The type of business that can create an equity crowdfunding campaign in Canada depends on which securities law exemption from the registration and prospectus requirements of Canadian securities laws you plan to rely on to conduct the campaign.

See the chart below for a summary of what type of businesses under what securities law exemption can create an equity crowdfunding campaign in Canada.

Note:

• Limitation on the type of business that can use the offering memorandum exemption does not come into effect in NS, SK, NB, and QU until April 30, 2016.

Funding portals may specialize in raising capital for certain types of businesses or businesses in a certain stage of development and as a result, restrict who may post a campaign on their portal.

Yes, as long as your company meets the eligibility requirements of the securities law exemption relied upon to conduct the campaign. See: "Can any type of business create an equity crowdfunding campaign?" in this Entrepreneur Questions FAQ.

Different funding platforms may have their own eligibility requirements and may not be open to start-up companies.

It depends on which securities law exemption from the registration and prospectus requirements of Canadian securities laws you plan to rely on to conduct the campaign.

There is no limit on the amount you can raise under the:

• Accredited investor exemption;
• Offering memorandum exemption;
• Existing security holder exemption (must be a reporting issuer); or
• Investment dealer exemption (must be a reporting issuer).

Under the offering memorandum light exemption, you can raise up to $500,000 in a 12-month period under this exemption.

Under the Start-up Equity Crowdfunding Exemption, you can raise up to $250,000 in two separate offerings in a 12-month period raising an aggregate total of $500,000 under this exemption.

Under the Integrated Equity Crowdfunding exemption, you can raise up to $1,500,000 in a 12-month period under this exemption.

Yes. You may for instance use the Start-up Equity Crowdfunding exemption to conduct a crowdfunding campaign to raise $250,000 and later in the year sell an additional $500,000 in securities relying on the accredited investor exemption.  You should however, seek the advice of a securities lawyer as to your own particular circumstances. 

Crowdfunding in all its forms, including equity crowdfunding, works best for businesses that have a compelling story to tell.  You need to stand out from the crowd.  Ideally, you have already started the process of building a community of supporters, for instance on social networks, to help ensure campaign momentum upon launch.  Other factors you should take into consideration include:

• Funding Requirements.  What is your funding target and strategy?  The sweet spot of an equity crowdfunding in Canada is expected to be between $100,000 - $1,500,000 depending on which securities law exemption is relied on to conduct the campaign.  Your needs may be better served by more traditional sources of funding if you require more than $1,500,000.

• Ability to raise funds via other methods.  Have you considered alternative sources of capital for both short and long-term requirements?  Does your investment appeal to prospective online investors?  Are you able to presell your product through reward-based crowdfunding models to raise the necessary capital?

• Ownership Structure.  Are you open to having a larger than average number of external investors in your private company?  Are you willing to accept/use standardized shareholders agreement?  Are you comfortable giving equity away and thus a degree of control in your business (Note, the average amount of equity offered to raise funding via an equity crowdfunding campaign is usually around 20-25%).

• Cost of Capital. There are fees (cost of capital) often associated with an equity crowdfunding campaign, such as regulatory compliance (i.e., background checks), listing fees, portal transactional fees, payment facilitation/escrow fees, legal/accounting contract and service fees, administrative overhead and other third party provider services.

• Financial and business consulting needs.  Do you require the assistance of professional sponsors/mentors to help structure your business offering?

It is not certain what kind of investor will be interested in equity crowdfunding investments in Canada as it is in early stages.  The Massolution study in the United States and data from operating equity crowdfunding portals in the United Kingdom and Australia have identified the following investors as being interested in equity crowdfunding:

• Retail equity crowdfunding investors (or the 96% of the qualifying population):

o   Average age 24-44, educated, 60/40 male/female ratio;

o   Have internet and computer hardware access and are active online;

o   Interested and able to take risks and bear the burden of investment loss;

o   The majority have not participated in start-up investments before (largely due to regulatory constraints); and

o   May be seeking double or triple impact investments including non-financial incentives;

• Angel investors interested in becoming the ‘lead investor’ in an equity crowdfunding deal;

• Angel investor syndicates; and

• Venture capital groups with partnership agreements with leading portals.

If you believe in your business, you will have likely tapped the easy sources of capital from:

• Your savings;

• Your line of credit;

• Second mortgage on your home;

• Credit cards;

• Bank loan; and

• Loan or equity raise from mom, dad and your big brother Jim.

Less obvious sources to first time entrepreneurs:

• Accelerator and incubator programs (starting list);

• Government grants, tax credits and other programs (www.concierge.portal.gc.ca/)*;

• Contests (ex. BCIC New Venture Competition);

• Factoring receivables;

• Lease back programs; and

• Local angel group pitch events.

If you are looking to raise equity or debt in the private placement market there are several exemptions from the registration and prospectus requirements of Canadian securities laws in NI 45-106 you can rely on.  The most common exemption is the private issuer exemption available to non-reporting issuers.  A “private issuer” is any business with less than 50 security holders (excluding employees) whose corporate documents contain restrictions on transferring securities. Under this exemption, you can raise money from:

• Your directors, officers, employees, and major shareholders.

