Corporate Finance Presentation

1. What is Crowdfunding?

2. Traditional Methods of Raising Capital
•
•
•
•
•
•
Friends & Family
Bank Loans
Angel Investors
Venture Capitalists
Issuance of Debt
Issuance of Shares

4. What is Crowdfunding?
• Crowdfunding is the collective effort of
individuals who network and pool their
money, usually via the Internet, to support
efforts initiated by other people or
organizations.
• New method of raising capital

6. 5 Methods of Crowdfunding
1.
2.
3.
4.
5.
Donation Method
Loan Method
Reward Method
Pre-Order Method
Equity Method

7. Donation Method
• Method of Crowdfunding to support specific
causes
• Very common method of crowdfunding
• Example: Jamaican Bobsled Team
– Needed to raise funds to compete at Sochi
Olympics
– Target of $80,000, raised $129,687
– No consideration for contribution

8. Donation Method Portals

9. Loan Method
• Alternative to bank loans
• Peer-to-Peer loans
• Loans are facilitated through funding portal
which takes a percentage commission on the
loan

10. Loan Method Portals

11. Reward Method
• Rewards contributors with items of value
• Example: Veronica Mars Movie
– Raised over $5 Million
• Rewards for Contributions included:
– $10 Donation: PDF Copy of Script
– $25 Donation: T-shirt
– $200 Donation: Autographed poster
– $5,000: Free Screening in your hometown
– $10,000: Speaking Role in the movie

12. Reward Method Portals

13. Pre-Order Method
• Similar to the Reward Method
• Consideration is pre-ordering an item that
does not yet exist
• Manufacturers rely on crowdfunding to get a
critical mass to finance production

14. Pre-Order Method Portals

15. Equity Method
• Allows companies to sell ownership in start-up
corporations through the funding portal
• Consideration is ownership stake in company
• Access to millions of equity investors
• Creates a faux stock exchange for start-ups

16. Equity Method Portals

17. The Canadian Equity Method
• Provides Equity Crowdfunding through the exempt
market
• Website only open to exempt investors under NI 45106
• Collective due diligence process for investors
• Funding portal has its’ own diligence requirements
• “Company offerings presented on the site are
considered to be highly speculative and, as such, are
suitable only for purchasers who are prepared to risk
the loss of their entire investment”

19. Benefits of Crowdfunding

20. Benefits for Companies
• Control can be less concentrated, lots of
investors
• Crowd of investors can serve as diversified
advisors for a start-up
• Low cost of acquiring capital
– Only have to pay funding portal commission
• No geographical boundaries

21. Benefits for Investors
• Risk can be diversified amongst a large group
of investors
– 10 investors investing $100,000 each; or
– 10,000 investors investing $100 each
• Less savvy investors can invest in affordable
start-ups
• Far less complex process of investing
• Requires no middlemen other than funding
portal

22. Risks of Crowdfunding

23. Risks for Companies
• Crowdfunding is not a continuous process
– Likely only one influx of cash to support
continuous cash flow needs
• Tax considerations are uncertain for crossboarder funding
• More investors mean more people to answer
to

24. Risks for Investors
• Risk of fraud
– Little accountability for company to deliver once
the funds are acquired
• Little to no disclosure requirements
– Makes due diligence more difficult
– Makes risk harder to calculate
• Crowds don’t always know best
• Little liquidity
– No resale market

25. Part Two
Regulation of Crowdfunding

26. Saskatchewan
General Order 42-925 Saskatchewan Equity
Crowdfunding Exemption
• Implemented under The Securities Act, 1988 on
December 6, 2013
• Provides an exemption for equity crowdfunding
from the registration requirements under Section
27 and the prospectus requirements under
Section 58
• First Canadian jurisdiction to directly regulate
crowdfunding

27. Saskatchewan Cont.
Financial and Consumer Affairs Authority:
• “We believe the Saskatchewan Equity Crowdfunding
Exemption will help small businesses and start-ups
raise a defined amount of money in an efficient and
cost effective way.”
• “But we are still protecting investors because we’ve
placed conditions on equity crowdfunding, including
limiting the amount of money individuals can risk in a
single investment. This should mitigate the risk to
individual investors if the business is not successful”.
• “Remember, all investments have risk but equity
crowdfunding should be considered high risk.”

