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Regulators need to heed the rise of crowdfunded ‘techquity’ markets

Re-posted with permission from the authors – Keller & Motala. 

Robert Keller is a senior securities lawyer with over a decade of experience in litigation and regulatory policy. Michael Motala is a political economist and law student who comments on the digital economy.

It comes as no surprise that millennials are distrustful of equity markets. The Great Recession continues to cast its long shadow on the labour market for young professionals, and in Canada at least, we are in a technical recession. Tanking commodity prices and schizophrenic stock markets reaffirm the volatility of conventional investment instruments. Squeezed out of traditional career paths, many young people have turned into tech entrepreneurs.

In an economy marked by diminishing venture-capital funds, however, this new wave of young talent is turning to crowdfunding to capitalize their business ventures.

Oculus RiftA prominent example is Palmer Luckey, the 23-year-old virtual-reality inventor who became very rich almost overnight last year, when Facebook acquired his venture, Oculus Rift, for $2-billion (U.S.), leaving his original crowdfunders stunned. The Oculus Rift was an unlikely gamble in 2012. Yet, the success of its original Kickstarter campaign, which sought $250,000 in seed capital, exceeded its target by almost 1,000 per cent.

Some organizations are seeing the writing on the wall and are rising to the occasion. New York’s Nasdaq exchange, for instance, is hoping to capitalize on emerging tech startups in Silicon Valley with the Nasdaq Entrepreneurial Center, a non-profit offshoot that recently opened in San Francisco to help young entrepreneurs connect with experts, mentors and financial backers. At home in Canada, programs such as Ryerson’s Legal Innovation Zone and the MaRS Discovery District are also incubating young tech talent.

Mr. Luckey’s good fortune suggests that crowdfunding offers a valid capitalization model, but it is emerging in untested regulatory waters. Unlike conventional shareholders, crowdfunders generally have few established legal rights in respect of the corporate venture they help create. With equity crowdfunding, in particular, investors generally have little say over the corporate governance of their investments, and little to no recourse when startups break their promises and sell out. Yet, crowdfunding activity continues unabated.

Securities regulators are taking note of emerging peer-to-peer “techquity” markets. In 2012, the United States’ JOBS Act established a right to use online equity crowdfunding portals to raise up to $1-million, but certain restrictions were enacted by the U.S. Securities and Exchange Commission in 2013.

In Canada, regulators have taken an even more restrictive approach. Six provincial authorities issued new regulations on crowdfunding in May of this year, imposing an aggregate limit of $500,000 (Canadian) a calendar year for each startup.

RegulatorsMeanwhile, the Ontario Securities Commission (OSC) pledged it would promulgate its own regulations soon, with a higher aggregate limit of $1.5-million a startup per calendar year. Both, under the final provincial regulations and those expected from the OSC, equity instruments issued through crowdfunding are subject to strict holding periods and sales of these instruments are only allowed under very limited circumstances.

Even if a startup decides to play by the rules, however – say, by establishing a home office in Canada and using a Canadian Internet portal – it remains to be seen whether the crowdfunding limits imposed will spur investment or end up impeding the market. In the public comment process on the new OSC rules, some industry members remarked that the legal and other fees involved in complying with the new regulations could eat up a considerable portion of the capital raised in each deal. Meanwhile, Kickstarter already offers a competitive, low-cost alternative for fundraising in 18 countries around the world, with few to no legal obligations imposed on the businesses raising such funds.

Other challenges arise from the fact that Canada is still a patchwork of different securities regulations. In the 21st century, many find it hard to believe that, in an advanced economy such as Canada’s, securities regulation is still subject to a 19th-century approach to jurisdiction.

Startups have to navigate different equity crowdfunding rules depending on the province in which they intend to raise funds, instead of dealing with a uniform federal market. This leads to inefficiencies, given the greater legal and administrative fees required for complying with different rules in different provinces, not to mention the frequent interjurisdictional conflicts, which only further inhibit the fundraising process.

