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Equity Crowdfunding in North America

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Equity Crowdfunding in North America

Since roughly 2009, crowdfunding in North America has grown steadily.  The continent, however, is a large place, with clear discrepancies in regulatory approaches between Canada and the United States.  The result is that these variances have led to U.S. crowdfunding becoming a runaway market, relative to Canada.

What is it?

As the name implies, crowdfunding is a means of raising capital from a large pool of investors/donators, rather than select venture capitalists.

Crowdfunding started off simple enough – give a wider audience the chance to help young companies out of the gate.  However, when first capturing the attention of many, securities laws prohibited issuers from compensating non-accredited investors/participants with equity in their companies; Meaning that participants weren’t really investors at all, but simply contributing to the growth of a company with the promise of potentially getting a product one day.

Fast forward to 2012, and a group of companies surrounding the industry successfully worked with regulatory bodies in the U.S. to amend existing laws.  These efforts eventually resulted in the formation of, what is known as, the ‘Jumpstart Our Businesses Act’ (JOBs Act).

JOBs Act

What the JOBs Act did was open the gates for the general public to gain exposure to true investment opportunities.  Until it was enacted, securities were only able to be sold and distributed to accredited investors.

The goal of this was primarily to help young companies, as one of the largest obstacles a start-up will face is attaining funding (regardless of potential) for the development of their products and services.

Previously, to attain said funding, regulators required that a detailed prospectus be filed and approved for the sale of any asset deemed a security.  This is a cost prohibitive, and time consuming, undertaking – meaning it is most likely not feasible for a small start-up.  While this undertaking may be inconsequential for a company raising millions upon millions of dollars, start-ups looking for modest amounts may find it a steeper hill to climb.

Naturally, this new act came with restrictions.  In an effort to maintain appropriate levels of investor protection, safeguards were put into place.  The following are only a few examples of these:

  • Capital generation events must be moderated by registered broker/dealers
  • Net-worth based investment limits
  • Generation caps on crowdfunding hosts

While this may sound restrictive, what this did was open the doors, ushering in a time where investment opportunities were no longer restricted to those that were already wealthy.

Lagging Behind

That brings us to the United States’ northern counterpart – Canada.  While crowdfunding exists in Canada, the flexibility and freedom for issuers/investors is simply not the same as it is in the U.S – despite being years removed from the advent of modern crowdfunding.

The main issue is the fact that there is no nationwide ‘rulebook’, similar to the JOBs Act, in Canada.  Each of the various provinces and territories may vary slightly in the structuring of their regulations, making it difficult to comply with all at once.

This segregation among Canadian regulators, means that issuers are often limited in their investor pool, as they are not necessarily eligible to host their offering in all regions – somewhat defeating the purpose of crowdfunding to begin with.

However, with the moves taken by the U.S. government over the past decade widely viewed as a success, the Canadian government has indeed taken notice.  It was announced in early 2019 that they would be reviewing their policies; the goal of which is to eliminate the current segregation among regulators, by creating their own variant of the JOBs Act.

With the Supreme Court of Canada opening the door to the potential national securities regulator in 2018, and plans to develop a national crowdfunding rulebook announced in 2019, the great white north looks primed to play catch-up.

Popular Platforms

With all of this talk about crowdfunding, many in the U.S. may be wondering where access to such investment opportunities are offered.  In an effort to answer these questions, securities.io’s very own, Antoine Tardif, recently penned an opinion article discussing his favourite portals offering equity based opportunities.

Top 5 Equity Crowdfunding Websites

For those in Canada interested in equity crowdfunding, the following are a few of the more notable portals active today.

In Other News

Always striving to adapt and improve with the times, the Securities and Exchange Commission (SEC) has recently announced a proposal which would see access to more traditional investment opportunities become even easier for investors.

This proposal is based upon the restructuring of what defines an accredited investor.  With the vast majority of investment opportunities restricted to those fitting the bill, broadening the definition, to reflect the modern world, will ideally democratize investing to an extent.

