Part Three

What is Crowdfunding?

Traditional Methods of Raising CapitalFriends & FamilyBank LoansAngel InvestorsVenture CapitalistsIssuance of DebtIssuance of Shares

What is Crowdfunding?Crowdfunding is the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations.New method of raising capital

5 Methods of CrowdfundingDonation MethodLoan MethodReward MethodPre-Order MethodEquity Method

Donation MethodMethod of Crowdfunding to support specific causesVery common method of crowdfundingExample: Jamaican Bobsled TeamNeeded to raise funds to compete at Sochi OlympicsTarget of $80,000, raised $129,687No consideration for contribution

Donation Method Portals

Loan MethodAlternative to bank loansPeer-to-Peer loansLoans are facilitated through funding portal which takes a percentage commission on the loan

Loan Method Portals

Reward MethodRewards contributors with items of valueExample: Veronica Mars MovieRaised over $5 MillionRewards for Contributions included:$10 Donation: PDF Copy of Script$25 Donation: T-shirt$200 Donation: Autographed poster$5,000: Free Screening in your hometown$10,000: Speaking Role in the movie

Reward Method Portals

Pre-Order MethodSimilar to the Reward MethodConsideration is pre-ordering an item that does not yet existManufacturers rely on crowdfunding to get a critical mass to finance production

Pre-Order Method Portals

Equity MethodAllows companies to sell ownership in start-up corporations through the funding portalConsideration is ownership stake in companyAccess to millions of equity investorsCreates a faux stock exchange for start-ups

Equity Method Portals

The Canadian Equity MethodProvides Equity Crowdfunding through the exempt marketWebsite only open to exempt investors under NI 45-106Collective due diligence process for investorsFunding portal has its own diligence requirementsCompany offerings presented on the site are considered to be highly speculative and, as such, are suitable only for purchasers who are prepared to risk the loss of their entire investment

Benefits of Crowdfunding

Benefits for CompaniesControl can be less concentrated, lots of investorsCrowd of investors can serve as diversified advisors for a start-upLow cost of acquiring capitalOnly have to pay funding portal commissionNo geographical boundaries

Benefits for InvestorsRisk can be diversified amongst a large group of investors10 investors investing $100,000 each; or10,000 investors investing $100 eachLess savvy investors can invest in affordable start-upsFar less complex process of investingRequires no middlemen other than funding portal

Risks of Crowdfunding

Risks for CompaniesCrowdfunding is not a continuous processLikely only one influx of cash to support continuous cash flow needsTax considerations are uncertain for cross-boarder fundingMore investors mean more people to answer to

Risks for InvestorsRisk of fraudLittle accountability for company to deliver once the funds are acquiredLittle to no disclosure requirementsMakes due diligence more difficultMakes risk harder to calculateCrowds dont always know bestLittle liquidityNo resale market

Part Two Regulation of Crowdfunding

SaskatchewanGeneral Order 42-925 Saskatchewan Equity Crowdfunding ExemptionImplemented under The Securities Act, 1988 on December 6, 2013Provides an exemption for equity crowdfunding from the registration requirements under Section 27 and the prospectus requirements under Section 58First Canadian jurisdiction to directly regulate crowdfunding

Saskatchewan Cont.Financial and Consumer Affairs Authority:We believe theSaskatchewan Equity Crowdfunding Exemptionwill help small businesses and start-ups raise a defined amount of money in an efficient and cost effective way. But we are still protecting investors because weve placed conditions on equity crowdfunding, including limiting the amount of money individuals can risk in a single investment. This should mitigate the risk to individual investors if the business is not successful.Remember, all investments have risk but equity crowdfunding should be considered high risk.

Saskatchewan Cont.Overview of Requirements to be exempt from Prospectus Requirements:The trade and payment must be made through an online funding portal The issuer cannot be a reporting issuer or an investment fundThe offering cannot exceed $150,000The securities offered cannot be derivatives

Saskatchewan Cont.Overview of Requirements to be exempt from Prospectus Requirements (continued):The exemption can only be used twice in each calendar yearThe offering cannot last more than six monthsAn offering document must be provided to investors through the portalNo one can invest more than $1,500 in an offering

Saskatchewan Cont.Resale Restrictions:The first trade in securities traded pursuant to the Order are subject to the provisions of NI 45-102 Resale of Securities as if they were acquired under section 2.5 of NI 45-106 Prospectus and Registration Exemptions