In any event, strict enforcement of the new crowdfunding rules may not be possible or desirable. In Canada, enforcement resources have traditionally been directed to the most egregious cases. Moreover, Canadian regulators may have little to no recourse against a foreign-based enterprise that is soliciting funds from Canadian residents using a foreign portal. It’s a similar challenge to the one posed by Netflix and Uber: When dealing with businesses that have no physical operations in Canada, Canadian regulatory authorities are hard-pressed to enforce regulatory powers or even court orders against such businesses.

The traditional idea of regulatory jurisdiction is being upended by the Internet and digital innovation. To make matters worse, implementing restrictive guidelines threatens to push away innovators, who will shop for another forum in which to do business.

From taxicabs to liquor stores to cellphones, Canadian regulatory culture seems prone to a certain inertia. Canada’s international competitiveness and economic growth prospects may suffer a high opportunity cost from overrestrictive or inconsistent crowdfunding limits, which may be difficult to enforce in the first place.

But this problem is not unique to equity crowdfunding – it applies to all securities regulation in Canada. If Canadian regulators want to remain effective, they need to heed this new “techquity” reality sooner rather than later.

Originally published in the Globe and Mail, October 2, 2015

VCs | Angels | Investment Funds – Let’s Make Some Noise

As an early advocate and first mover in the equity crowdfunding space in Canada, I am often asked, “Why isn’t Canada embracing this innovative new way to finance early stage business?” While it’s true that we have enjoyed some early traction, we know we need to create a bigger impact and collaborate with other players in the capital raising eco-system to stimulate adoption.

As a bootstrapped, single voice in the market, it hasn’t been easy.

Early this month, we announced we are seeking a small round of seed capital to fund our own traction. It’s not lost on us that we are looking for capital in the “funding gap”, the very stage in the capital raising life-cycle that doesn’t pique the interest of institutional investors, yet is too big for a typical friend and family round – the gap we intend to solve with our platform. We have several expressions of interest from those we have met and we are confident that we will accomplish the raise. But, the answer to the question above, might just be that no one has stepped up to the plate to fund an equity platform in Canada. I mean really fund!

This week, the UK’s two leading platforms, Crowdcube and Seedrs both announced new institutional investments into their companies, bringing their total invested capital to over US$42 million. Major institutions and venture firms have stepped up to the plate to help these disruptive finance tech firms change the way companies access capital and investors find alternative investments. Collectively, they have helped hundreds of companies raised over US$200 million in capital, with the majority of that capital going to early stage companies to accelerate their growth. Many of those companies have been able to grow their businesses, add jobs and create innovative products and services and are stimulating the UK economy. Some have been acquired (providing that all important exit) and others have gone on to IPO.

So, come on Canada, let’s not get left behind. Canadian investors deserve the right to invest in new and exciting ventures and our innovative early stage companies need these investment dollars to fund their next stage of growth. We’re working to make that happen, but we could use a little help along the way! To learn more about our capital raiseclick here.

A word from our lawyers: This communication is for information purposes only and does not constitute an offer to sell or a solicitation to buy any securities, nor should it be construed as a recommendation for any security offering. SeedUps Canada (a registered trade name of Crowd Capital Inc.) assumes no liability of any nature whatsoever for the accuracy or adequacy of any information disclosed herein.
You will not receive advice about the suitability of any security or about the merits of any investment. You should consult legal counsel with any questions about any investment. This communication may contain statements that are not historical facts, referred to as “forward looking statements”. The Company’s actual future results may differ materially from those suggested by such statements.

Are online groceries the next big thing?

Epicured MarketBusiness Insider has just released an in-depth report that looks at how new strategic e-commerce startups and big-name tech companies are pushing to move grocery sales online. Sound familiar?

That’s what Epicured Market’s Jillian Bowman is working toward.

She expects to launch her service, initially targeting the GTA, following her capital raise on SeedUps this summer.  20 million Canadians have digestive health conditions and Epicured Market aims to make it easier for them to make the necessary lifestyle adjustments to treat their digestive conditions with healthy, natural, real food solutions, while saving time and money.