SEC Proposes Amendment to Criteria Surrounding ‘Accredited Investors’

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Joshua Stoner is a multi-faceted working professional. He has a great interest in the revolutionary 'blockchain' technology. In addition to this, he is a licenced Paramedic in Nova Scotia, Canada. As such, he can provide emergency care/medicine to any situation necessitating it.

Crowdfunding

Mr. Wonderful Aligns Efforts with Equity Crowdfunding Platform ‘StartEngine’

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Mr. Wonderful Aligns Efforts with Equity Crowdfunding Platform 'StartEngine'

Wonderful News

In a piece of positive news, popular crowdfunding platform, StartEngine, has announced the arrival of a new shareholder/investor – Kevin O’Leary (AKA Mr. Wonderful).

Moving forward, Mr. Wonderful will assume the role of strategic advisor for the platform.  In doing so, StartEngine stands to greatly benefit from his vast network of connections, and the public attention that he is afforded.

Raising Capital

Mr. Wonderful notes, in his inaugural address as strategic advisor to StartEngine, that crowdfunding comes with various benefits.  The following are examples of these benefits:

  • Flexibility of terms
    • Participating companies have greater control of their valuation, and share price
  • A potentially greater share of the company can be retained
  • With a greater number of shareholders, each act as ‘brand ambassadors’, providing much greater exposure to company operations.

Equity Crowdfunding

The JOBs Act, which was put into place during the Obama administration, laid the groundwork for Crowdfunding as we know it today.

Not all methods of crowdfunding are the same, however.  In the following article, we take a look at what differentiates equity crowdfunding from investing in stocks, and simple crowdfunding seen through platforms like Kickstarter.

What is Equity Crowdfunding?

Kevin O’Leary

After successfully building and selling his company, SoftKey, for a staggering $4 billion, Kevin O’Leary (aka Mr. Wonderful), rose to fame in the public eye via Dragons Den.  This fame was then solidified through years as a host on spin-off ‘Shark Tank’.

Mr. Wonderful Aligns Efforts with Equity Crowdfunding Platform 'StartEngine'

Kevin O’Leary (Mr. Wonderful)

Whether looking at his experience as an entrepreneur, investor, or TV personality, few have experienced success like Kevin O’Leary.  It is the culmination of these successes that has allowed him to become a prominent force in business.

Mr. Wonderful recently created an informative message, detailing his relationship with StartEngine, and what we can look forward to from the platform moving forward.

Kevin O’Leary has commented specifically on COVID-19 and how it relates to crowdfunding.

“With the coronavirus pandemic causing economic uncertainty, startups and small businesses are having an incredibly hard time accessing capital, so you’re going to see a material increase in interest in crowdfunding companies like StartEngine that are solving that problem…We’re going to look back on this period as the start of the rise of equity crowdfunding, and I think it’s an industry that StartEngine is going to win.”

Speaking with Howard

Upon announcing the development discussed here today, StartEngine CEO, Howard Marks, took the time to share his thoughts.

“We saw huge growth in crowdfunding during the last economic downturn when entrepreneurs needed to find alternative capital sources. We are similarly ready to provide a funding solution now, in what is shaping up to be another challenging period…With the high level of uncertainty, we’ve already seen venture capital and angel funding slow significantly. The opposite is true on StartEngine — we’re seeing tremendous interest from everyday investors in the opportunities on our platform.”

Howard Marks continued,

“Crowdfunding is unique in its ability to find large numbers of shareholders that are aligned with a company’s mission and goals and are not on compressed timetables — a problem that currently plagues the traditional private equity and venture financial services industry”

In our on-going interview series, we have in the past had the pleasure of having a thorough discussion with StartEngine CEO, Howard Marks.  This conversation provides insight into the beginnings of StartEngine, and how they grew into the platform we know today.

Interview Series – Howard Marks, CEO of StartEngine

StartEngine

Founded in 2014, StartEngine maintains operations in Los Angeles, CA.  To date, the company has helped hundreds of companies raise over $135 million in funding.  This funding was made possible through a network consisting of over 235,000 active investors.

