Canadians are known for being modest and risk averse. Could this explain why Canada equity crowdfunding appears to be relatively underdeveloped so far? We talked to some of the market leaders to discover how Canada equity crowdfunding is doing in the key areas that determine market traction: regulatory environment, platform activity, deal flow, user growth, and media coverage.
The 2016 National Crowdfunding Association of Canada conference in Toronto saw a gathering of the portals and regulators, as well as the lawyers helping everyone to navigate the new regime.
Fantastic progress has been made on the regulatory front, but there is still widespread frustration that the regulations governing Canada equity crowdfunding aren’t simpler. Canadian market participants look with envy at the simpler regimes found in the likes of the UK and New Zealand. The fact that regulations are imposed province-by-province is an additional complicating factor, and according to law firm Dentons, a Canadian national regulator is difficult to see, despite a united push from the industry.
Securities marketed to the public in Canada require either a prospectus or an exemption. A prospectus can take a month or more to prepare, needs to filed with the regulator, and carries with it the significant burdens of a full due diligence process. For startups and SMEs, preparing such a document represents an untenable upfront cost.
To avoid the need to create this heavy, lawyer-and-time-intensive document, exemptions exist for offers marketed exclusively to accredited investors, and friends, family and close business associates.
In addition, the offering memorandum exemption provides a somewhat lighter document – but liability issues have driven offering memorandums to expand to a size not too different from a full prospectus. An offering memorandum still requires an audit and is still very costly to prepare.
The major change in the Canada equity crowdfunding landscape is the “Crowdfunding Exemption” which came into effect in January 2016 in Ontario, Quebec, Saskatchewan, Nova Scotia, Manitoba and New Brunswick. This offers companies wishing to raise up to CA$1.5 million an even more streamlined offering document and is being seen as the start of the true spirit of equity crowdfunding. BC joined in this exemption in May of this year.
Several platforms are targeting early stage/SME ventures and both accredited investors and retail investors. The two with the most traction are SeedUps (based out of Calgary, Alberta) which launched in early 2014, while Frontfundr (based out of Vancouver, British Columbia) launched in spring 2015.
In her blog post “Why isn’t Canada embracing [crowdfunding], SeedUps CEO Sandi Gilbert opined that culture is not the key barrier, “The space is very new in Canada – with SeedUps being the lone voice for early stage investment until recently. The Canadian public in general isn’t even aware that they can invest in deals online. So getting the word out is important.” Frontfundr CEO, Peter-Paul Van Hoeken echoed this in a recent Globe & Mail piece, “It’s a process to create a crowdfunding market… We don’t think the cultural difference is a primary factor.”
So far, not very much money has changed hands in Canada equity crowdfunding, but considerable platform activity, user growth and interest is indicative of much more to come.
Later stage ventures
The OCMX offers “institutional” crowdfunding for later stage ventures and has operated since 2009. InvestX launched a private equity platform late 2014 focused on Canadian and US investors. Some might say that what The OCMX is doing is more corporate finance or investment banking than “crowdfunding” often defined as small amounts raised from a large number of people online.
On the matter of culture, InvestX CEO Marcus New comments on one of the factors on slower Canadian adoption, “Entrepreneurship is not celebrated in Canada the way it is in other countries especially the US where there is an eco system that supports entrepreneurship.”
In terms of new portal entrants, NexusCrowd and Crowdmatrix are local operators which are setting up to launch, and the Israeli platform OurCrowd has also expanded its global presence to the Maple Leaf State.
In a recent speech, Terri Kirk, CEO of Funding Portal revealed Canada has the 6th highest adoption of fintech in the world, but even so, 57% of Canadians are unaware of what “fintech” is. So there is some way to go.
Still, Canada equity crowdfunding has captured the attention of the mainstream media, with CNN, Bloomberg and Fox all featuring stories. As the level of deal flow accelerates, more media coverage in this new funding medium will follow.
The aforementioned National Crowdfunding Association of Canada annual conference in Toronto saw a packed house of over 440 delegates and dozens of speakers, sponsored by big names in the Canadian funding landscape. Events are taking place regionally as well, organised by the national association, and by the portals undertaking their own education efforts to drum up interest from investors and company founders. Clearly, interest in the space is healthy and accelerting.
Defining what is “equity crowdfunding” and what should be counted in the $ raised figures is a difficulty, and means market size estimates vary widely. Craig Asano, Executive Director of the National Crowdfunding Association of Canada, said “The challenge is the definition of what’s included (and what’s not) in the aggregate count. I think platforms/transactions that are openly raising funding under the equity crowdfunding banner should be counted.”
Another challenge is that much of the raises claimed by the various platforms take place offline. As private companies, there is no real method to verify the totals but they are well aware of the importance of building trust in the sector.
FundRazr is an established Canadian platform that utilizes rewards and corporate sponsorships rather than securities to raise capital for ventures. CEO Daryl Hatton believes “Investors are unaware of the option to invest in this class, wary of it given low levels of knowledge and understanding and our natural conservative nature.”
The good news is that Canadian culture – i.e. conservatism – does not appear to be killing Canada equity crowdfunding. And Canadians may be less risk-averse than we assume – after all, they have been pouring investment dollars into mining exploration for decades. If Canadians can use that same pioneer spirit to build a knowledge economy, we can expect it to result in new jobs and growth. Investors take note.
About the Authors
Bret Conkin is the Founder of CrowdfundSuite, a Crowd investing and Crowdfunding Consultancy. CrowdfundSuite provides platform development and other expert services to help organizations profit from the new Crowd Economy. Bret is an Ambassador to the National Crowdfunding Association of Canada. He has founded and collaborated on multiple tech start-ups including Canada’s first Crowdfunding platform Fundfindr launched in 2008.
Nathan Rose is the Director of Assemble Advisory, a consultancy for companies wishing to pursue investment crowdfunding campaigns. Assemble Advisory assists with picking the right platform, putting together offer content and financial models, allowing companies to raise money sooner.