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What is Equity Crowdfunding?

Stockhouse Editorial
0 Comments| April 29, 2019


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Equity Crowdfunding is just starting to take off in Canada, giving investors and companies a new way to access capital. This Stockhouse tutorial outlines the major types of crowdfunding operating in Canada and how they work.
 
 
The Three Types of Crowdfunding
 
Crowdfunding is a relatively new method for start-ups or early-stage businesses to raise amounts of money from a large number of people, typically through an internet portal. Examples of different crowdfunding models include:
 
  1. Donation-based Crowdfunding. Strictly charitable, it allows people to give money to fundraise for a cause or assist someone or some entity in need with no expectation of receiving anything in return.

  1. Reward-based Crowdfunding. Provides individuals or organizations ‘rewards’ in exchange for people contributing to their projects. These projects may range from creating a new type of automotive gadget to publishing a comic book. Successfully-funded campaigns may provide backers with exclusive products, such as a first-edition of the gadget or a first-run copy of the book.

  1. And…Equity Crowdfunding. Allows people to invest in a business. In return for their money, investors are given a small stake in the company.
 
In general, crowdfunding is the aggregation of small amounts of capital from a group of people, usually completed through the internet, in order to fund a business, project or organization. Crowdfunding allows small businesses and entrepreneurs to tap into a large pool of capital without having to navigate through the gatekeepers of traditional funding. In an equity campaign, you receive securities of the company in return for your money. Often these securities are shares in the company but, in some cases, you loan money to the company in the form of a bond or debenture.
 
 
Key Differences Between Non-Equity Crowdfunding and Investment Crowdfunding
 
Non-Equity Crowdfunding
 
  • Funders do not become shareholders
  • Funders can not make a financial return
  • Unregulated
 
Equity Crowdfunding
 
  • Funders can become shareholders
  • Funders can make a Financial return
  • Highly regulated
 
 
Regulation
 
On May 14, 2015, the securities regulatory authorities of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick, and Nova Scotia announced that they were adopting substantially harmonized registration and prospectus exemptions (the start-up crowdfunding exemptions) to allow start-up and early-stage companies in these jurisdictions to raise up to $500,000 per calendar year through online funding portals. These exemptions will be in effect until May 13, 2020.
 
 
The Start-up Crowdfunding Exemption
 
In certain Canadian provinces, start-ups may be able to rely upon the start-up crowdfunding exemption. This exemption allows investors to purchase securities from various companies in crowdfunding campaigns.
 
Investors looking to invest in a start-up crowdfunding campaign must live in a province that allows companies to raise money using the start-up crowdfunding exemption. The exemption is available in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick, and Nova Scotia. In certain circumstances, a B.C.-based start-up company may also be able to raise money from an Alberta investor, or a B.C. investor may invest in an Alberta company using the start-up crowdfunding exemption.
 
It’s important to note that investing in young companies through equity crowdfunding is a risky proposition, but it can also be a way to support business innovation and become part of a community of entrepreneurs.
 
 
Risks Incurred
 
A high percentage of small businesses and new companies fail. You could lose your entire investment. For this reason, always make sure the investment is suitable for you before deciding to invest and always make sure that you carefully read all documents that you receive related to the investment before you sign the risk acknowledgement form.
 
Securities regulators like the British Columbia Securities Commission (BCSC) do not review offering documents or financial statements ahead of a crowdfunding campaign. The investor is responsible for verifying information in any report or document the company publishes.
 
A registered investment advisor, accountant, lawyer, or other independent third-party may be able to help you deliberate through a potential equity crowdfunding investment.



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