The battle of crowdfunding in Canada

There is a fierce battle going on right now in Canada’s high-tech sector, lobbying for the legislative changes in the country’s security laws to enact, so-called crowdfunding” or “crowdsourcing” legislation, which would permit Canadian entrepreneurs to raise up to $1M for their startups in small chunks solicited (often over the Internet) from a fairly large number of individuals.

What is the problem, then?
 The issue is that under the current Canadian securities laws, startups can only raise money by selling equity in their business to so-called “accredited investors,” who are strictly defined and typically include family members, angel investment firms or venture capitalists. Should you wish to raise funds from a broader circle of individual investors, your company needs to go through a process of stock listing on a publicly traded exchange that is normally prohibitive to the startup. More details on that is available in an excellent and succinct six-page document, “General Overview of Canadian Securities Laws Relating to Raising Capital By Early Stage Companies” prepared by FMC Law, members of the CrowdSourcing Advocacy Committee of CATA and available through their office.

The advancements in internet technology, however, make it possible these days to approach and raise the required capital in small amounts from a much broader group of individuals. Why is this approach important? 
It all has to do with risk management and sharing. To illustrate the issue let me quote from my article recently published in The Ottawa Citizen.

“Let’s say I need to raise $0.5M for my startup. I go to you and ask you for the whole sum or just a $100K chunk. Even assuming you have the means, you are going to agonize at length over your decision. However, if I ask you to invest $10-15K, you will spend far less time worrying and be much more predisposed to take the chance. By employing this tactic, an entrepreneur will likely raise her $0.5M because the risk is shared among many investors and each of them does not risk that much.

This is exactly how I raised, some time ago, angels financing for ATMOS Corp. I brought in about 20 private investors, with each contributing between $10K and $25K. The beauty of this approach is that nobody is going to loose sleep and the entrepreneur gets his objective accomplished. In fact, this is the same principle in action that powers the IPOs and syndicated VC rounds albeit in a smaller scale. It works, therefore, use it.”

As is often the case, our American friends are much faster on their feet and have already kick-started the required changes by the U.S. President Obama enacting the Jumpstart Our Business Startups (JOBS) Act
 on April 5, 2012. The act includes provisions to relax rules around online equity crowdfunding and will allow businesses to raise up to $1-million  via online “funding portals”. There is a real risk of Canada falling behind on the legislative side but also, more importantly, of having Canadian startups falling behind their competitors in the US.  Recently, Andrea Johnson, Partner with Fraser Milner Casgrain, summarized nicely the risks of falling behind the U.S. in this video interview with BNN.

Given that, unlike the US, Canada has no federal securities regulator and
 instead, securities are regulated at the provincial  level, we are likely looking at a rather fragmented approach to this problem –  with some provinces taking the lead and others a wait-and-see approach. In a typical fashion, it will likely take about 2 years for Canada to get its act together and catch up. The only bright side and some hope is the energetic lobbying campaign currently underway conducted by  the Canadian Advanced Technology Alliance (CATA) led by John Reid, president and chief executive officer. They deserve our strong support so take action today by writing and talking to your MPP or MP!

In a broader context of supporting and fostering entrepreneurial culture, why do we often
 have to be so reactive and lackadaisical in Canada? We need to create conditions in this country which encourage and make it easy to pursue new, especially knowledge-based, business creation. How about Canada as a startup nation? We already have a reasonably solid R&D infrastructure, we have system incentives, through the SRED mechanism, to encourage innovation. What we do not have are strong financial incentives that support risk- taking and capital raising for early-stage companies. This is not rocket science, a number of attractive measures have been put forward, including the proposed angel financing tax credit or these crowdfunding ideas. We need to lobby our politicians to take action now!
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