Crowdfunding is a 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:
- Donation
- Presale
- Securities (which can include equity)
In a securities crowdfunding campaign, you receive securities of the company in return for your money. Often these securities are shares in the company, but the securities may come in other forms. For instance, 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 Canada, start-ups can rely on the start-up crowdfunding exemption, which allows the company to raise small amounts of money from investors provided that all of the conditions of the exemption are met.
The specifics of the start-up crowdfunding exemption are on the BC 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 that you have read and understood the offering document and acknowledging the risks of investing in a crowdfunding campaign.
How Much Can I Invest through Crowdfunding?
You can invest up to $2,500 per crowdfunding offering. As well, you can invest up to $10,000 in a crowdfunding offering if a registered 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.
You can check whether a portal is registered or relying on the registration exemption on the CSA website. Not all crowdfunding portals are registered or relying on the registration exemption in every province, so check if the portal is allowed to do business in your area.
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, and there is a high chance you may not receive a return or be able to resell your investment. For this reason, always make sure the investment is appropriate for you and that you understand the risks of the investment before deciding to invest. As well, always make sure that you carefully read all documents that you receive related to the investment before you sign the risk acknowledgment form.
- Securities regulators like the BCSC do not review offering documents or financial statements (if any financial statements are provided) 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 another independent third party may be able to help you think through a potential crowdfunding investment.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Contact Centre 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 anonymously using BCSC’s online complaint form.
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