We’ve also recently heard from Yuba, a Calgary-based startup focused solely on bringing 100% local foods to downtown Calgary’s 140,000 consumers. Comprised only of local vendors whose production exists within Alberta, Yuba’s goal is to support small to mid-size food producers while offering Calgarians the opportunity to choose higher nutrient and fresher foods, ensuring their food dollars are reinvested back into the place they live and work.

Shopping Habits are Changing

Busy lifestyles and dietary restrictions are influencing the likelihood that consumers will look to online grocery options. The Business Insider report found that only 15% of U.S. adults have purchased general food items online, but 25% said they have bought speciality food and beverages online, which are hard to find elsewhere.

The Market Outlook

Blue Apron, a U.S. company that packages up perfectly portioned ingredients and recipes that are delivered to your home once a week has been killing it of late. Early this month they announced a $135M round of funding at a $2B market cap. Sounds like the market is heating up! According to Business Insider Intelligence, between 2013 and 2018, online grocery sales will grow at a compound annual growth rate (CAGR) of 21.1%, reaching nearly $18 billion by the end of the forecast period. For comparison, offline grocery sales will rise by 3.1% annually during the same period. It looks like the grocery sector is about to get a shake up!

Check out Epicured Market on SeedUps and read the full BI Intelligence article here.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product.Securities offered through Waverley Corporate Financial Services Ltd., an Exempt Market Dealer registered in certain Canadian jurisdictions. Investment opportunities on SeedUps Canada are suitable only to investors who are qualified to purchase the securities and who are familiar with and willing to accept the high risk associated with private investments. You will have to complete and sign additional documents to determine your suitability to make an investment. The Epicured Market offering is available for investment to qualified and suitable accredited investors only.

There’s a New Way for Companies to Raise Capital from the Crowd

CrowdfundingOn May 14th, six Canadian provinces jumped into the equity crowdfunding space in a big way. BC, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia announced a new prospectus exemption for early stage companies to raise capital. When I first read the press release, I have to admit, I wasn’t that excited. But, after chatting with the regulators and reviewing the documentation, I’m warming up to the idea.

It is obviously disappointing that once again, the provinces aren’t aligned in this exemption, but we are used to that in Canada. Although Ontario says they will not be part of it, Alberta is suspiciously quiet at this time, so maybe we’ll hear something from them soon. Overall – I think they may have it right. Here’s what I know at this time:

  1. Financial reporting – early stage companies will no longer be required to present financial statements prepared by outside accountants that conform to GAAP or IFRS standards, a costly, and frankly unreasonable task for companies that have had little or no financial history to date. We work with early-stage companies every day – companies that are seeking “go to market” funding in the range of $250K – $1 million. I’d say the financial requirement is the single biggest obstacle they face today. This is indeed good news.
  2. The Offering Document – is straight forward for a company to complete and clear, concise and easy for investors to read and review. I like the standardized format. We’ve already created a Form 1 “Start-up Crowdfunding – Offering Document” template. Download your copy here.
  3. The Maximum Raise – of $500,000 ($250,000 at a time) sounds reasonable to me – that capital, combined with capital from Friends and Family, Angels and Accredited Investors can certainly help most early stage companies gain some traction and aligns nicely with the reduced disclosure as identified above. The average capital ask on our platform is currently $600,000 – so it seems that the regulators have it right on this one too.
  4. The Maximum Investment – OK … this might be the one area where they got it wrong. $1,500 is a really small number. The average investment on the SeedUps platform today sits around $4,000. Remember, this isn’t the minimum investment, it is the maximum investment. I think it is an arbitrary number, and one that should be re-evaluated in the near term. Concurrent raises can balance out the average investment, but many eligible investors will wish they could invest more in early stage companies they believe in.
  5. Concurrent Raises – companies can raise capital under another exemption concurrently with this exemption and contribute those investments to the minimum raise in order to close the offering. This means that Angels and other sophisticated investors can participate in the capital raise. (One caveat – a non-regulated “funding portal” can’t execute the purchase under another exemption – but an EMD that is offering the securities could).
  6. Eligible Securities – the commissions have provided great flexibility in terms of the types of securities offered. In addition to common shares, companies can issue debt, convertible debt, preferred shares and limited partnership units. These alternate forms of capital, or combinations thereof, can make sense for certain early stage companies wishing to delay their valuations until a later date.