CEO, Howard Marks, currently oversees company operations.

StartEngine Makes Inc Top 10 California Companies List

In Other News

Much like the blockchain sector, crowdfunding is young and still experiencing a period of discovery and growth.  In the past we have looked at various platforms which facilitate such methods of capital generation, in addition to operational differences between Canada and the United States.

Equity Crowdfunding in North America

Top 5 Equity Crowdfunding Websites

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Various Proposals Put Forth Amending Prospectus Exemptions

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proposals

As alternative forms of capital generation, such as crowdfunding, continue to grow in popularity, regulators have recognized a need to make amendments in their approaches.

Whether looking back at the SEC’s proposal for a newly defined ‘accredited investor’, or potential ‘safe harbor’ programs, it is obvious that regulatory bodies are not content to sit idly by.

The most recent examples of such proposed amendments have been put forth in varying nations over the past few weeks.

  • United States
  • Canada
  • Latvia

The amendments put forth by each country’s respective regulatory bodies are focused, specifically, on crowdfunding, Reg. A, and Reg. D.

United States – SEC

The SEC has noted and referred to current regulations surrounding prospectus exemptions as ‘patchwork’ and the result of being ‘built over decades’.  They note that this most recent proposal looks to fill in regulatory gaps and restrictions which have arisen over time – making the patchwork seamless.

The most recent proposal, coming on behalf of the Securities and Exchange Commission, saw Chairman Jay Clayton state,

“Emerging companies—from early-stage start-ups seeking seed capital to companies that are on a path to become a public reporting company—use the exempt offering rules to access critical capital needed to create jobs and scale their businesses…The complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth.  These proposals are intended to create a more rational framework that better allows entrepreneurs to access capital while preserving and enhancing important investor protections.”

Proposed Changes

The following are a few key points which, if adhered to, would allow eligibility for a Prospectus Exemption.  The SEC notably includes amendments for multiple means of raising capital – crowdfunding, Reg. A, and Reg. D.

Crowdfunding

  • Increase offering caps to $5 million
  • Updated investor cap criteria to favour non-accredited investors

Reg. A

  • Increase offering caps to $75 million
  • Increase secondary sales cap to $22.5 million

Reg. D

  • Increase offering cap to $10 million

 

Canada – CSA

Securities laws within Canada may be viewed as disjointed, at times.  This is, usually, due to the fact that there is no Federal regulator overseeing pertinent sectors.  Rather, regulations are implemented on a provincial level – which can sometimes lead to inconsistencies through comparison.

The CSA have noted this, and state the following in their 45-110 proposal,

“We have heard from market participants that a harmonized regulatory framework tailored for securities crowdfunding available across Canada would foster the use of securities crowdfunding as an alternative for start-ups and early stage issuers to raise capital…The CSA have proposed the Instrument [45-110] to improve the harmonization of the regulatory framework for securities crowdfunding by start-ups and early stage issuers. Although the Instrument shares key features with the start-up crowdfunding blank.”

Proposed Changes

The following are a few key points which, if adhered to, would allow eligibility for a Prospectus Exemption.

  • $1 million cap on funds raised within 12months of crowdfunding campaign
  • Investors may purchase $2500 each, or $5000 when advised by a broker
  • Investor grace period
    • 48hr period ‘return’ period in which securities purchased can be voided

Latvia – FCMC

When first covering this Latvian development, we spoke with Fintelum’s Managing Director, Liza Aizupiete.  She spoke on how Fintelum and similar companies can now benefit from these changes.

In a bid to help startup and real-estate sectors access better funding options, the present changes to the securities law are making Latvia a more attractive EU member state for capital raising. The present regulatory environment allows Fintelum to serve small and medium-sized enterprises raising up to EUR 3 million, within 36 months, with lower capital markets entry barriers. Investors will be able to invest in fiat or cryptocurrencies and access fractionalized ownership of dividend-yielding projects, open to retail investors. With Fintelum tokenization and compliance tools, fractional owners of securities, or utility tokens, will be able to swap interest in projects using our peer-to-peer secondary market and thus increase liquidity in typically illiquid assets. For example, if you own a part of a company that owns either a real estate or represents a commercial company, you can digitally buy or sell these fractions among existing shareholders, or you can seek new investors interested in the project.”

