THE WHAT: There are different types of “Crowd” Models
Donations: a donor contract without
reward but charitable receipt if
applicable i.e.:GoFundMe, and Rally,
Reward: purchase contract for some type
of product or service i.e.: Kickstarter,
Lending: credit contract: credit is being
re-paid plus interest. i.e.: SoMoLend, Kiva
Expertise Sourcing : seeking talent
“labor” via a crowdsourcing model i.e.:
Idea Sourcing: seeking innovation ideas
from the crowd – internal or external or
both i.e. Dell IdeaStorm
Equity: shareholding contract, shares,
equity-like instruments, or revenue
sharing in the project/business, potential
up side at exit. i.e.: CrowdCube
THE WHY: SMEs: A Major Growth Engine
• SME’s ranked #1 Growth Area in Ontario
• 50 % GDP and 55 % of jobs
Yet, 25 % of SMEs stop their activities within
2 years; 50% within 5 years of being founded.
More capital is required in order for
startups to build scale and grow revenues
Canada 13 out 16 on Innovation Rankings
Yet, good universities, engineering schools,
teaching hospitals, and technical institutes. It
produces science that is well respected around
IS THE CROWD THE ANSWER TO BETTER
- Creates collaboration
- Provides capital to scale across early company
formation vectors/funds key milestones like product
Capital is harder for SMEs to come by
VC Fundraising has been declining in Can since 2001
Many private sector investors have abandoned this asset class, leaving gov’ts
as the new source of VC money (?)
Fund size compression risks increasing
Fund managers investing> $1M declining sharply
Capital Gap Access continues to widen between Can & USA
Limited Can VC Funding (down by 60% since 2001)
Less than 1% of the Population are Accredited Investors
Is something wrong with
Investment Capital in Canada:
A Wake Up Call
Source: Thompson Reuters, 2012
Venture capital difficult to find for smaller
Debt Finance hard to come by
Business Angels – Limited Investments
Typically a syndicate each investing $25-$100K
What if there was a way to have say 500
angels each investing $5K?
What if anyone could become a business
Early-Stage Equity Investment Ecosystem
Motivation: Only financial
Motivation: An entrepreneurial
mix of emotional engagement,
social and financial return.
There is place for
everyone to benefit in
the ecosystem & fill a
Average CF Raise:
LANDSCAPE Venture Capital :
Declining Capital Sources
Source: Thompson Reuters, 2012
Q1.Would a crowdfunding exemption be useful for
issuers, particularly SMEs, in raising capital?
Yes, for issuers with good business opportunities that aren't
a good fit for angel or VC investors.
Yes, to validate and de-risk the market for the issuer's
product or investment offer.
Venture Capital investments in Canada have been dropping
since about 2001.
Though 2011 saw an increase of 34%, up to $1.5B even the
already low amount of 2007 ($2.1B) has not yet regained.”
Q2. Have we recognized the potential benefits of this
exemption for investors ?
Yes, in part. But not fully:
CF provides a path for non-accredited investors to profit from their insights, invest
in their local communities and engage in the Canada's innovation engine of
Accredited investors do not have a monopoly on insights into the risks and
opportunities of an investment. Recall that angels and VCs turned down the
Pebble Watch. So, yes, many will invest through crowdfunding and invest wisely
CF is also good for other investors in the ecosystem. It will bring more investment
opportunities to light and give angel and VC investors a place to point companies
to for funding (if appropriate) rather than just saying no. Where other investor
classes have been concerned about crowdfund investing, our experience has
been those concerns have been alleviated with a better understanding of how it
can work and is working in other jurisdictions.
Q3. What would motivate an investor to make an
investment through crowdfunding?
Crowdfunding will essentially be start-up investing.
Start-up investing is inherently risky. Securities of start-ups are wholly
inappropriate for conventional investing objectives such as capital
preservation. While some people invest in start-ups for the promise of
potentially high returns commensurate with the risk profile, just as often
start-up investors have non-financial objectives: to support friends or family;
to promote businesses with a positive social or community impact; to help
bring to market a desirable product or service; or even as a hobby in
As long as investors fully and properly understand the risks and can sustain
the loss of their investment, we see no public policy reason to restrict this
activity, and many reasons to support it.
This is capital that would not have been sourced if crowdfunding portals had
not been available to all investors, regardless of their wealth.
Average Transaction Size
Crowdfunding Portals Works
Source: The Crowd Café 2013. http://www.thecrowdcafe.com/investment-crowdfunding-works/
Q4. Can investor protection concerns associated with
crowdfunding be addressed and, if so, how?
YES. We believe that the risks associated with crowdfunding can be
addressed through four key measures:
Require all crowdfunding investment to be transacted through a new
form or exemption or dealer registration lighter category should be
allowed to help stimulate the innovation market for crowdfunding
Require all crowdfunding investment by non-accredited investors to be
subject to reasonable limits on the dollar amount to be invested. These
limits should not apply to accredited investors (or other investors that
fall under another exemption).
Require all crowdfunding investors to agree to a standard-form risk
Require all issuers seeking crowdfunding to provide basic disclosures.
Q5. What measures, if any, would be the most effective
at reducing the risk of potential abuse and fraud?
The most important measure is to establish a simple and
proportional regulation for crowdfunding portals.
Simplicity is essential, as many stakeholders who wish to
establish portals are not securities industry professionals.
