It has been a few weeks now since our securities regulators announced a myriad of capital raising regulations for private companies in Canada. For my friends south of the border, we don’t have one regulator that issues national regulations (the SEC); we have 13 different regulators that implement regulations they feel best suit the business and investor environment in their province. When possible, they harmonize these regulations with other jurisdictions, but in many cases, small jurisdictional differences become exceptions in their regulations. It is a bit cumbersome, but technologies like SeedUps and OfferingPoint help manage what investors can access and how much they can invest in particular capital offerings.

Overall, the recent announcements will help lower the cost of raising capitaland broaden the pool of investors companies can attract to invest in their business. That has been our goal from the outset, and although not perfect, these are significant steps to satisfying the funding gap companies face when seeking between $250K and $2 million in growth capital.

Download “Your Guide to Raising Capital Online“.

Until now, the only way private companies could raise capital from non-accredited investors was through the Offering Memorandum exemption requiring them to prepare a complex disclosure document complete with audited financial statements (note – Ontario has just published its intent to allow its constituents to participate in these capital offerings effective January 2016) . This exemption has worked well for companies raising north of $2 million in capital, as it is good corporate governance for companies of that size to audit their financials in any event (and they can actually afford it). It simply didn’t make practical sense for companies that were looking for the gap financing I refer to above. So now, companies can prepare a relatively simple disclosure document, present their offering on a public facing portal and attract investment from a wide array of investors – institutions, angels and individuals.

Many of our peers are concerned that companies raising capital through these new exemptions will be saddled with too many shareholders and a dysfunctional cap table that will be disruptive to future investment. I too, agree that too many shareholders may be challenging to manage. The new regulations have investor limits that range from $1,500 to $5,000 for non-accredited investors. In simple math, if a company raised $1.5 million from only those investors, they could be faced with managing over 600 investors. The reality is,no one would recommend that a company raise that much money $2,500 at a time. Capital raises, whether conducted offline or online most always involve different types or classes of investor.

The first investors are key to a successful capital raise.  Everyone wants to see someone else lead the way and typically, those lead investors are close to the company and its management or are advocates or customers of the company and have watched the development of the business to this stage. Companies that want to raise $1.5 million through equity crowdfunding should secure this lead investor prior to launching their raise. The funding portal helps the company share that story with Business Angels and other sources of large capital, filling the middle portion of the raise. The Crowd is there to fill out the rest.

When done properly, a $1.5 million capital raise might have 75 investorsfrom different classes. A lead investor for $500,000, sophisticated investors averaging $75,000 each and the Crowd averaging $7,500 each. That may still sound like a lot of shareholders, but structured properly and managed with technology solutions, those 75 investors can be the company’s sales and marketing arm. When out to dinner with friends, they’ll be talking about their latest investment and encouraging the success of the company.

Hey – have you heard about the XYZ app? It’s awesome – you should download it now! Did I tell you I was a shareholder?

Anyone remember a little company called WestJet? They built their company with the “average investor” advocate. In their day, they did it in the public markets, but today, companies can start with private investors, then go public when they are ready.

Here’s why these regulations are important and what they will mean to the Canadian economy. The potential investment dollars in the hands of the Crowd is enormous. If just a very small percentage of the “not-yet-accredited” investor put a suitable proportion of their investment portfolio into early stage companies, Canadian businesses could access over $1 billion in untapped capital. Imagine what companies could do with that capital. They will grow their businesses, add jobs and contribute to the innovation and diversification of the Canadian economy. Seriously – shouldn’t we give them a chance?