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Three types of crowdfunding
Crowdfunding is a way for start-ups or early stage businesses to raise amounts of money from a large number of people, typically through the internet. Examples of different crowdfunding models include:
- Donation-based crowdfunding is strictly charitable, allowing people to give money to fundraise for a cause or assist someone in need with no expectation of receiving anything in return.
- Reward-based crowdfunding sees individuals or organizations providing rewards in exchange for people contributing to their projects. These projects can range from creating a new type of kitchen gadget to publishing a cookbook, and successfully-funded campaigns may provide backers with exclusive products, such as an early edition of the gadget or a first-run copy of the book.
- Equity crowdfunding allows people to invest in a business. In return for their money, investors are given a small stake in the company.
About equity crowdfunding
Equity crowdfunding is where a new business or start-up raises money by selling many small stakes, usually in the form of shares, to a large number of investors. Instead of making a donation or funding a specific project in exchange for a reward, you’re investing in a business and essentially becoming one of its owners.
Equity crowdfunding is an option available to everyday (retail) investors in Ontario as of January 25, 2016.
Warning
Participating as an investor in equity crowdfunding is extremely risky but it can also be a way to support innovation and become part of a community of entrepreneurs.
Rules, regulations and limited protections
A new prospectus exemption in Ontario allows equity crowdfunding. Where investors buy stakes in businesses through equity crowdfunding, the businesses are raising money using a prospectus exemption. Since the businesses are using a prospectus exemption, there are fewer requirements imposed upon the businesses offering these investment opportunities – and with that comes less protections offered to investors. But some rules and restrictions are in place:
Registered funding portals only
These transactions are conducted over the internet through a funding portal. A funding portal must be registered with the Ontario Securities Commission if it is operating in Ontario or if it is selling to investors in Ontario. You can confirm this by contacting the Ontario Securities Commission or by going to CheckBeforeYouInvest.ca.
Funding portals have duties to perform, including:
- Conducting background checks on the companies and their executive officers.
- Collecting an offering document from the companies and ensuring that information is available to people before they invest. This document includes information about who controls and runs the company, what the company does, why it is raising money, how much money it needs to raise, and how it plans to use the money raised. This is not as detailed as a prospectus would be.
- Notifying you of any changes to the offering document, if you had previously purchased under the original offering document.
- Providing you with a Risk Acknowledgement Form that lists the principal risks associated with equity crowdfunding. You must complete this form and confirm you understand the information in the crowdfunding offering document before you are allowed to make an investment.
Crowdfunding offering documents vs. prospectuses
A prospectus is a comprehensive disclosure document that sets out detailed information about the company and its business and describes the securities being issued and the risks associated with purchasing those securities.
A crowdfunding offering document includes information about who controls and runs the company, what the company does, why it is raising money, how much money it needs to raise and how it plans to use the money raised. This is not as detailed as a prospectus would be, but it does provide investors with information in order to make an investment decision.
Crowdfunding issuer obligations in Ontario
- Businesses that raise money through crowdfunding are called crowdfunding issuers
- After someone has invested in a crowdfunding issuer, the crowdfunding issuer must make available certain information to investors, including:
- annual financial statements and an annual notice detailing how the money raised has been spent
- notice of specified key events, such as changes in control of the business
Investor protections
- Everyday investors in Ontario can only invest up to $2,500 per investment and cannot invest more than $10,000 in total per year
- Investors with high net worth and income are able to invest more because they have certain characteristics, such as the ability to withstand financial loss and have the financial resources to obtain expert advice
- If you change your mind after you invest, you have 48 hours to cancel the deal, starting from the date you agree to make the investment
These limits are in place because of the high risk nature of equity crowdfunding, but they won’t protect you from all risks associated with equity crowdfunding. So before you consider any equity crowdfunding offering, know and understand the risks.
Key point
With equity crowdfunding, the goal is to raise money by selling stakes in a business to investors, usually in the form of shares.
Warning
Participating as an investor in equity crowdfunding is extremely risky but it can also be a way to support innovation and become part of a community of entrepreneurs.