On June 25, 2015, Spring Activator hosted an information event on Canada’s new equity crowd funding rules. Bonnie Foley-Wong, Co-Founder of Spring Activator and Founder, Pique Venture Investments, moderated the event. The panel consisted of:
- Praveen Varshney, Director, Varshney Capital Corp.
- Peter Paul van Hoeken, Founder & CEO, FrontFundr
- Lindsay Clark, Associate Lawyer, Larbarge Weinstein
- John Keserich, Partner, BDO Canada Accounting
Event-sponsor Vancity introduced the evening, highlighting how Vancity is interested in helping their members find options for equity financing since they do mostly do debt financing.
Crowd funding in Canada has hit $35M in investment, outstripping angel investment. It is expected to outstrip Venture Capital investment in 2016.
What Are They Rules Around Raising Equity Through Crowd Funding?
Lindsay commented that:
- New equity crowd funding exemption allows companies to raise money from residents of B.C. providing individuals invest no more than $1500 per offering, the company uses an online funding portal, and the maximum raised is $250K per offering with a maximum of twice per year (max $500K/year).
- The exemption is available to any size and stage of privately owned company even though it’s called the start-up exemption. You can’t be a public company, and you can’t have raised money in the past under a prospectus.
- The company must be incorporated.
- Once your business reaches 50 shareholders, it has more obligations to its investors, and it loses the option to raise capital the second time within the year.
- Unless you get a waiver from each investor saying they don’t want audited financial statements, you’ll need to produce them.
John listed the info required by the new Start-up Crowdfunding Exemption offering document:
- Risk of Investment
- Business Overview
- List of Management and Directors
- Date Securities are Acquired and the Value of the Security
- Track record of fraud, bankruptcies
- Activity in startup crowd funding
- Terms and conditions of the securities
- Financial statements
- Use of funds w/i the company
- Compensation given to the funding portal
- Risk factors in the business
- Resale restrictions
Are There Any Concerns Businesses Should Worry About?
Find The Right Investors
Praveen cautions that when businesses raise money, they should still be trying to hand select investors. It’s not easy money – when businesses take money from someone else, they might hear that their fiduciary duty to treat is as well as their own money. He suggests that businesses should go beyond treating the money like it’s their own, they should treat it better than your own. Essentially you’re starting to operate like a small public company. The up side is that your investors will start to promote you and want you to succeed, the down side is that they’ll start to look for dividends and involvement in how the company operates.
When he’s fundraising, he’s often looking for a lead investor. If there’s a well known person that invests, many other investors will follow and trust that it’s a good investment because they’ll know that the lead investor has done their homework on the company so they don’t need to do so much due diligence. This also helps set a share price since something is only worth what someone is willing to pay. If you can find a lead investor, you’ll find out what they are willing to pay and then you have a valuation and some momentum before you do your offer.
On FrontFundr, investors can see who other investors are if they opt in to have their name displayed. If there is already an accredited lead investor who invests outside the $1500 maximum – like for $50K or $100K, then it’s easier to trust that someone has done the due diligence and take a good look at that company.
Since the new crowdfunding rules are different in each province, businesses need to make sure their investors are in the right province. As a business, you need to make sure all your investors fall under the crowdfunding exemptions (Ontario has no exemption yet), so it’s easiest to attract investment from B.C. unless the business wants to understand the difference in each province’s rules.
Attracting investment through crowdfunding can have its drawbacks. Having many small investors has the potential to scare off larger investors. There are several ways to limit the rights of those smaller investors that calm larger investors – for instance, issuing preferred shares with a redemption right, or issuing non-voting shares. However these make the offer less attractive to potential investors.
One issue businesses don’t anticipate is investor involvement. Lindsay encourages businesses to think about the structure for involving investors before any investment offering, as well as costs to maintain that structure. Think about how to structure governance to include investor input efficiently.
On the old crowdfunding platforms, John encourages businesses to pay attention tax issues. If companies trad perks and product/services for money on a crowdfunding platform, they often don’t budget paying the tax in the province where it is shipped. When a $1K cheque comes in, the business often thinks the full amount is theirs. If the product gets shipped to BC, the business needs to submit $12 to the province. If the product gets shipped to the US, it’s more complicated, as state tax, county tax and others may apply.
How Do Businesses Prepare for Equity Crowd Funding?
John commented on the need for having corporate governance in place. Entrepreneurs struggle when they bring in outside investors and then continue to run the company as they used to. He encourages businesses to figure out in advance how they want to structure governance and investor involvement.
Businesses will need to use an online platform for an equity offer. FrontFundr has some of the first offers. But a business can’t just post an offer without preparation. It doesn’t look good to be on a platform and not have any activity. A business should make sure that there will be activity once they have an offer, so they should be working on advertising the offer and building potential investment before their offer is listed. FrontFundr also has a sector lounge, where they suggest businesses put potential offers before they go live to assess interest, potentially help set the price, and allow FrontFundr to complete the due diligence on the project.
- Platforms costs
The FrontFundr platform cost is two-pronged:
- 2% fee for getting a business ready, and helping them get their documentation together.
- 4% fee on all new investment. Fees are not charged when the business brings the investors to the platform themselves. (For reference, fees in the US, UK, and the Netherlands are approximately 5-7.5%.).
- Filing requirements, accounting and legal work. A rough ballpark estimate is $5-10K depending on the type of investment. Costs depend on how much input the business needs from advisors. The more the business does themselves, the more costs can be reduced. All documents should be reviewed by a lawyer but Lindsay encourages businesses to get a law firm involved from the beginning as its better (and cheaper) to set it up properly than to try to fix something that’s not set up properly.
- Summary of the Canadian regulations by province from FrontFundr.
- Tool to identify sources of equity and non-dilutive financing: ca
- BC Securities Commission information on private placements – raising capital in private markets, reporting requirements and forms, and methods/deadlines for filing and info on fees.
- Watch the video of the event below.