to rethink venture capital alternatives has been gaining momentum.
- Is this the moment for Equity Crowdfunding (ECF) to emerge and become a viable alternative for startups? For startups domiciled in Canada vs the United States, jurisdiction and laws vary when it comes to choosing equity crowdfunding platforms. Qualification, campaign execution and benefits can also be different. What should you consider when getting ready to do your first capital raise?
- I reached out to two ECF platforms: Jonny Price, VP of Fundraising at Wefunder (US) and Alexander Morsink, Managing Partner at Equivesto (Canada) to understand these disparities but also demystify the many stereotypes associated with this emerging fundraising alternative.
See: Australian Equity Crowdfunding Markets Raised $72 Million in 2022
- The Legal Differences between Canada and the US
- Morsink illustrates that the publicly known concept of equity crowd funding is an umbrella term used to describe different ways private companies can raise capital in Canada. Private companies raising capital in Canada use prospectus exemptions, which are legal doorways that any company raising must bring their potential shareholders through.
- The first national ECF rules (NI 45-110 Startup Crowdfunding - similar to RegCF in the US) introduced in 2021 now allow companies raising capital to do so via an online investment platform.
- Offering Memorandum exemption (part of NI 45-106) “which is similar to the Regulation A (US) still allows the company to raise from the general public in Canada, but at no maximum raise limit.” In Canada, this option requires private companies to have ongoing audited financial statements and annual reports filed to regulators where 45-110 does not.
- “Accredited Investor” exemption allows high net worth individuals (HNW) to invest in private companies with no regulatory reporting.
- “Equivesto uses multiple prospectus exemptions at the same time for one issuer, so while a deal on the platform will be listed as an ECF deal open to the public, Angel investors will use the ‘Accredited Investor’ exemption, not the NI45-110 ‘Startup Crowdfunding’ exemption, as the legal doorway to make the investment.”
- Handling large number of investors?
- Wefunder has a lead investor who signs on behalf of all investors via special purpose vehicle (SPV)
- Equivesto recommends issuing a new class of non-voting shares and requiring investors to sign a voting trust agreement. Quarterly updates are recommended to keep investors engaged, and having many smaller investors can benefit the company by providing support and assistance in various ways.
See: Equity Crowdfunding Growth: It Took UK Seedrs 8 Years to Raise the First £1Billion and Only 2 Years for the Next Billion
- Social media is good for ECF because it reaches a lot of people and makes it easy to keep records, but scammers can use it to trick people. How do Wefunder and Equivesto protect people from scams?
- Wefunder and Equivesto both take measures to protect investors from fraudulent ventures in the ECF space, with Wefunder implementing fraud checks and offering features such as Lead Investors to provide signals for investors.
- Equivesto complying with regulatory requirements including verifying company information, conducting background checks on directors, and requiring companies to certify information is truthful before making it available to investors. Companies raising via ECF in Canada must also adhere to strict guidelines when using social media and other platforms to promote their campaigns, and investors are subject to a KYC and suitability review to ensure they are aware of the riskiness of their investments.
Continue to the full article --> here
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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