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Strength in numbers

By Brenda Bouw | August 19, 2016

Entrepreneurs have more options than ever when it comes to raising money for their startups, thanks to a growing number of new and improved technologies. This landscape includes financial technology, or fintech, companies that are harnessing mobile and other Web-based platforms to change the way people save, borrow, invest and gather capital. A prime example is the rise of crowdfunding, whereby startups raise smaller sums from a larger group, usually online.

There are two main types of crowdfunding: rewards-based platforms like Kickstarter, which let users donate cash to help launch a product or to prepay for it; and equity crowdfunding, where investors purchase a stake in the company and, ideally, share in its financial success.

Equity crowdfunding is gaining momentum in Canada, thanks to recent regulatory changes in certain provinces that allow startups to raise money directly from everyday Canadians as well as individuals and organizations deemed to be accredited.

Equity crowdfunding is expected to fill a much-needed funding gap for early-stage companies, and it could play an important role in encouraging Canadian innovation.

“In Canada there is a lack of angel investors to serve those companies’ needs – to get that early-stage capital to really grow and prove their concept,” says Sean Burke, Chief Operating Officer of FrontFundr, a Vancouver-based equity crowdfunding platform that as of this spring had raised about $500,000 for businesses including mobile gifting platform Guusto Gifts Inc. and online global payment network RentMoola Payment Solutions Inc. Crowdfunding gives companies like these an additional opportunity to access a broader pool of investors, Burke notes.

Equity crowdfunding connects investors of all sizes

It’s not just the little guys who are taking advantage of equity crowdfunding’s new life in Canada.

“FrontFundr has designed a platform that brings in angel and venture capital investors to lead a financing round,” Burke says. “Now we have the crowd, or retail investor, participating alongside venture capitalists and getting the same terms on the deal.”

That gives the entrepreneurs, and the retail investors, more exposure to bigger players with the clout to take the startup to the next stage. “I think equity crowdfunding has the potential to play a significant role, primarily in the earlier-stage companies, but also later as those companies mature and look to take on a new pool of investors or a new pool of brand champions,” Burke says. “That’s also where there is an opportunity for different companies to utilize this new fundraising mechanism.”

Regulatory scrutiny key for equity crowdfunding success

Before new equity crowdfunding regulations were put in place in parts of Canada, only family and friends of startup founders and accredited investors such as institutions and high-net-worth individuals would typically invest in these early-stage ventures. Equity crowdfunding opens the door for retail investors to get in on the ground floor of a startup, but with strict guidelines for them, the companies and platforms like FrontFundr.

For example, in Manitoba, New Brunswick, Nova Scotia, Ontario and Quebec, companies can raise up to $1.5-million annually. In each of those provinces, there’s a $2,500 ceiling per deal for individual investors. Ontario also has an annual cap of $10,000 per year for all equity crowdfunding deals. In B.C., which has separate regulations from Ontario and some other provinces, companies can only raise $250,000 per offering twice a year, and investors are limited to a maximum of $1,500 per deal.

Crowdfunding websites must also register with securities commissions in every province where they operate and comply with reporting rules.

FrontFundr welcomes this level of scrutiny because it will help to sustain the equity crowdfunding model. “One of the great things about equity crowdfunding is that it is highly regulated,” Burke says. Although the regulations are complex, “it shows that the securities regulators are fully supportive of this new form of raising capital,” he adds. “By putting these rules in place, we can ensure that there is a robust system to protect the investors, while at the same time helping young companies grow and succeed through early-stage financing.”

Burke says there are several safeguards and mechanisms on the FrontFundr platform to protect investors. “There is a difference between what they call a funding portal and a registered dealer funding portal,” he explains. “FrontFundr is a registered dealer funding portal. Part of our due diligence is to make sure that we review each of the companies that list on our platform and make sure that they pass a certain level of due diligence screening that we take quite seriously.”

However, investors must do their own due diligence too. FrontFundr also performs a suitability analysis to ensure that a particular investment aligns with an investor’s goals and objectives, Burke says. “That helps to protect the investors, making sure that they have a diversified portfolio and they understand the risks and rewards that are associated when investing in early-stage private companies.”

Related videos:

Fintech: Consumer expectations drive changes in banking

Equity crowdfunding: Bridging the early-stage funding gap

Reward-based vs. Equity-based

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