Bottom line – at SeedUps Canada, we’ve always advocated for lowering the cost of raising capital for early stage companies, without compromising investor protection. This new exemption does just that. Now, when raising capital, companies have several options at their disposal. We’re excited about the prospects for the companies we are working with. Stay tuned!

How to Raise Capital from the Crowd


So you’re ready to access new capital to grow your business.  Do you know what it takes to successfully raise capital?  It takes more than just a good idea and a good story.  You’ll need to be fully prepared.  You must comply with securities regulations, corporate governance and present your investment opportunity in a clear and transparent way.  Here are some steps to consider as you prepare your pitch.

Corporate Governance

Is your business incorporated?  Do you have the appropriate articles to support issuing shares in your company?  Do you have a board of directors (including some independents) or an advisory board?  As they say – you need to get your business affairs in order prior to reaching out to the public for investment.  You’ll also have to consider the type of shares you are offering and the amount of equity you are offering for the investment.

Investors will have to complete documents including subscription agreements, risk acknowledgement forms and validate their qualifications to invest in your offering.  Fortunately, SeedUps Canada provides online execution of these documents, making it an efficient and compliant environment to raise capital.  Be sure to seek the appropriate legal and financial professionals to help you organize your fundraising.

Compliance – Securities Regulations

SeedUps Canada is a CrowdFinance platform.  That means you raise money in exchange for shares in your company.  Selling securities is regulated by the various securities commissions in Canada and companies raising capital on the SeedUps platform must offer their securities under one of the following prospectus exemptions:

  • Offering Memorandum (OM) Exemption
  • Accredited Investor (AI) Exemption

The Offering Memorandum Exemption

The Offering Memorandum – Form 45-106F2

In Canada, private companies can raise capital from the public – meaning the Crowd – through an Offering Memorandum (OM) exemption. The OM is a document that provides information about your company and the shares you are offering to investors. The document contains disclosure about:

  • the business of the company,
  • the company’s financial and material facts and contracts,
  • the directors, management and promoters,
  • the securities offered,
  • the risks of the investment, and
  • how the money will be used

It is a legal document of a prescribed format that gives rise to significant legal obligations on the part of your company. Like any other important legal document, it should be prepared with the assistance of an experienced securities lawyer who has a thorough understanding of your business.  We’ve created an OM template that you can review and complete so you are well prepared prior to engaging legal counsel, often times resulting in reduced legal fees. Download template here.

Risk Acknowledgement Form 45-106F4

Each investor must complete a Risk Acknowledgement Form that accompanies the OM.  We have sample forms for you to discuss with your legal counsel.

Subscription Agreement

Each investor must sign a Subscription Agreement that forms part of the OM.  We have a sample subscription agreement for you to discuss with your legal counsel.

Need legal advice?  Check out our participating partners.

Financial Statements

The Offering Memorandum must include audited financial statements prepared in accordance with Canadian GAAP or IFRS for publicly traded companies.  If your company is located in Alberta and you are only looking to raise up to $500,000 in capital, you have the option of offering your securities under a Blanket Order (OM Blanket) whereby the financial requirement is relaxed to allow for non-audited financial statements that are prepared in accordance with Canadian GAAP or IFRS applicable to private enterprises.

Need accounting advice?  Check out our participating partners.

The Accredited Investor Exemption

The Accredited Investor Exemption gives a company the ability to raise capital from high net worth individuals.  These investors are deemed to be sufficiently knowledgeable of investment matters therefore do not need the protection of securities legislation.

Only 3% of the Canadian population qualifies as an accredited investor, so pitching your company’s offering to this limited audience may not be your best approach.  Although the disclosure required in this type of offering is much less than that of an OM offering – the potential of a successful offering may also be reduced.

Is an offering document required?

