What is Crowdfunding?

Traditional Methods of Raising Capital

• Friends & Family• Bank Loans• Angel Investors• Venture Capitalists• Issuance of Debt• Issuance 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 Crowdfunding

1. Donation Method2. Loan Method3. Reward Method4. Pre-Order Method5. Equity Method

Donation Method

• Method of Crowdfunding to support specific causes

• Very common method of crowdfunding• Example: Jamaican Bobsled Team– Needed to raise funds to compete at Sochi

Olympics– Target of $80,000, raised $129,687– No consideration for contribution

Donation Method Portals

Loan Method

• Alternative to bank loans• Peer-to-Peer loans• Loans are facilitated through funding portal

which takes a percentage commission on the loan

Loan Method Portals

Reward Method

• Rewards contributors with items of value• Example: Veronica Mars Movie– Raised over $5 Million

• Rewards 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 Method

• Similar to the Reward Method• Consideration is pre-ordering an item that

does not yet exist• Manufacturers rely on crowdfunding to get a

critical mass to finance production

Pre-Order Method Portals

Equity Method

• Allows companies to sell ownership in start-up corporations through the funding portal

• Consideration is ownership stake in company• Access to millions of equity investors• Creates a faux stock exchange for start-ups

Equity Method Portals

The Canadian Equity Method

• Provides Equity Crowdfunding through the exempt market

• Website only open to exempt investors under NI 45-106

• Collective due diligence process for investors• Funding portal has its’ own diligence requirements• “Company 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 Companies

• Control can be less concentrated, lots of investors

• Crowd of investors can serve as diversified advisors for a start-up

• Low cost of acquiring capital– Only have to pay funding portal commission

• No geographical boundaries

Benefits for Investors

• Risk can be diversified amongst a large group of investors– 10 investors investing $100,000 each; or– 10,000 investors investing $100 each

• Less savvy investors can invest in affordable start-ups

• Far less complex process of investing• Requires no middlemen other than funding

portal

Risks of Crowdfunding

Risks for Companies

• Crowdfunding is not a continuous process– Likely only one influx of cash to support

continuous cash flow needs

• Tax considerations are uncertain for cross-boarder funding

• More investors mean more people to answer to

Risks for Investors

• Risk of fraud– Little accountability for company to deliver once

the funds are acquired• Little to no disclosure requirements– Makes due diligence more difficult– Makes risk harder to calculate

• Crowds don’t always know best• Little liquidity– No resale market

Part Two Regulation of Crowdfunding

Saskatchewan

General Order 42-925 Saskatchewan Equity Crowdfunding Exemption

• Implemented under The Securities Act, 1988 on December 6, 2013

• Provides an exemption for equity crowdfunding from the registration requirements under Section 27 and the prospectus requirements under Section 58

• First Canadian jurisdiction to directly regulate crowdfunding

Saskatchewan Cont.Financial and Consumer Affairs Authority:• “We believe the Saskatchewan Equity Crowdfunding

Exemption will 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 we’ve 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 fund

• The offering cannot exceed $150,000• The 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 year

• The offering cannot last more than six months• An offering document must be provided to

investors through the portal• No 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 Information Form GO45-925F1• Individual Information Form GO45-925F2• Offering Document GO45-925F3• Report of Trades Form GO45-925F4

Saskatchewan Cont.Offering Document GO45-925F3• Contact details for the issuer, promoters, directors, officers, and

control persons• Where to find the articles of incorporation (or similar documents)• Explanation of the business• Previous offerings and use of funds• Management’s business experience• Financial state of the business• Offering size and use of funds• Rights of investors, for example voting rights and dividends• How reports will be made to investors• Type of security and price• Risks specific to the investment

Saskatchewan Cont.Overview of Requirements for Online Funding Portals to be Exempt

from Registration Requirements:• Portals must be independent and can’t provide advice• Portals 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 reached

• Portals must provide issuers with investors details, including contact details

• Portals must ensure that the issuer and investors have an address in Saskatchewan

• Filing requirements: Portal Information Form GO 45-925F5 and Portal Individual Information Form GO45-925F6

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 Question

Are 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 States

• JOBS (Jump Start Our Business Start-Ups) Act signed into law in April 2012

• The Act amends the Securities Act of 1933 introduces an exemption for crowdfunding

• Exemption will come into effect once rules are finalized

• Rules 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 period• Investors 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 $100,000

– 10% 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 exemption

• Companies 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 company’s 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 portal

• Similar requirements and restrictions on the activity of portals as Saskatchewan, with an additional requirement to provide potential investors a channel to discuss offerings

United Kingdom

Prospectus 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: is your investment protected

• “Many crowdfunding opportunities are high risk and complex… the majority of startup businesses fail”

• “Dividends are rare and your investment could be diluted if more shares are issued”

• “We 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”

Ontario

• OSC Staff Consultation Paper 45-710: Considerations for New Capital Raising Prospectus Exemptions released in December 2012

• Sets out their concept for crowdfunding, with the qualification that it is subject to change, and may not be proposed at all

• Proposed 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 Canada

• An 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 issuer’s 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 year

• Issuers must provide an information statement, including risks facing investors and one year’s financial statements

• For 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 limitations– They understand the risk of losing their entire investment

and can absorb the loss– They 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 investment

• Ongoing financial disclosure: Issuer must provide annual financial statements, and keep records on the distributions, the security holders and the use of funds

• Investments 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 Questions• What 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 anti dilution ‐protection, tag along rights and pre emptive rights, be ‐ ‐provided to shareholders?

Discussion Question

Do we want to allow equity crowdfunding?

Discussion Question

Considering 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:Saskatchewan Ontario U.S.

Offering limits Under $150,000 per offering, maximum of twice a year

Under $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 year

Yearly limits vary with investors

Issuer restrictions Unavailable for reporting issuers

Available for reporting issuers

Unavailable for SEC reporting companies

Ongoing disclosure and financial statements

Not required but “suggested”

Annual financial statements

Annual financial statements

Funding portals Exempt if requirements met

Must register Must register, new category

Other Limited detail in the rules

Two day cooling off period

Communication channels

Discussion Question

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

Part Three

Alternative Exemptions, Success Stories, and Personal Experience

Alternative Exemptions

• Crowdfunding Exemptions – Registered Dealers– Accredited Investors– Prospectus Exemption• Saskatchewan (December 2013)• Ontario (Announced for Q1 2014)

Proposed Offering Memorandum Exemption

Canadian Regulation

• Next Steps for Canadian Regulators– Analyze 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 Stories

• Pebble 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 - Mycestro

• Made initial investment of $99 in February 2013

• Estimated delivery date was June 2013• In June 2013, estimated delivery date delayed

to October 2013• Received no updates until December 2014

when delivery date delayed to June 2014• Wait and see…

Kickstarter Accountability

• Kickstarter Accountability– Who 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 Questions

• Have 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?