Saskatchewan Cont.Resale Restrictions (continued): NI 45-102, s. 2.5(1) Unless the conditions in subsection (2) are satisfied, a trade that is specified by section 2.3 or other securities legislation to be subject to this section is a distribution. (2) the conditions are: 1. The issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the trade. 2. At least four months have elapsed from thedistribution date.Or, resell the securities pursuant to another exemption

Saskatchewan Cont.Filing Requirements:Issuer InformationFormGO45-925F1Individual InformationFormGO45-925F2Offering DocumentGO45-925F3Report of Trades FormGO45-925F4

Saskatchewan Cont.Offering DocumentGO45-925F3Contact details for the issuer, promoters, directors, officers, and control personsWhere to find the articles of incorporation (or similar documents)Explanation of the businessPrevious offerings and use of fundsManagements business experienceFinancial state of the businessOffering size and use of fundsRights of investors, for example voting rights and dividendsHow reports will be made to investorsType of security and priceRisks specific to the investment

Saskatchewan Cont.Overview of Requirements for Online Funding Portals to be Exempt from Registration Requirements:Portals must be independent and cant provide advicePortals must make available the offering document and the Important Risk Warnings online. Investors must confirm they have read and understood them.Portals an only release funds once the minimum amount to close the offering is reachedPortals must provide issuers with investors details, including contact detailsPortals must ensure that the issuer and investors have an address in SaskatchewanFiling requirements: Portal InformationFormGO 45-925F5 and PortalIndividual InformationFormGO45-925F6

Saskatchewan Cont.Schedule A Important Risk Warnings:I understand that I might not make any money from this investment, I could lose my entire investment, and I will find it very difficult to sell this investment I have read and understood the Offering Document.This investment opportunity has not been approved in any way by the Financial and Consumer Affairs Authority of Saskatchewan, or by anyone else.I understand that I have not received any advice about this investment from this website or the Government of Saskatchewan. If I want guidance, I know that I need to seek professional investment advice.I understand that I do not have as many legal rights when purchasing this investment as I would when investing through a prospectus offering. If I want to know more, I know that I need to seek professional legal advice.I currently reside in Saskatchewan.

Discussion QuestionAre the risk warnings contained in Schedule A of General Order 42-925 along with the offering document sufficient to alert investors to the risks of investing?

United StatesJOBS (Jump Start Our Business Start-Ups) Act signed into law in April 2012The Act amends the Securities Act of 1933 introduces an exemption for crowdfundingExemption will come into effect once rules are finalizedRules were proposed by the Securities and Exchange Commission in October 2013 (585 pages)

United States Cont.Highlights of the JOBS Act Crowdfunding Exemption:The total amount of all offerings under the exemption must be less than $1 million in a 12-month periodInvestors subject to yearly investment limits of$2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,00010% of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. Maximum investment under the exemption of $100,000.

United States Cont.Highlights of the JOBS Act Crowdfunding Exemption (continued):Companies that are SEC reporting companies (those listed on exchanges or companies greater than a certain size) may not use the exemptionCompanies must release an offering document, which must include financial statements. They may be subject to an review or audit requirement depending on the size of the companys offerings.Annual report provided to investors

United States Cont.Highlights of the JOBS Act Crowdfunding Exemption (continued):Offerings must take place through a registered broker or registered funding portalSimilar requirements and restrictions on the activity of portals as Saskatchewan, with an additional requirement to provide potential investors a channel to discuss offerings

United KingdomProspectus exemption:A prospectus is generally not required for offerings of securities if the value of the securities being offered is less than 5 million with less than 150 investors.

United Kingdom Cont.FSA Information Bulletin: Crowdfunding:isyourinvestmentprotectedMany crowdfunding opportunities are high risk and complex the majority of startup businesses failDividends are rare and your investment could be diluted if more shares are issuedWe believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money

OntarioOSC Staff Consultation Paper 45-710: Considerations for New Capital Raising Prospectus Exemptions released in December 2012Sets out their concept for crowdfunding, with the qualification that it is subject to change, and may not be proposed at allProposed rules are expected to come out in the next few months, with an opportunity for comments

Ontario Cont.Overview of OSC Staff Consultation Paper 45-710:Issuers must be incorporated federally or under the corporate statute of a Canadian jurisdiction (e.g. OBCA) and must have a head office in CanadaAn issuer is limited to raising $1.5 million under the exemption over a 12 month period.Advertising of the offering can only take place through a funding portal or on the issuers website. Social media can be used to direct investors there.

