Crowdfunding is form of financing a company. Start-ups and early-stage businesses can use crowdfunding to raise money for operations, expansion, or other business reasons.
Investors can invest in companies for relatively small amounts of money, and companies can access wider pools of investors with a crowdfunding campaign.
There are different forms of crowdfunding, including:
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.
Presale and donation crowdfunding do not generally involve securities transactions, so we don’t discuss them in this article.
The Start-up Crowdfunding Exemption
In certain Canadian provinces, start-ups may be able to rely on the start-up crowdfunding exemption. This exemption allows investors to purchase securities from 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.
The specifics of the start-up crowdfunding exemption are on the British Columbia Securities Commission (BCSC) website.
How Can I Invest in a Start-up Crowdfunding Campaign?
To crowdfund, a company must provide an offering document outlining its business and plans for the proceeds of the campaign. This document is available through the funding portal hosting the offering.
Once you’ve read the offering document, you can take part in the crowdfunding campaign on the funding portal. You will need to complete some paperwork confirming your province of residence, and you will also need to acknowledge the risks of investing in a crowdfunding campaign.
How Much Can I Invest through Crowdfunding?
B.C. investors can invest up to $1,500 per crowdfunding offering.
In some cases, you may be able to invest up to $5,000 provided certain requirements are met, which include:
- You live in B.C. or Alberta
- The business’ head office is in B.C. or Alberta
- The start-up crowdfunding distribution is made through a registered dealer
- The dealer has determined the investment is suitable for you
What is a Funding Portal?
Funding portals facilitate crowdfunding campaigns. In Canada, equity crowdfunding must go through a funding portal.
There are two types of funding portals: registered dealers and portals that rely on exemptions from the dealer registration requirement. When you go to a funding portal website, you will see a notification that tells you if the portal is a registered dealer or not registered under securities legislation.
Portals that are registered dealers are obligated to determine if the crowdfunding investment is suitable for the investor.
Portals that rely on the registration exemption cannot provide advice about the investment. The investor must determine if the investment is suitable for them.
Not all crowdfunding portals are registered in every province, so check if the portal is allowed to do business in your area. The BCSC website has a list of crowdfunding portals permitted to operate in B.C.
The Risks of Start-up Crowdfunding
Crowdfunding offerings have risks, especially if start-up companies are raising money.
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 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.
Compared to publicly traded companies, there may be less information available to make a decision about investing in a start-up. Private companies do not have obligations to provide investors with regular updates, such as annual reports and financial statements.
Shares you buy from a crowdfunding campaign may be hard to sell. This is common with most private company securities. You may have to hold on to the investment indefinitely or wait for the company to become a reporting issuer, such as by filing a prospectus and obtaining a receipt for it from the BCSC, before you can sell.
A registered investment advisor, accountant, lawyer, or other independent third-party may be able to help you think through a potential crowdfunding investment.
More Information about Start-up Crowdfunding
The British Columbia Securities Commission and BCSC InvestRight have resources to help investors learn more about start-up crowdfunding.
- Start-up Crowdfunding Guide for Investors
- Types of Crowdfunding infographic
- Private Placement Market Guide
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymous using BCSC’s online complaint form.
In October 2013, BC Securities Commission panels released three enforcement decisions and two settlements. The Mutual Fund Dealers Association (MFDA) issued two reasons for decisions relating to BC residents. The Investment Industry Regulatory Organization of Canada released no decisions in October 2013 relating to BC residents. You can find a summary of the cases below. […]
BCSC staff ambassadors tour the province, helping people to protect themselves from fraud and unsuitable investments. Our goal is to enable BC investors to develop critical thinking skills so they can become more informed of steps they should take to protect themselves when investing. Where we are this month Coquitlam Be Fraud Aware […]