No, there is no requirement to prepare and present an OM for an offering made to accredited investors.  Most companies will prepare a document that has pertinent information about the business, its market and competitive advantage. While there is no requirement or prescribed format for an offering document, potential investors will want to understand enough about your business to make an investment.

Risk Acknowledgement Form 45-106F9

Beginning May 5, 2015 all accredited investors must also complete a Risk Acknowledgement Form.  We have sample forms for you to discuss with your legal counsel.

Subscription Agreement

Each investor must sign a Subscription Agreement that clearly quantifies how the investor meets the accredited investor standard.  We have a sample subscription agreement for you to discuss with your legal counsel.

Need legal advice?  Check out our participating partners.

Due Diligence

Waverley Corporate Financial Services Ltd (Waverley) is a registered Exempt Market Dealer and handles all securities related activity on the SeedUps Canada platform.  Waverley has an obligation to understand the structure, features and risks of the securities offered by your Company.  As part of due diligence, we will gather certain documentation to present to Waverley including:

  • Background checks on key Officers and/or Directors
  • Certificate of Incorporation or Partnership Agreement
  • Underlying Organizational Documents (Articles of Incorporation, relevant shareholders’ agreements, employment contracts, etc.)
  • Detailed Business Plan
  • Detailed Pro-forma Projections
  • Investor Deck
  • Pre and Post Financing Capitalization Tables, and
  • Other supporting documents

Valuation

How do you know what your company is worth? It’s a challenge for early stage companies that may be pre-revenue or just going to market. At SeedUps, we have an alliance with Equidam, a platform for business valuation that allows you to better estimate your future and compare your company with others. Your company valuation is computed using 5 different quantitative and qualitative methods based upon your input and the best financial data available.

It’s free to generate an executive summary and SeedUps referral companies receive preferred pricing for an annual subscription with Equidam, where you can

download the full 16 page document at every stage of your company’s development.  Click here for more details.

Marketing Materials

Video Production

A video pitch is a powerful tool for you to communicate your investment potential in a succinct and compelling manner. It will help bring your business to life, show that you are serious and add credibility to your pitch. You don’t need to be a professional videographer to make a short video these days and by doing one you will surely increase your chances of success.

Need help? Check out our video production partners.

Investment Deck

A presentation deck that succinctly describes the investment opportunity and why an investor should be interested can help market your opportunity. You should ensure that the information in your presentation is consistent with the information provided in your offering documents.

Media and Press Releases

If your company has be recently covered in the press – we can post links that can be shared with our investors.

Marketing Plan

We’ll work together with your team to prepare a marketing plan that will include social media, email marketing, blogging and events. To learn more about preparing for your pitch – review our Pitch Checklist.

Offering Costs

Offering Documents

If you do not have any of the Required Disclosure Documents prepared, you will incur professional services fees to prepare and present the documents.  Although the fees can vary relative to the preparedness of the company, the complexity of the business and the choice of professional firms, we would suggest that these fees can range as follows:

  • Accounting – $2,500 to $10,000
  • Legal – $2,500 to $20,000

These fees are generally required to be paid prior to the capital raise, so your Company should be prepared for such costs.

Success Fees

If you comply with all of the requirements to present your offering on the platform and Waverley signs off on due diligence, your Company will incur an onboarding fee of $3,200 and a $10 “per investor” fee payable to SeedUps Canada and a success fee of 5% payable to Waverley at the time of closing (when you get your money).

Moving Forward

If you are prepared to move forward with us, we will present you with Engagement Letters outlining the terms of our agreement and begin the steps required to present your offering on the platform.

Paperless Paperwork

Have you already found your investors? The SeedUps platform has all the tools you need to execute your private capital raise quickly and accurately. With our platform, companies, securities lawyers and other advisors have an integrated solution that makes it easy to move the capital raise online. Ask us about Paperless Paperwork.

New Live Deals Launch on SeedUps Canada

Jump On and BeautyGram launched this week on SeedUps Canada. Only registered investors can view offering details, so register now to learn more about our latest featured companies.

