Popular websites such as Kickstarter and Indiegogo allow users to create online fundraising campaigns to ask for loonies or larger amounts from people within their social and professional networks. Investors are not granted equity in the company, but rather “perks” – a product presale, promotional gear or even just good karma.
But significant barriers stand in the way of taking this trend to the next level in Canada, barriers that the United States overcame after enacting the Jumpstart Our Business Startups (JOBS) Act in April. This legalized debt- and equity-based crowdfunding by updating decades-old securities laws that prohibit people from publicly soliciting funds from unaccredited investors.
Those dated laws still stand in Canada, however. With no national securities commission capable of making sweeping national changes, it falls to each province and territory to change legislation – and we need to get moving, says John Reid, president and CEO of the Canadian Advanced Technology Alliance.
Australia and the United Kingdom have already adopted laws similar to the United States to allow for equity-based crowdfunding.
“The fact that we’re slow adopters is really not a good sign and message that we should be sending out internationally,” he says. “We’re trying to make Canada a destination for business startups, yet we’re lagging behind.”
WHAT NEEDS TO BE DONE
Last month, CATA submitted an open letter to federal Industry Minister Christian Paradis, calling on the Canadian government to “address funding gaps in the innovation chain” and provide a framework of support for crowdfunding from which the provinces and territories could draw.
The letter asks the government to consider tax credits for crowdfunders as an incentive to help startups gain capital of which angel investors, family and friends can only provide so much.
Mr. Reid says he believes it will only take one province or territory committing to updating legislation before the rest follow suit. Changing laws could place Canada at the forefront of the crowdfunding movement.
“You always have to go for the big picture, and the bigger picture is how we can become the innovation nation instead of the catchup nation,” he says.
CROWDFUNDING: THE FACTS
Venture capital investments in Canada have been dropping since 2001. Last year, $1.5 billion was invested nationally, down 28.6 per cent from $2.1 billion in 2007.
The amount of new money coming into Canadian VC funds was almost flat in 2011 at slightly more than $1 billion (compared to a 32-per-cent increase in the U.S.), and none of that new money came from U.S.-based investors (compared to 16 per cent in 2010).
A total of $112 million in equity crowdfunding was raised in 2011 globally, a little more than half of which was from the United Kingdom and Ireland.
Most of the rules in the U.S. JOBS Act have yet to be drafted, but in general the act will allow up to $1 million raised from investors, or up to $2 million if firms supply the crowd with audited financial statements. The companies do not have to disclose financial statements until they have 1,000 shareholders.
Source: The Canadian Advanced Technology Alliance
A kick at the Kickstarter can
When equity is not at stake, crowdfunding is legal – but that doesn’t mean it’s easy.
That’s a lesson local technology company Teknision learned after launching a Kickstarter campaign to raise money to manufacture its Android tablet software.
The U.S.-based fundraising website uses Amazon Payments, which requires users to have a U.S. social security number, address and bank account, to process monetary transactions.
Teknision president Gabor Vida partnered with a U.S. affiliate to create the account, but that partner got cold feet and pulled out – costing Teknision the more than $50,000 it had successfully raised.
Thankfully, a second campaign (after Mr. Vida was able to open a U.S. bank account himself) was even more successful, with 6,420 backers pledging almost $67,000 for the project.
Kickstarter does plan to expand to more countries, according to its website, and an agent from Amazon Payments says the company began by offering service to American customers only, but plans to grow shortly.
However, the difficulty of circumventing Kickstarter’s rules and regulations, paired with Canada’s prohibition of some forms of crowdfunding, places our country at a disadvantage, says Mr. Vida.
“If we truly believe that our companies can compete on a global stage, they have to have the ability to do so,” he says.
The government should find a way for Canadians to use Kickstarter, he adds, because it loses revenue every time a Canadian company pays taxes in the United States following a campaign.
HOW TO RUN A KICKASS CAMPAIGN
For companies trying to commercialize their product after draining dry the pockets of friends and family, online crowdfunding can raise small amounts of money quickly.
Mr. Vida says the key to Kickstarter success is having a niche gadget that is easy to describe and afford, making it a simple decision to invest in.
Marquis Côté, president of local board game company UniForge Inc., has just completed his second Kickstarter campaign with the help of a family member in the United States. Part of the company’s success in raising roughly $30,000 in total was a well-planned campaign with strategic marketing from beginning to end.
The company plans to continue using Kickstarter campaigns for additional games, Mr. Cote says.
There are other crowdfunding options for Canadian citizens, such as Indiegogo, although the site has a smaller user network than Kickstarter.
There are reasons why the government may be wary of equity-based crowdfunding, Mr. Côté says. Uninformed citizens may invest money in companies without understanding the risk.
But understanding the gamble of crowdfunding is part of digital literacy, CATA’s Mr. Reid says, adding that he feels it’s no different than buying a lottery ticket.
“We’re being a little too defensive,” he says, “and it doesn’t take long before you’re displaced.”