• Close family members of your directors, senior officers, or major shareholders. Close family members are only your spouse, parents, grandparents, siblings, children, grandchildren, or in-laws. Your aunts, uncles, cousins and Godparents are not close family members.

• Close friends of your directors, senior officers, or major shareholders. Your close friend is someone who has known you for enough time to be able to judge your capabilities and trustworthiness. The relationship must be direct (that is, a close friend of your close friend is not your close friend).  Someone that goes to the same church, is part of the PTA group you belong to, is a fellow Shriner or is a Facebook or LinkedIn “friend” is not a close friend for the purpose of this exemption.

• Close business associates of your directors, senior officers, or major shareholders.  Your close business associate is someone who has had enough prior business dealings with you to be able to make a sound judgment about your capabilities and trustworthiness. Being a customer or former client is not enough to make someone a close business associate.

• Accredited investors.  An accredited investor is a person who meets at least one of the following financial qualification tests, or qualifies in some other way:

o   At least $1 million in financial assets (cash and marketable securities) before taxes, net of any debts. Neither the person’s home nor any other real estate the person may own are considered financial assets;

o   Net income before taxes of more than $200,000 consistently over the past two years ($300,000 when combined with a spouse’s net income); or

o   Net assets of at least $5 million.

Another name for an accredited investor is an angel investor.

When relying on the private issuer exemption you are not required to file a report with your local securities regulator.  You should keep a record however, of how you determined each investor fit into one of the categories above.  One day you may have to prove to a securities regulator that you properly relied on the exemption when selling your securities.

Your security holders can transfer their securities to one of the types of people listed above, provided the directors’ consent to the transfer of shares. No other transfers of securities are permitted.

You are no longer a private issuer if you have more than 50 shareholders or you sell securities under the offering memorandum exemption or under the minimum investment exemption ($150,000).  You can raise money from all of the people a private issuer can sell to as a non-private issuer as an exemption exists for each one independent of the private issuer exemption.  You may also use other securities law exemptions such as the offering memorandum and minimum investment exemption.  The main difference between being a private issuer and a non-private issuer is that non-private issuers must report all sales of securities to all applicable the securities regulators in Canada within 10 days of closing the first sale and each subsequent sale.

You can engage a registered investment dealer, exempt market dealer or a finder relying on the Northwestern exemption to assist you with finding investors.  Your business may be exempt from the securities law requirement to register as a dealer when selling securities if you are “not in the business of trading”. To qualify for this exemption, you must have an active business unrelated to the sale of securities. This registration exemption applies to officers, directors and employees of your business involved in raising money through the sale of your securities, unless they:

• Are principally employed to sell your securities;

• Spend most of their time selling your securities; and

• Are paid to sell your securities.

If any of the above is true, your company and employees will need to be registered or you will be in breach of the registration requirements.

No commission or finder's fees may be paid to a director, senior officer, founder, or control person of business in connection with a trade under the private issuer exemption, (except a trade to an accredited investor) or under the family, friends, and business associates exemption.

* If you are a tech, biotech or manufacturing company you should also call your local representative at the Government of Canada Concierge Service – it is free.  This is a new program implemented in December of 2013 to help entrepreneurs identify government grants, rebates, and loan programs along with other services to advance their business. To take advantage of the Concierge service visit: www.concierge.portal.gc.ca/ or call: 1-855-534-8433.

No. If you have a quality business, there is no reason you will not be able to raise capital with angel investors or venture capitalists after conducting a crowdfunding campaign.  On January 15, 2014, Crowdfund Capital Advisers released a research report titled, “How Does Crowdfunding Impact Job Creation, Company Revenue and Professional Investor Interest?.” What they discovered is 71% of small businesses that were successful with crowdfunding either received or were in conversations to accept follow-on investment.

By listing on a funding portal, you gain access to new groups of accredited and non-accredited investors who may be interested in helping you obtain the funding you need that is not available elsewhere.  Besides funding, crowdfunding can provide you with a quick and efficient way to test the market for your product or business through feedback from prospective customers and backers.  It can also create product, brand and service evangelists out of early investors.  Crowdfunding campaigns can also increase your business’s visibility to potential joint venture partners, purchasers, venture capital firms, and acquirers.  Many businesses who started a crowdfunding campaign to raise money have found these other benefits have launched their business further than would have been possible through a traditional financing round.

You should protect your intellectual property to the extent possible under Canadian and American trademark and patent laws prior to any form of crowdfunding.

Information related to your business will become public in a crowdfunding campaign.  This is true anytime you are seeking to raise capital as investors will want as much information as possible to evaluate your business and the risks involved.  You should not expect that you will be able to get prospective equity crowdfunding investors to sign non-disclosure agreements. Angels and venture capital firms never sign non-disclosure agreements as they see hundreds of business plans each year with similar ideas.  Your team and your ability to execute is the key to your business’s success.  You need not disclose every minute detail about your product or service, just the basics that investors need to make an informed decision.