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Crowdfunding 101 Canada

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Presentation at the Vaughan, Ontario, Canada Business Series with Panelists: Jim Turner, VP of Ontario Securities Commission, Christopher Charlesworth and Hivewire, Adam Spence, SVX …

Presentation at the Vaughan, Ontario, Canada Business Series with Panelists: Jim Turner, VP of Ontario Securities Commission, Christopher Charlesworth and Hivewire, Adam Spence, SVX

Published in: Economy & Finance, Business

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  • 1. Crowdfunding Ontario, Canada and OCDN Presented by: Ms. Debra Chanda debra.chanda@launch120.co m
  • 2. Active Crowdfunding Platforms WW & $
  • 3. Types of Crowdfunding and Growth
  • 4. THE WHAT: There are different types of “Crowd” Models CrowdSourcing Models • Donations: a donor contract without reward but charitable receipt if applicable i.e.:GoFundMe, and Rally, FundRazr  Reward: purchase contract for some type of product or service i.e.: Kickstarter, Indiegogo Lending: credit contract: credit is being re-paid plus interest. i.e.: SoMoLend, Kiva  4   • Expertise Sourcing : seeking talent “labor” via a crowdsourcing model i.e.: CrowdFlower Idea Sourcing: seeking innovation ideas from the crowd – internal or external or both i.e. Dell IdeaStorm Crowdfunding Models Equity: shareholding contract, shares, equity-like instruments, or revenue sharing in the project/business, potential up side at exit. i.e.: CrowdCube
  • 5. THE WHY: SMEs: A Major Growth Engine for Ontario • 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 significantly.
  • 6. 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 the world?? IS THE CROWD THE ANSWER TO BETTER COMMERCIALIZATION CANADA? - Creates collaboration - Provides capital to scale across early company formation vectors/funds key milestones like product development
  • 7. 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 picture? this
  • 8. Investment Capital in Canada: A Wake Up Call Source: Thompson Reuters, 2012
  • 9. Bottomline    Venture capital difficult to find for smaller requirements 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 angel?
  • 10. Early-Stage Equity Investment Ecosystem 50 million Motivation: Only financial return 2 million Crowdfunding 1 million 500,000 Motivation: An entrepreneurial mix of emotional engagement, social and financial return. There is place for everyone to benefit in the ecosystem & fill a major gap. Average CF Raise: $100-$250K 100,000 Friends and Family Source: crowdfundingframework.eu Angels Venture Capital Private Equity IPO
  • 11. LANDSCAPE Venture Capital : Declining Capital Sources Source: Thompson Reuters, 2012
  • 12. 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.”
  • 13. 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 growth. 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 for profit. 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.
  • 14. 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 retirement. 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.
  • 15. Investment Crowdfunding Average Transaction Size
  • 16. Crowdfunding Portals Works Source: The Crowd Café 2013. http://www.thecrowdcafe.com/investment-crowdfunding-works/
  • 17. 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: 1. 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 portals. 2. 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). 3. Require all crowdfunding investors to agree to a standard-form risk acknowledgement. 4. Require all issuers seeking crowdfunding to provide basic disclosures.
  • 18. 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 mature.
  • 19. 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.
  • 20. What’s New with the Rest of the Globe? Not Inertia 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 assess risks. 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 offerings).    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.
  • 21. Equity CrowdFunding Portal Activity
  • 22. 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 investment. 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 environment.  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.  OM exemptions  Raise capital through non-accredited investors under the existing OM exemptions (except Ontario).  Combined exemptions $500k and limit of $2k per individual investor
  • 23. 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.”
  • 24. 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 development.” We have a next generation to lead