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Under the new nationally harmonized equity crowdfunding rules, startups can raise up to $1.5-million in a 12-month period, up from $500,000. Each investor can invest $2,500 (up from $1,500) or up to $10,000 if they go through a registered dealer, per company.Drazen_/iStockPhoto / Getty Images

Canada’s new harmonized equity crowdfunding rules are opening up financing options for startups and giving average investors the chance to gain from the potentially explosive growth of the country’s emerging small companies.

Lori Joyce, founder and chief executive officer of Betterwith Foods Inc., launched her equity crowdfunding campaign on FrontFundr Financial Services Inc., a Toronto-based online fundraising platform, at the end of November with the goal of raising at least $250,000.

She wants to use the money to help solidify the position of the Victoria-based no-additive, natural ingredient ice cream maker, and eventually distribute its products nationally.

Equity crowdfunding, and the new expanded rules that came into effect in late September, means “we get to grow with our fans, we get to grow with our customers,” she says.

“We have customers now that can help us and be part of this growth because they’re already investing in us and they’re already buying the products.”

Satisfied customers are also the best marketing tool to help spread the word about the company’s products and raise awareness, she adds.

“FrontFundr literally solves both of these problems that every small business and [consumer packaged goods] maker has.”

Ms. Joyce didn’t go the venture capital or angel investor route for financing. She found most won’t talk to you until you have $1-million in sales, and those investors wanted too much equity off the top. This disincentivizes entrepreneurs who have put everything on the line – their lives, homes, and credit ratings – to build their companies.

She also feels equity crowdfunding levels the playing field and will allow more female entrepreneurs to raise the cash they need to expand and succeed.

“This is going to be a fantastic opportunity for women entrepreneurs to have more control and be able to grow their companies,” she says.

Betterwith Foods, founded in December 2016, now has a strong team in place. “We’ve perfected our product and we now have a national co-packer where we can scale,” she says from her family’s self-sustaining farm in Victoria, where she learned the value of working and living off the land.

Ms. Joyce was supposed to launch her company’s campaign in mid-November but postponed it after the floods in British Columbia devastated so many dairy farmers. Instead, she spent time raising donations to help these farmers recover.

Limits to protect investors

Under the new nationally harmonized equity crowdfunding rules, startups can raise up to $1.5-million in a 12-month period, up from $500,000. Each investor can invest $2,500, up from $1,500, or up to $10,000 if they go through a registered dealer, per company.

Previously, rules were different across the country making it a challenge for small companies to run a national crowdfunding campaign.

“One of the things that we heard from market participants was that it would be a benefit to startup businesses that want to raise capital nationally to have a harmonized regime,” says John Hinze, director of corporate finance at the B.C. Securities Commission, which was the lead regulator on these changes for the Canadian Securities Administrators.

“That was certainly one of the key drivers for us,” he says. “Let’s harmonize the good but multilateral regimes so that we can offer greater access to capital for startup companies and make it national.”

However, the new rules also include limits to protect investors.

“We think that with these increased limits, it definitely gives people a lot more runway ... to raise money,” he says, “in a way that doesn’t expose retail investors to a massive amount of risk because of those investment limits.”

So far, it’s too early to tell how many more companies and investors will take advantage of these changes, Mr. Hinze says.

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Growing ‘digitization’ of private markets

From the perspective of Peter-Paul Van Hoeken, FrontFundr’s founder and CEO, the changes are significant enough and more startups are choosing this path.

There are already a record 21 companies currently running equity crowdfunding campaigns on the funding platform, he says.

The harmonized rules and the higher limits mean it’s easier and less costly for startups to raise capital in Canada. Other equity crowdfunding platforms in Canada include Vested Technology Corp., Equivesto Inc., and others.

“[This is] another indicator of the increasing momentum of the growing digitization of private markets, also known as equity crowdfunding,” Mr. Man Hoeken says. “We are reinventing venture capital.”

FrontFundr has raised about $70-million through 85 equity crowdfunding campaigns since its launch in 2015 and has almost 30,000 registered users.

“Investing in startups is not for privileged investors anymore,” Mr. Van Hoeken says, adding that a retail investor who wants to put $20,000 into private markets could invest $1,000 in 20 different companies and create a diversified portfolio without adding too much risk.

While some companies may not succeed, an investor might get a company that returns $30,000 on a $1,000 investment over time, he notes.

Bridging the gap on raising funds

Nimalan Balachandran, founder and CEO of Toronto-based CloudTax Inc., says he launched his company with the goal of helping Canadians save time and money by preparing their taxes online.

Raising funds on FrontFundr means he can not only raise money from clients but spread the word about CloudTax’s product and let average investors benefit from its growth, which has so far been self-funded.

“This is another way to give retail investors an opportunity to participate and grow their investments,” he says of the company he started in 2014 after helping people file their taxes while also working with the Canada Revenue Agency.

So far, CloudTax has raised about $90,000 of its $250,000 goal. The aim is to raise up to $1-million through the equity crowdfunding campaign and potential angel investors.

CloudTax is also in talks with a large financial institution to integrate the product into its online platform.

Mr. Van Hoeken says equity crowdfunding fills the gap for small companies between when they can raise funds from family and friends to when they grow big enough to approach an angel or venture capital investor.

Other countries, including Britain and the U.S., are further ahead than Canada on equity crowdfunding, allowing it to “go mainstream,” Mr. Van Hoeken says. Now, about 40 per cent of startups in Britain raise capital using equity crowdfunding. “It has really taken off there.”

In Canada, though, “it’s still in its infancy,” and the main challenge will be to educate investors and startups about their new options.

“I always feel like we’re not only building a company, which is already challenging enough, but I feel like we have to build the market,” he says.