The Jump On Story

Jump On is something entirely new in the travel industry. It uses the power of online group buying to ensure a win-win situation for both the industry and travellers. The bottom line is that charter airlines keep their planes busy and customers get convenient weekend getaways at a great price. Think Uber for the skies.

What is a BeautyGram?

It’s an alternative to the traditional option of sending flowers and chocolates to women. Consumers select pre-made or customizable gift packages through a user friendly e-commerce site BeautyGram.com. The BeautyGram’s are package in the Company’s signature pink packaging and delivered to the recipient’s door.

 

Register as an investor to review, evaluate, follow and even invest in your favourite profiled companies. You’ll be able to join the discussion forums, chat with other investors and invite friends and colleagues from your own networks to join the Crowd. So, register now to learn more about our unique online investment platform.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product.Securities offered through Waverley Corporate Financial Services Ltd., an Exempt Market Dealer registered in certain Canadian jurisdictions . Investment opportunities on SeedUps Canada are suitable only to investors who are qualified to purchase the securities and who are familiar with and willing toaccept the high risk associated with private investments.  You will have to complete and sign additional documents to determine your suitability to make an investment.

Perspective: The Core Mission of Crowdfinance

On March 10, 2015, Dara Albright posted an insightful article on Crowdfund Insider. She and I share a similar belief – that crowdfinance is an important and inevitable shift in the capital raising ecosystem. I seriously couldn’t have said it better myself. 

Here’s Dara’s take …

I spend many waking hours advocating for crowdfinance and preaching about the economic repercussions of an unjust financial system that inhibits entrepreneurs from procuring growth capital and restrains unaccredited investors from acquiring higher yielding private securities.

I’ve dedicated more than four years to this endeavor because I wholeheartedly believe that a fundamental shift from institutional to crowd investing is crucial to preserving the capitalistic principles that fuelled centuries of global innovation and upward mobility.

Because the fate of future generations depends upon the success of this mission, it is imperative that the underlying purpose of crowdfinance doesn’t get lost in the industry’s unbridled enthusiasm or lapses in judgement. Crowdfinance emerged in response to deficiencies in capital formation. Through the melding of technological achievement and regulatory easing, crowdfinance is able to offer a more practical solution to enriching the capitalization process.

Crowdfinance provides businesses with the unprecedented ability to crowdsource inventions, pre-test product launches, gauge consumer demand and convert consumers into loyal stakeholders. This process gives weaker companies the chance to rectify flawed products or business models prior to raising sizeable rounds of capital. It also helps ensure that sounder startups make their way to a larger pool of investors.

Read the rest of the article at Crowdfund Insider here.

This article originally appeared on Crowdfund Insider.

Can Lending Club’s IPO Help Thwart a Looming National Retirement Crisis?

Courtesy of CROWDFUND INSIDER

 By 

Marking another watershed moment for crowdfinance, the initial public offering of Lending Club (NYSE: LC), the world’s largest online P2P (“peer-to-peer “) marketplace connecting borrowers with lenders, was priced on Wednesday at $15 per share (a $5.4 billion valuation) – far above its pre-roadshow expected range of $10-$12. Surging in the aftermarket, the P2P giant closed its first trading day at an $8.4 billion valuation – larger than most banking establishments.

Lending Club Transforming the Banking SystemThe success of Lending Club’s IPO signifies there is as much institutional demand for its stock as there is for its listed loans. With all kinds of financial institutions cashing in on marketplace lending, I started thinking about the disenfranchised retail investor who is typically shut out of hot IPOs and higher yielding private debt.

While I usually use high profile IPOs as a way to illustrate economic injustice and vent about the public markets being nothing more than an exit strategy for the financially privileged, Lending Club’s IPO is an exception. The platform known for helping smaller investors access higher interest bearing loans should be commended for democratizing its IPO allocation and giving its community of retail lenders the ability to participate in its IPO through a direct share program. In a December 2011 article I implored Facebook to implement a similar direct registration strategy, stating that;

“if Facebook sold just 1 share of its stock to each of its members, it could raise in excess of $30B or three times the amount that its bankers would raise by placing it in the hands of their favorite institutional clients.”

facebook-logoFacebook took the traditional path and wound up with flippers. Lending Club, on the other hand, will likely end up with a more supportive shareholder base.

