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Jason Best, Zak Cassady-Dorion and Sherwood Neiss created a regulatory framework that balanced the needs of entrepreneurs and investor protection in order to make CrowdFund Investing legal in the United States.

As Canadian regulators grapple with the legal issues around crowdfunding, they have the luxury of knowing the two sticking points that held up U.S. legislation: investment limits and financial disclosure.

Before President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act in April, "unaccredited investors," or regular folks without much money, were barred from investing in any startup's fundraising campaign. There was too much risk of being lured in to a scam.

But because the venture capital market for early stage startups dried up so dramatically in the aftermath of the financial crisis, Jason Best, Zak Cassady-Dorion and Sherwood Neiss – three entrepreneuers who had collective raised $87-million (U.S.) – decided to convince Congress that something needed to be done. They helped get the U.S. government to change its mind, but it wasn't easy. When they showed up in Washington, D.C., in February, 2011, "no one knew what crowdfunding was," Mr. Neiss said in an interview.

In a nutshell, the word essentially refers to online campaigns that raise awareness about a specific project or business and solicit funds from individual investors, made popular by such sites as Kickstarter and Indiegogo. Crowdfunding will be a particularly hot topic as of Monday with the launch of Global Entrerpreneurship Week. Around the world, there are planned discussions about the importance of small business and conversations on how to help them thrive. The topic of crowdfunding has gained so much interest, the White House will host an event on the topic on Thursday, led by Mr. Neiss and his partners.

In Canada, provincial securities commissions are still debating whether crowdfunding that enables investors to take an equity stake in a small business should be permitted. Concerns have been cited by informed market watchers such as Columbia Law School Professor John Coffee, who called the JOBS Act "The Boiler Room Legalization Act of 2011" because of the potential for fraud. New Brunswick premier David Alward has asked for a crowdfunding study and the Ontario Securities Commission is debating whether to expand the number of investing exemptions that protect investors. The British Columbia Securities Commission is also circling the topic and wants to dig deeper.

While they weigh the benefits and drawbacks, crowdfunding is exploding. In 2011, more than 450 crowdfunding platforms raised $1.5-billion around the world, according to research firm Massolution, and projections for 2012 are leaps and bounds beyond that.

Mr. Best, Mr. Cassady-Dorion and Mr. Neiss won their country over by being earnest. Instead of representing a lobby group, they spoke about people like themselves who needed more capital, and they agreed with the doubters that mom-and-pop investors needed to be protected, especially considering that so many startups ultimately fail. After educating U.S. lawmakers on crowdfunding, Mr. Neiss said they then took a hands-on approach to develop safeguards that protect the average investor.

In terms of disclosure, they came up with requirements that included filing a reputable business plan, a thorough explanation of the use of proceeds, a detailed company valuation, and a set of audited financials for those looking to raise more than $500,000. Each of these elements would then be vetted by websites – registered with the Securities and Exchange Commission (SEC) – that are permitted to solicit crowdfunds.

Strict limits were also put in place. Under the new legislation, anyone who makes under $40,000 a year can invest a maximum of $2,000; anyone who makes between $40,000 and $100,000 can invest a maximum of 5 per cent of their income; anyone who makes more than $100,000 can invest up to 10 per cent of their income, up to an annual limit of $100,000.

Mr. Neiss said all of these requirements are more stringent than those imposed on big companies that raise tens of millions of dollars in private placements to accredited investors, raising the bar for startups, which would need to put together business plans and financial statements should they succeed anyway.

Since the bill was passed, Congress gave the SEC 270 days to come up with a framework to implement the new law. That deadline expires on Dec. 31.

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