For instance, if you contribute $25 to the Ever Lovin' Jug Band's campaign, you'll get a copy of their debut album on vinyl.
Or pledge $115 to get a Pebble smart watch before it hits store shelves.
While Canadian entrepreneurs are free to offer many different types of these rewards to supporters, there's one thing they can't offer: equity.
In other words, you can use a crowdfunding site to pre-sell a watch, or promise a limited edition T-shirt, but you can't sell a stake in your company.
On April 5, U.S. President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. The act includes provisions to relax rules around online equity crowdfunding. Specifically, the law will allow businesses to raise up to $1-million (U.S.) via online “funding portals.” Personal investments in crowdfunded ventures will be capped based on an individual’s annual income or net worth.
In Canada, though, if you were to use a crowdfunding site to offer shares in your company, “you would be breaking the law,” says John Reid, president and chief executive officer of the Canadian Advanced Technology Alliance (CATAAlliance).
Mr. Reid worries that, without similar Canadian legislation, entrepreneurs will route their business through U.S. companies and services. “It's not a good sign,” he says. “We're out of step with the U.S. and have not reacted in real time. This is a signal that our public policies are out of step with the realities of the globally interdependent world.”
Crowdfunding fragmentation possible
So if equity crowdfunding becomes legal in the United States but not in Canada, what does that mean for Canadian entrepreneurs who use U.S.-based crowdfunding platforms?
“The short answer is, we don't know how the rules are going to play out,” says Indiegogo chief executive officer Slava Rubin.
The U.S. Securities and Exchange Commission is currently working through a 270-day review period for the JOBS Act, deciding exactly what the rules will look like before the law is implemented.
For Canadian entrepreneurs, this U.S. law could make choosing a crowdfunding platform even more difficult.
New equity-focused crowdfunding platforms will open for business and established players may also decide to offer equity crowdfunding. The crowdfunding space will become even more crowded and, while some services will be available to Canadians, like reward or pre-sales crowdfunding,, others, like equity crowdfunding, will not.
Mainstream equity crowdfunding could also introduce fragmentation, geographically limiting where capital can be raised. When you're pre-selling Pebble smart watches, orders can come from anywhere in the world. But when you offer shares of your business, investment rules vary from territory to territory, geographically restricting who can support you.
Says CATAAlliance's John Reid: “There will be fragmentation, and there will be different rules and opportunities depending on the country where you source capital.”
If Canada should one day decide to adopt U.S.-style crowdfunding legislation, Canadian entrepreneurs will have to make tough tactical decisions: Should they raise capital by pre-selling products or by offering partial ownership of their business?
Canadian crowdfunding legislation?
So when can entrepreneurs expect to see Canadian crowdfunding legislation? Unlike the United States, Canada has no federal securities regulator. Securities are regulated at the provincial and territorial level, and Canada's 13 regulators co-ordinate their efforts through the Canadian Securities Administrators (CSA).
When it comes to equity crowdfunding, the CSA says it will take a wait-and-see approach.
Crowdfunding would be “a pretty big leap, I think, for us to take, but we would be interested in seeing where it goes,” CSA chairman Bill Rice said in an interview with the Globe.
“I think that's a total cop-out,” Mr. Reid says. “We should have the right to invest small amounts of equity in those startup businesses which we believe in or want to support.”
Mr. Reid is hopeful that one of the provincial or territorial securities regulators will introduce new crowdfunding rules that mirror the U.S. JOBS Act.
If one province embraces crowdfunding, he says, “the other provinces will be incented to follow suit because they will not want to be seen as a less attractive environment for startups.”
Special to The Globe and Mail
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