28. Saskatchewan Cont.
Overview of Requirements to be exempt from
Prospectus Requirements:
• The trade and payment must be made
through an online funding portal
• The issuer cannot be a reporting issuer or an
investment fund
• The offering cannot exceed $150,000
• The securities offered cannot be derivatives

29. Saskatchewan Cont.
Overview of Requirements to be exempt from
Prospectus Requirements (continued):
• The exemption can only be used twice in each
calendar year
• The offering cannot last more than six months
• An offering document must be provided to
investors through the portal
• No one can invest more than $1,500 in an
offering

30. Saskatchewan Cont.
Resale Restrictions:
• The first trade in securities traded pursuant to
the Order are subject to the provisions of NI
45-102 Resale of Securities as if they were
acquired under section 2.5 of NI 45-106
Prospectus and Registration Exemptions

31. Saskatchewan Cont.
Resale Restrictions (continued):
• NI 45-102, s. 2.5(1) Unless the conditions in subsection (2)
are satisfied, a trade that is specified by section 2.3 or other
securities legislation to be subject to this section is a
distribution.
(2) …the conditions are:
1. The issuer is and has been a reporting issuer in a
jurisdiction of Canada for the four months immediately
preceding the trade.
2. At least four months have elapsed from the
distribution date.
• Or, resell the securities pursuant to another exemption

32. Saskatchewan Cont.
Filing Requirements:
• Issuer Information Form GO45-925F1
• Individual Information Form GO45-925F2
• Offering Document GO45-925F3
• Report of Trades Form GO45-925F4

33. Saskatchewan Cont.
Offering Document GO45-925F3
• Contact details for the issuer, promoters, directors, officers, and
control persons
• Where to find the articles of incorporation (or similar documents)
• Explanation of the business
• Previous offerings and use of funds
• Management’s business experience
• Financial state of the business
• Offering size and use of funds
• Rights of investors, for example voting rights and dividends
• How reports will be made to investors
• Type of security and price
• Risks specific to the investment

34. Saskatchewan Cont.
Overview of Requirements for Online Funding Portals to be Exempt
from Registration Requirements:
• Portals must be independent and can’t provide advice
• Portals must make available the offering document and the
Important Risk Warnings online. Investors must confirm they have
read and understood them.
• Portals an only release funds once the minimum amount to close
the offering is reached
• Portals must provide issuers with investors details, including contact
details
• Portals must ensure that the issuer and investors have an address in
Saskatchewan
• Filing requirements: Portal Information Form GO 45-925F5 and
Portal Individual Information Form GO45-925F6

35. Saskatchewan Cont.
Schedule A “Important Risk Warnings”:
• I understand that I might not make any money from this investment, I
could lose my entire investment, and I will find it very difficult to sell this
investment
• I have read and understood the Offering Document.
• This investment opportunity has not been “approved” in any way by the
Financial and Consumer Affairs Authority of Saskatchewan, or by anyone
else.
• I understand that I have not received any advice about this investment
from this website or the Government of Saskatchewan. If I want guidance,
I know that I need to seek professional investment advice.
• I understand that I do not have as many legal rights when purchasing this
investment as I would when investing through a “prospectus offering.” If I
want to know more, I know that I need to seek professional legal advice.
• I currently reside in Saskatchewan.

36. Discussion Question
Are the risk warnings contained in Schedule A of
General Order 42-925 along with the offering
document sufficient to alert investors to the
risks of investing?

37. United States
• JOBS (Jump Start Our Business Start-Ups) Act
signed into law in April 2012
• The Act amends the Securities Act of 1933
introduces an exemption for crowdfunding
• Exemption will come into effect once rules are
finalized
• Rules were proposed by the Securities and
Exchange Commission in October 2013 (585
pages)

38. United States Cont.
Highlights of the JOBS Act Crowdfunding Exemption:
• The total amount of all offerings under the exemption
must be less than $1 million in a 12-month period
• Investors subject to yearly investment limits of
– $2,000 or 5% of their annual income or net worth,
whichever is greater, if both their annual income and net
worth are less than $100,000
– 10% of their annual income or net worth, whichever is
greater, if either their annual income or net worth is equal
to or more than $100,000. Maximum investment under
the exemption of $100,000.

39. United States Cont.
Highlights of the JOBS Act Crowdfunding Exemption
(continued):
• Companies that are SEC reporting companies
(those listed on exchanges or companies greater
than a certain size) may not use the exemption
• Companies must release an offering document,
which must include financial statements. They
may be subject to an review or audit requirement
depending on the size of the company’s offerings.
• Annual report provided to investors

40. United States Cont.
Highlights of the JOBS Act Crowdfunding
Exemption (continued):
• Offerings must take place through a registered
broker or registered funding portal
• Similar requirements and restrictions on the
activity of portals as Saskatchewan, with an
additional requirement to provide potential
investors a channel to discuss offerings

41. United Kingdom
Prospectus exemption:
• A prospectus is generally not required for
offerings of securities if the value of the
securities being offered is less than £5 million
with less than 150 investors.

42. United Kingdom Cont.
FSA Information Bulletin:
Crowdfunding: is your investment protected
• “Many crowdfunding opportunities are high risk and
complex… the majority of startup businesses fail”
• “Dividends are rare and your investment could be
diluted if more shares are issued”
• “We believe most crowdfunding should be targeted at
sophisticated investors who know how to value a
startup business, understand the risks involved and
that investors could lose all of their money”

43. Ontario
• OSC Staff Consultation Paper 45-710:
Considerations for New Capital Raising
Prospectus Exemptions released in December
2012
• Sets out their concept for crowdfunding, with the
qualification that it is subject to change, and may
not be proposed at all
• Proposed rules are expected to come out in the
next few months, with an opportunity for
comments

44. Ontario Cont.
Overview of OSC Staff Consultation Paper 45-710:
• Issuers must be incorporated federally or under
the corporate statute of a Canadian jurisdiction
(e.g. OBCA) and must have a head office in
Canada
• An issuer is limited to raising $1.5 million under
the exemption over a 12 month period.
• Advertising of the offering can only take place
through a funding portal or on the issuer’s
website. Social media can be used to direct
investors there.

