September 26th, 2018
Equity crowdfunding is here to stay
Even with investor protections in place, it’s a risky venture with limited opportunity to unlock value.
After months of chatter, equity crowdfunding has come to Canada. Unlike traditional crowdfunding, popularized by websites such as Kickstarter, equity crowdfunding allows investors to buy a stake in a start-up company instead of merely donating to a venture or pre-purchasing a product from a fledgling entrepreneur. Essentially, it allows unlisted, small and mid-sized business to raise capital by selling securities (including shares, limited partnership units and promissory notes) to individual investors without going through all the hassle of an initial public offering and at a fraction of the price. The idea was first hatched in the U.S. in an effort to stimulate job creation but regulators there have delayed the program while they work to establish investor protections.
Regulators in Saskatchewan however believe they have it figured out. In December, the province’s Financial and Consumer Affairs Authority (FCAA) made equity crowdfunding available to businesses and investors there. The rules limit businesses to two offerings of up to $150,000 per year and investors to $1,500 per offering. The participating business can’t be an investment fund and can’t offer derivative type securities. The money is held in trust for six months or until the full $150,000 is raised at which point it’s either returned to investors (if the full amount isn’t reached) or handed over to the business owner.
Even with these measures in place, the FCAA considers equity crowdfunding a “high risk” investment. “We have waived the need for registrations and prospectuses—which means you will not get the usual advice from anyone as to whether the investment is suitable for you,” read FCAA documents to prospective investors. “Start-up and small business is vital to our economy, but they are highly speculative. There are clear statistics that a high percentage of start-up and small business fail,” it goes on to say.
What’s more, investors have few opportunities, if any, to unlock the value of their stake. The FCAA’s director of securities Dean Murrison doesn’t expect there will be a market for equity crowdfunding investments since shares are not tradable and can only be sold under certain exemptions (to family, close friends and close business associates for example). Remember, small startups that go public or get bought out by companies like Google and General Electric are the exception, not the rule.