Regardless of how its shares trade, Lending Club’s IPO will undoubtedly bring vast mainstream awareness to the industry. Many more retail investors and financial advisors will come to embrace this higher yielding fixed-income diversifier. This, alone, will have enormous implications for income-starved seniors and those struggling to save for retirement in today’s near-zero interest rate climate.

With the fed keeping interest rates artificially low, U.S. households continue to lose billions in interest income. Hardest hit are retirees who are most dependent on interest income for basic living expenses. According to a November 2013 McKinsey Global Institute report, over the last six years, seniors 65-74 years old lost on average $1,900 in annual income while those 75 and older lost $2,700.

$1000 in $100 Bills MoneyIn a recent Wall Street Journal op-ed penned by Charles Schwab himself, he estimates that $58 billion in annual interest income was lost by America’s seniors since 2008. This is capital that, according to Schwab, would have boosted US GDP by $115 billion a year or .7% and added approximately 700,000 new jobs.

Had seniors been invested in P2P, where annual returns average in excess of 8%, instead of watching their savings dissipate, they could have been helping create jobs. Now that is food for thought.

Retirees aren’t the only ones suffering. Even working Americans, striving to build their nest eggs, are feeling the pain.

Unemployed Great DepressionAccording to the Employee Benefit Research Institute, a staggering 83% of the nation’s poorest are at risk for running out of money, with 66% of workers having saved less than $50,000 for their retirement, and 28% having saved less than $1,000. Even more chilling, these assumptions are based on people earning 8% above inflation each year on their stocks and about 2% above inflation on their bonds — net of fees. Given that conventional fixed income asset classes haven’t yielded 2% above inflation in a long time and retail has, for the most part, fled the volatile equity markets, this forecast is alarmingly over-optimistic. Adding fuel to the fire, with social security on the brink of insolvency, America is facing a retirement crisis of epic proportions. One that I fear could make 2008 look like the roaring twenties.

But there is hope. According to self-directed IRA and crowdfinance expert, James A. Jones, P2P investing through self-directed IRAs can help solve America’s imminent social security default. Applying the ‘Rule of 72’ (which is basically states that dividing 72 by the annual rate of return will provide a rough estimate of how many years it will take for the initial investment to double), Jones estimates that the average P2P portfolio will double approximately every seven or eight years – even less when you factor in tax-deferred growth by investing through a self-directed IRA. Not bad considering it would take more than 30 years for the typical CD investment to double!

As the industry’s first IPO success story lures the masses to the promising world of P2P, only history will reveal if it was the catalyst that thwarted a looming retirement crisis.

____________

Dara AlbrightDara Albright is a recognized authority, thought provoker and frequent speaker on topics relating to market structure, private secondary transactions, next-gen IPOs, P2P and crowdfinance. Albright has held a distinguished 22 year career in IPO execution, investment banking, corporate communications, financial marketing as well as institutional and retail sales. She is a visionary who continues to introduce rising asset classes and crowd-structured financial products to the Wall Street community.

Through her NowStreet blog, Albright was one of the earliest voices covering the JOBS Act and advocating for greater democracy in the equity and credit markets. She produced the very first crowdfunding conference in January 2012 which was headlined by key JOBS Act architects: Congressman Patrick McHenry and Dave Weild. That event helped birth the crowdfinance movement and led to the founding of the industry’s trade and leadership organizations. In 2013, she co-founded LendIt which went on to become the largest and most recognized global p2p & online lending conference organization. Some of the most prominent figures in the financial industry as well as the legislature continue to participate in Albright’s events. Her leading-edge articles that have helped shape the direction of the crowdfinance industry can be found on Equities.com, Crowdfund Insider, Seeking Alpha, Investing.com and Business Insider. She has been featured in Forbes, ABA Banking Journal, Thestreet.com, Private Wealth Magazine as well as in a number of leading industry trade publications. Albright continues to help issuers, investors as well as financial service providers across the globe capitalize during this unprecedented period of financial industry disruption and regulatory reform.

