NCFA Canada | Craig Asano | June 8, 2015

On June 1, 2015, Neil Gross, Executive Director of Canadian Foundation for Advancement of Investor Rights (FAIR Canada) contributed an article to the Globe and Mail that highlighted a series of risks to the reader community, specifically:  1. Extreme Failure Rate, 2. Fraud, 3. No Accountability, 4. Illiquidity, and 5. Dilution. (see original post which appeared both online and in print:  Crowdfunding has its place, but it's a crazy way to invest.

A few thoughts in response:

Below are a few responses from the crowdfunding industry and community which intends to provide readers with a more holistic view of both the opportunities and risks inherent with investing in crowdfunding markets:

Equity Crowdfunding: Good and Necessary

Neil Gross’ article in the June 1 edition of the ROB (“Crowdfunding has a place, but it’s a crazy way to invest.”) is grounded in a fundamental misunderstanding of risk in business and in the investing world.

Mr. Gross contends that start-up businesses are intrinsically high risk and that equity crowdfunding actually increases the risk of investors in those types of firms.

Are Start-ups really riskier today?

Today’s business world has become intrinsically riskier up and down the spectrum of companies, from the largest to the smallest, as disruptive technologies attack established business models in the supposedly safest industries. Look what’s going on in banking. The CEO of RBC sounded the alarm several months ago when he commented that the banks were on a ‘collision course’ with the likes of Facebook and Google.

And, that’s just the tip of the iceberg as many specific banking business lines from foreign exchange to mobile payments come up for grabs by new upstart competitors unburdened by legacy branch networks and haphazardly-stapled together technology systems.

On the same ROB page was an article on P2P lending whose author called the development, “A game-changer – if we don’t hinder innovation.” Crowdfunding too can be a game-changer unless, as too often happens in the financial sector, this innovation is stifled by super-regulation.

The iron reality is that no firm of any size is safe today. Just ask Encyclopedia Britannica.

Does Crowdfunding Increase Investor Risk?

Just the reverse. Crowdfunding can decrease the risk for investors as a whole. A company that fails to excite potential investors and that fails to attract a crowd of those investors is likely going to fail in the marketplace.

Crowdfunding may simply lead to poorly-conceived firms with weak business plans getting frozen from accessing capital sooner, rather than later. So, crowdfunding may result in more efficient capital markets in Canada than we have today.

The Role of Retail Investors

An episodic debate in Canada has been around varying views over the role of retail investors in funding early-stage companies.

Mr. Gross’ article clearly lands on the side of those who distrust retail investors to look after their own interests – unless accompanied by huge dollops of regulation and professional advice.

It’s important to recognize that the regulators aren’t going away and have set strict limits on the exposure of individual investors to individual firms.

It’s also worth recalling that the advice channel has not been immune from fraudsters like Bernie Madoff. Under the present crowdfunding rules, it’s hard to imagine any repeat of the multiple billions that were siphoned off by Mr. Madoff…and, sadly, he hasn’t been the only one of his ilk, only the most egregious example.

This takes us back to risk. There is risk in every path to investing.

By Richard Remillard, President, Remillard Consulting Group, and NCFA Board member

Other posts by Richard:

A fearless forecast for 2015

Canada needs a financial innovation institute

Via email:  Equity Crowdfunding is Creating a New Playing Field

What I am confused about in this article is whether he is talking specifically about startups funding in general or crowdfunding?

Looking at the dot-com bubble bursting or past on-line IPOs that had a big downturn prior to some recovering, I sense this piece was written in haste without much research on relative investment options.

Each of his main categories, Extreme Failure Rate, Fraud, No Accountability, Illiquidity and Dilution can be attributed to angel investing and even seed rounds where the startup is being highly sought after. Realistically, the mandatory reporting of investment status is the only difference and as with any industry, expectations will dictate some information transfer. Eventually it may even become a way of weeding out riskier options if they are not very transparent.

Equity crowdfunding is creating a new playing field where people who have already been involved in the rewards/charity funding side of things can now take the risk with the longer-term reward for a company's success. If an investor does not do their due diligence and research the company, competition, industry and customer base, there is no difference in putting money in a risky stock market pick vs. equity crowdfunding.

The startups are still going to have to work  as hard to convince people to invest in the their company because they will be in it for the long-term success, not short-term rewards. All of the elements of the pitch deck, understanding the investors and showing your roadmap for success will still be there. What will happen is a number of angel investors will be able to expand their portfolios with smaller investments. Partners in Venture Capital firms can put a stake early on with less invested and less to lose.

If anything, I expect this to be a new stage of the investment process where the startup has no existing customers, run rate, prospect funnel or even a minimal viable product (MVP) to showcase. Concurrently or prior to bootstrapping they will have the ability to pilot the MVP, gauge market interest, market for recruiting talent and even pivot along the way depending on market traction with less investment early on.

By Shahab Khan, NCFA Ambassador

LinkedIN Post: here

IT Business Article - contributor:  here

Via Email:  Equity crowdfunding is working in several international jurisdictions

Interestingly FAIR has proposed practical "solutions":  here

Via email:  Crowdfunding is not just for high risk Start-ups

Interested in more?  Dispelling myths #1 and #2

 If you'd like to contribute your thoughts on this topic/article please email info@ncfacanada.org.

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 950+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit ncfacanada.org.