Centralized digital platforms and connected fintech apps, together with evolving securities and investment regulations, have opened exciting new ways for entrepreneurs and business start-ups to raise money – and lots of it. Hundreds of millions of dollars are already flowing into what’s called equity crowdfunding.
Crowdfunding, of course, is raising cash from the public (the “crowd”) as a kind of ‘pre-purchase’ of a new service or product.
Equity crowdfunding raises cash from people who in turn get to own a proportionate slice of the company itself – their equity.
Equity crowdfunding allows start-ups and early-stage small businesses to connect with a network of investors and supporters, bringing in much-needed capital and building momentum for their product or service without being subject to the economic whims and analyst predictions of the publicly traded stock market. The uncertainty in public markets means investment opportunities in the private markets are becoming more attractive.
Equity crowdfunding strategies enable small and large investors to get in on early-stage investment opportunities that could lead to high returns, while being sheltered – for the most part – from market volatility. The return on equity crowdfunding investments can be more reflective of the success of the company than public market sentiment.
So as a result of new securities and investment regulations, hundreds of millions of dollars have now been privately invested using online tools that connect investors of all shapes and sizes with equity crowdfunding opportunities in the marketplace.
In Canada, what’s known as National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions from the Canadian Securities Administrators has brought a consistent set of rules and requirements to crowdfunding activities in most provinces (Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan are covered for now).
The rules allow a start-up or early-stage business to raise cash by distributing eligible securities without filing a prospectus through an online funding portal if the issuer satisfies certain legal requirements.
A private enterprise, known as the issuer, offers an equity stake in the company in exchange for the funding from the ‘crowd’ or investors. In return for the money invested, investors gain a stake in the company and potentially earn returns.
Among the positive changes brought about through 45-110, analysts cite:
- An increase in the amount of money a company is able to raise within a 12-month period from $500,000 to $1.5 million.
- An increase in the amount of money an individual can invest, from $1,500 to $2,500 to a maximum of $10,000 if deemed suitable by a registered dealer.
- An allowance for associations (commonly known as co-operatives) to engage their members as investors.
For companies, the benefit of these changes is clear, as within one campaign an entrepreneur is now able to raise enough money to grow their business toward the next stage of development without the need for continual visits to the capital markets – which can be both costly and time consuming
For these reasons and more, equity crowdfunding is clearly an attractive and growing opportunity.
In the U.S., for example, one large retail investment firm, StartEngine, will acquire a major competitor, SeedInvest, bringing together almost two million potential investors into the equity crowdfunding space. The two companies cite a combined investment portfolio of more than $1 billion (USD) and over 250 successful funding rounds.
Here in Canada, among the growing number of players in the sector, Toronto-based FrontFundr reported it has surpassed 100 successful closes and processed over $150 million in investments for start-ups in Canada.
Since its launch in 2015, FrontFundr has seen steady business growth, but this year it says investor activity has increased by 25 per cent quarter-over-quarter.
“We’re incredibly excited to see equity crowdfunding succeeding here in Canada and poised to go mainstream as we’ve seen in other countries” Peter-Paul Van Hoeken, Founder and CEO of FrontFundr, said when making the announcement. “Now that we’ve surpassed 100 successful raises on our platform, we see FrontFundr becoming the go-to platform for people to invest in Canada’s innovation economy while providing promising Canadian private companies access to capital from the public — and this is only the beginning.”
Clearly showing a belief in the potential of equity crowdfunding, FrontFundr launched its own fundraising campaign, giving everyone the opportunity to invest in the platform itself as well as the overall Canadian start-up ecosystem. The campaign is now open; anyone can make an investment until December 30.
That fact – that anyone can participate in equity crowdfunding – opens the market to a much more diverse and socially reflective community of investors and entrepreneurs.
FrontFundr’s research and analysis indicated some 18 per cent of companies funded through FrontFundr are women-led, compared to the three per cent of venture capital funds that go to women-led businesses.
In addition, fully one quarter of FrontFundr investors (users) are women, compared to the 12 per cent of venture capital decision makers who are women.
Among the many companies that have had campaigns on FrontFundr include CAARY, developers of a credit and finance management tool for small and medium businesses; Manzil, a Toronto-based fintech company providing shariah-compliant and halal investment services; and Joni, a B.C.-based company creating sustainable menstrual products.
More recently, fintech and agritech companies have described their success on the equity crowdfunding platform:
Hempalta is an Alberta-based agri-tech company developing advanced technology to produce hemp-based products; hemp is regarded as one of the world’s most sustainable crops as it is renewable, reusable and recyclable.
To support its hemp processing innovation and product creation, Hempalta successfully completed an equity crowdfunding round on FrontFundr and with the support of existing shareholders raised just over $1 million. It’s expected the company will use some of the crowdfunding financing to install an automated packaging solution to scale up its product packaging and delivery capabilities, with installation expected by the end of the year.
Based in Montreal, personal finance application developer Hardbacon has secured Canada $819,000 in funding through the FrontFundr equity crowdfunding portal.
“I’m really happy to close this round with this level of success, especially considering the economic uncertainty right now,” said Julien Brault, CEO of Hardbacon. “We are reaching 250,000 unique visitors on our website and it’s just the beginning. We have never been more ready to reach our next stage of growth.”
The Hardbacon app, available for download in the App Store and Google Play Store, helps Canadians plan and mange their personal finances, budgeting and even investments.
Those who use the app can compare different financial services such as credit cards, bank accounts, online brokers, robo-advisors, mortgages and crypto exchanges.
Clearly, equity crowdfunding opportunities should be added.
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