45. Ontario Cont.
Overview of OSC Staff Consultation Paper 45-710
(continued):
• Limits on investors: Can only invest $2,500 in a
single investment and $10,000 using the
exemption per year
• Issuers must provide an information statement,
including risks facing investors and one year’s
financial statements
• For offerings where proceeds will be greater than
$500,000, or if the issuer is a reporting issuer,
the financial statements must be audited

46. Ontario Cont.
Overview of OSC Staff Consultation Paper 45-710
(continued):
• Information statement must be certified by issuer.
Statutory rights for the investor for misrepresentation.
• Investors must sign a risk acknowledgement
confirming:
– They are within the investment limitations
– They understand the risk of losing their entire investment
and can absorb the loss
– They understand that they might have trouble selling the
securities

47. Ontario Cont.
Overview of OSC Staff Consultation Paper 45-710
(continued):
• “Cooling off” period of two days, where they can
rescind their investment
• Ongoing financial disclosure: Issuer must provide
annual financial statements, and keep records on
the distributions, the security holders and the use
of funds
• Investments must be made through a registered
funding portal, and the portals will likely have to
register

48. Ontario Cont.
OSC Staff Consultation Paper 45-710: Consultation Questions
• What would motivate an investor to make an investment
through crowdfunding?
• If we determine that crowdfunding may be appropriate for
our market, should we consider introducing it on a trial or
limited basis? For example, should we consider introducing
it for a particular industry sector, for a limited time period
or through a specified portal?
• Should issuers be required to spend the proceeds raised in
Canada?
• Should rights and protections, such as anti‐dilution
protection, tag‐along rights and pre‐emptive rights, be
provided to shareholders?

49. Discussion Question
Do we want to allow equity crowdfunding?

50. Discussion Question
Considering the different approaches or
proposals to regulation taken by
Saskatchewan, the United States, the United
Kingdom and Ontario, which do you think is
preferable?

51. Some key differences between the regimes:
Saskatchewan
Ontario
U.S.
Offering limits
Under $150,000
per offering,
maximum of twice
a year
Under $1.5 million a Under $1 million a
year (total offerings) year (total offerings)
Investment limits
$1,500 per offering $2,500 per offering
and $10,000 a year
Yearly limits vary
with investors
Issuer restrictions
Unavailable for
reporting issuers
Available for
reporting issuers
Unavailable for SEC
reporting companies
Ongoing disclosure and Not required but
financial statements
“suggested”
Annual financial
statements
Annual financial
statements
Funding portals
Exempt if
requirements met
Must register
Must register, new
category
Other
Limited detail in
the rules
Two day cooling off
period
Communication
channels

52. Discussion Question
Would you regulate equity crowdfunding
differently, and if so, what would be your
approach?

53. Part Three
Alternative Exemptions, Success
Stories, and Personal Experience

54. Alternative Exemptions
• Crowdfunding Exemptions
– Registered Dealers
– Accredited Investors
– Prospectus Exemption
• Saskatchewan (December 2013)
• Ontario (Announced for Q1 2014)

55. Proposed Offering Memorandum
Exemption

56. Canadian Regulation
• Next Steps for Canadian Regulators
– Analyze the results of foreign (U.K/
U.S./Australian) and domestic (Saskatchewan)
legislative reforms
– Revise the draft legislation (including framework
for portal registration)
– Allow for public comment
– Implement legislation monitor portals/
effectiveness of legislation

57. Success Stories
•
•
•
•
Pebble Watch ($10.2 Million)
Righteous Salad Dressing ($140,000 for 15%)
3Doodler ($2.35 Million)
Veronica Mars Movie ($5.7 Million)

58. Pebble Watch

59. Righteous Salad Dressing

60. 3Doodler

61. Veronica Mars Movie

62. Personal Experience - Mycestro

63. Personal Experience - Mycestro
• Made initial investment of $99 in February
2013
• Estimated delivery date was June 2013
• In June 2013, estimated delivery date delayed
to October 2013
• Received no updates until December 2014
when delivery date delayed to June 2014
• Wait and see…

64. Kickstarter Accountability
• Kickstarter Accountability
– Who is responsible for completing a project as
promised?
– Fraudulent Creators?
– Are creators legally bound to fulfill promise of
their project?
– Can I get my money back?

65. Discussion Questions
• Have you ever been involved in crowdfunding
a project?
• Would you invest in start-ups using a
crowdfunding exemption? Why or why not?
– Pros? Cons?
• What, if any, protections would you need to
see in place before you invested?