Ontario Cont.Overview of OSC Staff Consultation Paper 45-710 (continued):Limits on investors: Can only invest $2,500 in a single investment and $10,000 using the exemption per yearIssuers must provide an information statement, including risks facing investors and one years financial statementsFor offerings where proceeds will be greater than $500,000, or if the issuer is a reporting issuer, the financial statements must be audited

Ontario Cont.Overview of OSC Staff Consultation Paper 45-710 (continued):Information statement must be certified by issuer. Statutory rights for the investor for misrepresentation.Investors must sign a risk acknowledgement confirming:They are within the investment limitationsThey understand the risk of losing their entire investment and can absorb the lossThey understand that they might have trouble selling the securities

Ontario Cont.Overview of OSC Staff Consultation Paper 45-710 (continued):Cooling off period of two days, where they can rescind their investmentOngoing financial disclosure: Issuer must provide annual financial statements, and keep records on the distributions, the security holders and the use of fundsInvestments must be made through a registered funding portal, and the portals will likely have to register

Ontario Cont.OSC Staff Consultation Paper 45-710: Consultation QuestionsWhat would motivate an investor to make an investment through crowdfunding?If we determine that crowdfunding may be appropriate for our market, should we consider introducing it on a trial or limited basis? For example, should we consider introducing it for a particular industry sector, for a limited time period or through a specified portal? Should issuers be required to spend the proceeds raised in Canada?Should rights and protections, such as antidilution protection, tagalong rights and preemptive rights, be provided to shareholders?

Discussion QuestionDo we want to allow equity crowdfunding?

Discussion QuestionConsidering the different approaches or proposals to regulation taken by Saskatchewan, the United States, the United Kingdom and Ontario, which do you think is preferable?

Some key differences between the regimes:

SaskatchewanOntarioU.S.Offering limitsUnder $150,000 per offering, maximum of twice a yearUnder $1.5 million a year (total offerings)Under $1 million a year (total offerings)Investment limits$1,500 per offering$2,500 per offering and $10,000 a yearYearly limits vary with investorsIssuer restrictionsUnavailable for reporting issuersAvailable for reporting issuersUnavailable for SEC reporting companiesOngoing disclosure and financial statementsNot required but suggestedAnnual financial statementsAnnual financial statementsFunding portalsExempt if requirements metMust registerMust register, new categoryOtherLimited detail in the rulesTwo day cooling off periodCommunication channels

Discussion QuestionWould you regulate equity crowdfunding differently, and if so, what would be your approach?

Part ThreeAlternative Exemptions, Success Stories, and Personal Experience

Alternative ExemptionsCrowdfunding Exemptions Registered DealersAccredited InvestorsProspectus ExemptionSaskatchewan (December 2013)Ontario (Announced for Q1 2014)

Proposed Offering Memorandum Exemption

Canadian RegulationNext Steps for Canadian RegulatorsAnalyze the results of foreign (U.K/ U.S./Australian) and domestic (Saskatchewan) legislative reforms Revise the draft legislation (including framework for portal registration)Allow for public comment Implement legislation monitor portals/ effectiveness of legislation

Success StoriesPebble Watch ($10.2 Million)Righteous Salad Dressing ($140,000 for 15%)3Doodler ($2.35 Million)Veronica Mars Movie ($5.7 Million)

Pebble Watch

Righteous Salad Dressing

3Doodler

Veronica Mars Movie

Personal Experience - Mycestro

Personal Experience - MycestroMade initial investment of $99 in February 2013Estimated delivery date was June 2013In June 2013, estimated delivery date delayed to October 2013Received no updates until December 2014 when delivery date delayed to June 2014Wait and see

Kickstarter AccountabilityKickstarter AccountabilityWho is responsible for completing a project as promised?Fraudulent Creators?Are creators legally bound to fulfill promise of their project?Can I get my money back?

Discussion QuestionsHave you ever been involved in crowdfunding a project?Would you invest in start-ups using a crowdfunding exemption? Why or why not? Pros? Cons?What, if any, protections would you need to see in place before you invested?