Crowdfunding is a form of financing a company. Start-ups can use crowdfunding to raise money for operations, expansion, and more.
Start-up or early-stage businesses can raise money for their operations by selling securities (such as bonds and common shares) to investors through a start-up crowdfunding campaign. If you contribute, you are an investor and hope to earn interest or participate in future profits of that business.
Can Anyone Invest in a Start-Up Crowdfunding Campaign?
Yes, anyone can invest in a start-up crowdfunding campaign. Canadian securities regulators have adopted a number of exemptions to allow companies to sell securities to investors through crowdfunding. It is up to you to protect your own interests by knowing what exemption the company is using to sell you its securities.
How Much Can You Invest?
The maximum a business can raise from each investor is $2,500.
In certain circumstances, investors can invest up to $10,000 if a registered dealer has determined that the investment is suitable for that investor.
Where Can You Find Start-Up Crowdfunding Offers?
In order to raise money through start-up crowdfunding, a company must first complete an offering document outlining its idea and make it available online through a funding portal. There are two types of funding portals:
- Funding portals that are relying on an exemption from the dealer registration exemption must not provide you with advice about your investment. In this case, you will have to assess the suitability of the investment on your own.
- Funding portals that are operated by registered dealers are obligated to determine if the investment is suitable for your situation.
What Risks do These Types of Offers Have?
Pay close attention to the risk warnings. Before you invest, the funding portal will ask you to confirm that you have read and understood the risk warnings and the offering document. These investments are risky and you could lose your entire investment.
Can You Sell it Easily?
Likely no. In many cases, you will have to hold your investment indefinitely.
What are the Expected Types of Returns?
Returns are always uncertain and depend on many factors beyond the company’s and your control. The majority of start-up and early-stage companies never go public. If the company you invest in never goes public, then you may never be able to sell your shares. That’s what makes it so risky and why you should only invest in a private company using crowdfunding if you can afford to lose your whole investment.
For more detailed information, review the Start-up Crowdfunding FAQs on the Canadian Securities Administrators’ (CSA) website.