Crowdfunding involves gathering small monetary contributions from everyday people for a perk – such as pre-sales, as Teknision did for its software called Chameleon, a customized home screen for Android tablets.
The company raised more than double its monetary goal, but the process was far from easy. Because of crowdfunding platform Kickstarter’s requirement that campaigns receive money via an American address and bank account, Teknision had to recruit a U.S.-based partner to participate in the campaign, which eventually fell through. The Ottawa-based team had to do the whole thing over again to make money.
“The hoops we had to run through in order to use Kickstarter were kind of onerous,” says Teknision president Gabor Vida. “It’s a whole bunch of red tape.”
Mr. Vida is one of many Canadians calling for changes to crowdfunding laws. Currently, provincial securities laws only allow accredited investors to purchase equity in companies.
That’s something the U.S. changed last spring when President Barack Obama passed the Jumpstart Our Business Startups, or JOBS, Act, allowing individuals to purchase equity in a company via crowdfunding.
If Canada doesn’t catch up, what’s to stop businesses from heading south where they can more easily raise money?
That’s the concern of John Reid, head of the Ottawa-based Canadian Advanced Technology Alliance. He’s lobbying for updated securities laws to match our southern neighbours and allow early-stage companies to access the funding they so badly need.
Almost 500 crowdfunding platforms already exist globally and are projected to generate approximately $3 billion this year.
WHY CROWDFUNDING ISN’T ENOUGH
If crowdfunding had been around when local e-commerce platform provider Shopify was just getting started, the access to dozens of customers committed to using its software that the tool would have provided would have been invaluable, says chief platform officer Harley Finkelstein. But while it would have supplemented the company’s fundraising, it would not have been a replacement.
“The biggest part of fundraising is not just the funding,” he says. “It’s the advice, the mentorship, the experience they provide to us. You don’t get that from crowdfunding.”
While pre-sales and social proof would’ve been beneficial, selling equity to so many unknown individuals isn’t ideal.
“You want to curate your list of investors,” he says. “You don’t want to have a bunch of skeletons in your closet because you have all these investors from years before.”
Teknision’s Mr. Vida has similar concerns.
“If I could raise $1 million through pre-sales or $1 million through equity, I’d be silly if I said equity,” he says.
Crowdfunding could be in the cards for local mobile company Nuvyyo. CEO Grant Hall says he sees it as an extended friends and family round.
A successful campaign can provide an idea of the demand for your product or service, which you can take to investors for future funding, Mr. Grant says.
“Raising cash is one of the toughest aspects of being a startup,” he says. “Anything that allows you to make that process easier is welcomed by any startup.”
But Mr. Grant does have concerns about the process. After Nuvyyo’s friends and family round came extensive shareholders’ agreements – 30 page documents of legalese. He wonders, how would one complete financing paperwork with hundreds of crowdfunders?
And what happens when the company has to discuss strategic shifts and everyday decisions with its disparate and scattered shareholders?
It’s a concern raised by Richard Reiner, founding partner at Toronto-based CC Stratus Capital.
“Opportunities arise (for businesses) that have to be acted on quickly,” he said at an event in November. “If you have a group of investors that are most likely not experienced in the life cycle of startups, will they be able to join in the decision-making process that leads to the right result?”
He spoke at a crowdfunding conference in Toronto titled Technicity 2012, where advocates from across the country discussed the need for crowdfunding reform.
While many questions surround the topic, the one that sticks out most is how to protect investors from fraud and financial harm.
But that’s an age-old, knee-jerk reaction, said ING Direct Canada president and CEO Peter Aceto at the conference. He saw those same concerns with banking over the phone, online and through mobile.
“With time and experience, as humans we always find a way to overcome those obstacles to change,” he said.
WHO DOES WHAT?
Another such obstacle is determining whose responsibility it is to perform due diligence on the investment. Is the onus on the startup, which perhaps has never been part of a financial transaction? Or is it up to the crowdfunder, who might be in the same boat?
Shopify’s Mr. Finkelstein paused to think about the question before deciding the responsibility should remain in the hands of the investor.
“It’s the investor’s money,” he says. “If you’re going to be the investor, the onus is on you.”
Regardless of where the responsibility lies, there will be many investors who lose money. But that’s one of the reasons why CATA has been pushing for an increase in Canadian financial literacy, Mr. Reid says.
“You have to make people understand that they could lose all of their investment, but that’s a true statement anywhere you invest,” he says. “I think you have to give the consumer every opportunity and freedom to invest in the marketplace on things that are important to them.”
With no national securities commission capable of making sweeping changes, it falls to each province and territory to update legislation.
In 2013, Mr. Reid says he believes Canada will likely see at least one province allow an equity-based exemption for crowdfunding, with an online platform to support it. New Brunswick is on the cusp of breaking ground on the issue, but it could be Ontario that leads the charge.
SIDEBAR: CROWDFUNDING IN THE U.K.:
“We found that people love to be an armchair dragon, they love the fact that they can sit at the kitchen table and sift through different businesses and put money in them … I have no doubt this is going to go on to be a large contributor to the economy. We need to encourage it, we need to embrace it, and we really need to give it the chance to flourish.” - Darren Westlake, CEO of the British equity-based crowdfunding platform Crowdcube, speaking at Technicity 2012.
BY THE NUMBERS:
- £4.2 million funded since 2010
- 31 different companies funded
- Almost 25,000 members
- Average investment: £1,800
- Largest single investment: £100,000
- Largest overall deal: £1 million
CROWDFUNDING IN THE U.S.:
In the spring of 2012, U.S. President Barack Obama passed the Jumpstart Our Business Startups, or JOBS, Act which allows the public to purchase company equity online.
Individuals can invest up to five per cent of their annual income if it totals less than $100,000, and 10 per cent for those who make more than $100,000.
A maximum of $1 million can be raised by an issuer per year (or up to $2 million if audited financial statements are provided).
Issuers must use the services of an intermediary that is either a broker registered with the Securities and Exchange Commission or a funding portal registered with the SEC.
Issuers must ensure that the investor understands they are risking the loss of the entire investment, as well as providing educational material on the company.
Companies do not have to disclose financial statements until they have 1,000 shareholders.
TIPS FROM TEKNISION:
President Gabor Vida tells OBJ how to run a successful crowdfunding campaign:
- Crowdfunding platform Indiegogo has more flexible options for Canadians than Kickstarter and accepts Canadian addresses and bank accounts.
- It’s much easier to get funding for hardware than software because it’s easier for funders to conceptualize.
- The amount of funding you ask for is the amount funders will assume you need to build the entire product. This can make monetizing difficult later on if the funding did not cover all costs.
- The power of video can’t be underestimated.
- Provide lots of communication and updates to your funders.
- Fulfilling your promises or “perks” is very important.
- Crowdfunding can be a great marketing and branding vehicle – often more important than the money itself.
- Don’t hesitate to get an idea out there. Otherwise, someone else will do it first.
PROVINCE PUSHING CROWDFUNDING REFORM
Speaking at a Toronto crowdfunding conference in November, Brad Duguid, then the provincial minister of economic development and innovation, said his government wants to help legalize equity-based crowdfunding.
Former premier Dalton McGuinty has requested the Ontario Securities Commission consider an exemption for crowdfunding in the provincial securities act, Mr. Duguid said.
“This is an incredibly important initiative that Ontario needs to take the lead on,” he said.
The OSC will engage in a consultation about the possibility of an exemption early this year.