Crowdfunding in Canada - Funding for Your Small Business?
Crowdfunding vs Equity Crowdfunding in Canada
This article summarizes the state of crowdfunding in Canada so you can see if and how crowdfunding in Canada might fit into your funding mix.
“Ordinary” Crowdfunding vs. Equity Crowdfunding
“Ordinary” crowdfunding asks people to contribute funds to support a specific project.
Crowdfunding platforms such as Kickstarter are good examples; one of Kickstarter’s three rules that every crowdfunder must follow is that projects must create something to share with others.
Funders are rewarded for their contributions by perks of some kind, as Indiegogo calls them, things or sometimes experiences. Often different rewards are given to funders who contribute different amounts of money or spaced to mark particular “milestones” during the project.
(To learn more about how ordinary crowdfunding works, see Crowdfunding in Canada: Kickstarter vs. Indiegogo.)
Equity crowdfunding, on the other hand, involves giving funders some type of ownership in the company. Traditionally, a company goes public by creating an IPO (Initial Public Offering) and inviting investors to buy in to the company by offering shares.
Currently, equity crowdfunding is illegal in most of Canada because of existing Canadian Securities Laws which state that private companies can’t sell securities (such as shares) to the general public to raise funds.
The State of Equity Crowdfunding in Canada
In sum; here in one province and coming in others.
Each province and territory have its own Canadian Securities Commission and these regulatory authorities are starting to add equity crowdfunding exemptions to their rules.
As of writing, Saskatchewan is the only province in Canada that has a crowdfunding specific prospectus exemption (as of May 14, 2015).
This exemption waives the registration and prospectus requirements for small businesses and start-ups so that they can raise the funds they need through investment by the public.
There are rules, of course.
To use equity crowdfunding in Saskatchewan:
Both the business and the investor must be located in Saskatchewan.
Businesses can make two, six-month offerings of $150,000 each over the course of a year.
No person may invest more than $1,500 in an offering.
The business cannot be a reporting issuer or an investment fund and cannot offer derivative type securities.
Businesses must give Financial and Consumer Affairs Authority (FCAA) notice of their intention to issue an offering 10 business days before posting online.
The business cannot charge investors a commission or other amounts.
The business must report their sales to FCAA within 30 days of the offering’s close.
There are no fees payable to the FCAA for the offering.
And you can’t just do this yourself; your small business’s pitch needs to be made through a crowdfunding portal site, which will hold the money your small business raises in trust until the minimum amount is raised. (If the minimum fundraising goal isn’t met, all the investors will get their money back.)
Elsewhere in Canada
Ontario, Manitoba, British Columbia, Quebec, New Brunswick and Nova Scotia have similar crowdfunding exemptions on the table.
Ontario plans to have their crowdfunding exemption legalized by summer of 2015. As of writing, their crowdfunding proposal will have businesses able to raise funds through online crowdfunding portals registered with the Ontario Securities Commission (OSC).
Businesses will be able to raise up to $1.5 million during a 12 month period.
Investors will be able to invest up to $2,500 in a single investment and up to $10,000 under the exemption in a calendar year. You can read more of the details in this backgrounder from the OSC.
While the proposed crowdfunding exemptions in other provinces are similar, some have different proposed limits. In BC, for instance, the proposed exemption will allow equity crowdfunding as long as:
• the issuer raises no more than $150,000 per offering and offers no more than twice per year;
• no investor invests more than $1,500 per offering;
• the offering is made on an on-line funding portal;
• the issuer provides a streamlined offering document to investors through the portal.
Read more details on BC’s proposed crowdfunding exemption.
You may also want to read this summary of the progression of equity crowdfunding rules in Canada by Gowlings.
The Bottom Line
Ordinary crowdfunding can be a valuable tool in your fundraising toolbox if yours is a particular type of business. Artists of all types, software developers, or any kind of “maker” business that is looking for funds for a specific project can do well on general crowdfunding platforms.
However, if your business idea doesn’t fit the standard crowdfunding platform m.o. and you’re prepared to give up some ownership in your company, you’ll have to move your business to a province or territory that currently allows equity crowdfunding or wait for it to become legal in the jurisdiction where your business resides.
And a last word to the wise; any business considering selling any portion of ownership to raise funds should consult with a lawyer and/or non-vested financial advisor, both for equity protection and to explore the potential advantages and disadvantages of such a fundraising strategy for your small business.