While we believe many portals would voluntarily adopt the
measures identified in 2, 3 and 4 above (reasonable limits on
dollar amount invested for non-accredited investors; standardform risk acknowledgements; and basic disclosure
requirements), we feel there is a benefit to standardizing the
requirements and expectations, at least until the industry is
Q6. Are there concerns with retail investors making
investments that are illiquid with very limited options
for monetizing their investments?
NO. Investors investing in a crowdfunded issuer must
be advised these are early stage, investments and
present a higher risk .
Stories of success of liquidity and ability to monetize
investment will become increasingly clearer on success
trends, as the industry matures.
This should be made completely clear in the standardform risk acknowledgement.
What’s New with the Rest of the Globe?
Italy – first country to implement an equity-based Crowdfunding law, July 2013
The law says that for general solicitation:
An offering must receive 5% investment by a professional investor, a registered incubator or a bank foundation.
The maximum raised cannot exceed €5 million per year.
Individual investments must be concluded by broker-dealers to comply with anti-laundering laws and the E.U. Markets in Financial
Instruments Directive (MiFID). This dictates that your investment profile match your proclivity to risk investments. But there will be
an exemption for small investments.
1. Professional investors must own 5% of a crowdfunded firm after the crowdfunding and not before, as previously dictated.
2. There will be MIFID exemptions for investments lower than €500 for individuals and €1000 for companies, thus lowering cost and
red tape. Nevertheless, payment must be managed through a broker dealer.
3. Under Italian law as well as for Europe in general, professional or "accredited" investors are defined by the E.U. MiFID, Schedule 2,
as individuals or organizations that possess the experience, knowledge and expertise to make investment decisions and properly
The investment cap is €5 million (more than six times that of the JOBS Act) and there is no personal
investment limit for individuals, and any European company domiciled in Italy is eligible to
Crowdfund, regardless of the nationality of its shareholders.
US - SEC has lifted the ban on solicitation for certain private equity offerings (506c
This means that start-ups, venture capitalists, and funds can openly advertise that they’re raising money, casting a much wider
net to attract a larger pool of investors.
The implementation of this part of the JOBS Act will attract new investors and provide billions of dollars of new capital for small
to medium businesses. It’s good for the investor – more access to deals, and good for business – more access to capital.
The next step in the JOBS Act is opening up private equity investing to the general public.
Where is Ontario at? Where is Canada at?
OSC Exemptive Relief Order
On June 20th, the OSC issued an exemptive relief order that gives MaRS SVX relief from certain knowyour-client (KYC) and suitability requirements
At present, only Ontario residents and Ontario issuers can use the portal and investments can be made
by accredited investors only and unlike the current no limit ceiling under the accredited investor
exemption, investments through MaRS SVX will be limited to $25K in each deal and a maximum of $50K
for all portal transactions in a calendar year unless the investor can warrant their suitability to a larger
Many have been touting this as a first step toward Crowdfunding legislation. I’m not so sure. True
Crowdfunding will open up investment opportunities to the “Crowd;” those that don’t meet the financial
test of an accredited investor ($200K in annual income or a minimum of $1 million net assets).
Saskatchewan Issues Crowdfunding Proposal
the FCAA, August 2013 issued the framework for a proposed exemption to The Securities Act, 1988,
which would allow equity Crowdfunding in Saskatchewan.
$100K through equity investments of $1K from each investor. This exemption contemplates “regulation
lite” as the portal would not have any registrant status, and the company would not be required to
prepare an Offering Memorandum nor be subject to ongoing disclosure as is required in today’s
The Issuer would be required to file with the FCAA, an information document that sets out the basics of
the offering and an investor risk warning 10 days prior to the offering.
Does the ROI for that analysis support a $1K investment? That remains to be seen.
Raise capital through non-accredited investors under the existing OM exemptions (except Ontario).
Combined exemptions $500k and limit of $2k per individual investor
Five benefits that entrepreneurs of all types can
realize from Crowdfunding (Chance Barnett)
Crowdfunding can validate an existing prototype that's working.
This is where it fits as a place in the investment ecosystem or the life cycle of a business
A small business that has great customers but for some reason not enough cash on hand to want a loan can use it.
The community can come in and fund that small business to help it buy the additional inventory it needs. There will be a
large market and debt based investment in crowd funding.
Big brands will use it as a means of getting capital.
You don't have to be a small business to do this
Big brands, for example, might want to use crowd funding to pre-sell some of their products.
Crowdfunding will enable a new set of relationships to form around companies.
Crowd funding is inherently social
It is a shortcut to getting customers and merging that with the process of financing or pre-selling what you're doing.
That's a shift in the way business has been done
Financing a company and building a brand might soon become one and the same
Crowdfunding will enable the birth of new small-business investments.
What we're seeing is technology, the social web and the right economic time creating this new marketplace of earlystage investing online
There's already great angels, and angels can be complemented by capitalization from the crowd.
Ultimately, crowd funding leads to job creation from the ground up.
Job creation isn't about transferring workers from one position to another -- it's about creating jobs that didn't exist. "If
you can find someone who has been out of work starting a business, or someone who is going to hire veterans that have
been out of work, you are starting to move the needle potentially to get people back in the workforce.”
If you are not leading you are following
"I think what most people are most excited
about — is that people understand that access
to capital is important from a development
standpoint," Barnett added. "If you look at it
from a macro perspective, what we've had for
a long time is a top-down effort to provide
solutions. Crowdfunding is essentially a
bottom-up approach that says, 'We don't need
centralization. We need platforms to allow
people to aggregate around the things that
might be working and help fund that
We have a next generation to lead