Proposed Changes

The following are a few key points which, if adhered to, would allow eligibility for a Prospectus Exemption.

  • €1 million cap on
  • €1 million to €5 million elibible for simplified prospectus
  • €3 million cap for a 36mth period

Growth

Whether all of these proposed changes come into effect remains yet to be determined.  What can be said, though, is that it is promising to see regulators growing with their industries.

Stagnant regulation can often lead to stagnant growth.  Notably, each country has chosen to drastically increase capital caps for issuers and investors alike.  This, alongside adept protection measures, does not imply stagnant growth.

Hopefully these potential amendments will foster continued acceptance and access to alternative means of raising capital.

In Other News

On various occasions in past months, we have touched on developments pertaining to crowdfunding and regulation changes.  The following articles are a couple examples of this:

Canadian Securities Administrators (CSA) Address Crypto-Assets within Regulatory Framework

Equity Crowdfunding in North America

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CSA Seeks Input on Proposed National Instrument 45-110

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Proposed National Instrument 45-110

In an attempt to spur innovation in the security token offering (STO) sector, the Canadian Securities Administrators (CSA) released a public request for comment regarding proposed changes to the country’s securities laws – Proposed National Instrument 45-110. The changes would provide companies access to more capital and, raise the maximum investor amount under the exemption. This news showcases the desire of Canadian regulators to embrace crowdfunding moving forward.

Officially, the Proposed National Instrument 45-110 Start-up Crowdfunding changes enhance the Canadian market’s capabilities. These upgrades are designed to bring the market in line with emerging technology. Specifically, blockchain tech such as tokenized securities are more cost-effective and easier for companies to issue. As such, regulators want to upgrade the current legislation to allow more activity and liquidity in the market. Importantly, the changes would have far-reaching effects. The CSA is responsible for regulations in securities markets in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, and Nova Scotia.

Proposed National Instrument 45-110 Upgrades

Under the new Registration and Prospectus Exemptions, start-ups and early-stage issuers can raise up to $1 million each year via crowdfunding campaigns. This is an increase of double over the previous legislation. Additionally, the maximum investment a purchaser can make went up to $2,500. This change represented a $1000 increase over the current regulations. Interestingly, an investor can double that amount to $5000 if they get the approval of a registered dealer.

Intro to Proposed National Instrument 45-110

Intro to Proposed National Instrument 45-110

Importantly, investors would gain a two-day grace period to consider their investment decision. The statement calls this a “two-day contractual right to withdraw from your agreement to purchase the security.” This proposed change is a consumer protection mechanism the CSA would like to see instated to combat investor confusion.  Of course, it’s hard to say how issuers will feel about this add-on. Lastly, the proposed changes require funding portals to annually certify that they have the working capital to continue operations for the next year.

Discussing the proposed changes, Louis Morisset, Chair of the CSA and President and CEO of the Autorité des marchés financiers spoke on the need to “harmonize” the securities crowdfunding sector. He explained how universal standards provide companies with more access to capital. In this way, the thresholds for capital-raising and investing can increase safely.

Proposed National Instrument 45-110 Start-up Crowdfunding Public Input Request

The official input request continues for 90-days in total. Consequently, the comment period expires on May 27, 2020. Importantly, the CSA welcomes the public to comment and ask questions.  Regulators are ready to direct you regarding the proposed changes and how they may affect your business moving forward.

The CSA Seeks to Spur Innovation

You have to hand it to the CSA on their approach to the market. This strategy allows regulators to get a feel for the market and what its participants require to continue the growth of their businesses. This decision falls in line with a recent push by Canadian regulators to remain at the forefront of the digitization of the economy. You can expect to see some adjustments made to the propositions after the CSA examines all the feedback. For now, Canada continues to play a dominant role in the tokenized securities sector.

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