It’s Time to Disrupt the Private Capital Markets

Guest Post – Neal Gledhil, Founder & CEO ECN Capital

Somewhere along the way, it became very expensive for companies to raise capital from private investors. As public company costs continued to rise and investors’ confidence in the public markets waned, it was obvious that companies not ready to do an IPO would look to private capital as a stepping stone to the public markets. The regulators agreed – implementing prospectus exemptions designed to be used by those companies that required this pre-IPO money or in fact, were never going to be a candidate for the public markets.

Today, private capital investment far outweighs the capital raised in the public markets with many companies choosing to stay private while raising substantial amounts of capital. These issuers have had much success working with EMDs to market their offerings to their investor base, and EMDs have become known for the types of investment products they bring to market.

Investors have embraced the private capital markets as well, feeling empowered by choosing their own investments rather than committing their entire investment portfolio to fund managers who, at their discretion, make investment choices on their behalf.  But this ‘freedom to choose your own investments’ is a tricky business. Where do investors find deals they want to invest in, and where do the Issuers find the investors that are looking for their offerings? In many cases, access to deal flow relies on who you know, naturally flowing to professional investors that have the time and the patience to listen to investment pitches and conduct their own due diligence.

This is where the capital raising costs explode. Issuers, intent on finding private capital, engage all sorts of advisors and representatives to market their deals, and EMDs saddled with the burdens of KYP, KYC and Suitability have to charge fees to review, evaluate and determine if the deal is suitable to be presented to their investor base through commissioned dealing representatives. For companies seeking smaller amounts of capital, say $5 – $10 million, the upfront costs they have to pay to dealers to market their deal become onerous. Not because the dealers are unscrupulous and greedy, just because that’s the cost dealers must bear to bring a deal to market. As our dealer friends at the PCMA can contest, being a registered EMD, isn’t a license to print money!

So herein lies the problem. Many a good company seeking capital has nowhere to turn and investors wanting to invest that never have a chance to find investment opportunities that may interest them.

Enter disruption. Enter technology.

“A disruptive business model expands participation in the market by lowering the cost to serve previously unprofitable customers, typically through the introduction of a new technology or business process.” – Ryan Caldbeck, CEO CircleUp

Until quite recently, there has been very little adoption of technological efficiencies in the private capital markets. Much of the process is antiquated and laborious, requiring person-to-person interface and paper pushing along the way.  Administration costs are high and the entire process requires a great amount of time and involvement by the EMD and the dealing representative to execute. Some of this is certainly a result of securities regulations, however the other part in my opinion, is that the investment community has been slow to adopt the technological efficiencies available.

From client onboarding to transaction execution, today’s dealers can achieve efficiency by embracing technology, not simply to comply with securities regulations, but to improve that compliance and create a better environment for the Investor. This doesn’t mean that person-to-person interaction is not required at certain points and in certain circumstances in order to comply with KYP, KYC and Suitability obligations, but technology can assist in much of the administrative burden while improving compliance.

We believe that the private capital markets are undergoing a shift as investors seek to discover opportunities outside of their usual networks and make investment decisions independently. This has been occurring in the public markets for years, illustrated by the significant rise in popularity of online discount brokers. It is a natural progression to manifest in the private markets.

Our goal in developing the ECN Capital marketplace is to use technology to improve the private market experience for all stakeholders. But beyond this, we are a conduit to find unique opportunities that would be typically inaccessible to most investors.

Implementing technological efficiencies in different parts of the economy typically results in broader exposure, convenience and a reduction in the costs. The competitive nature of industry means that those savings can be passed on to the end user. It should be no different in the private capital markets. These savings should be passed on to the investor and the issuer. This is our mission at ECN Capital, and it is an evolution that will undoubtedly occur in the industry over time.

Without question the disruption has begun and technological efficiencies will be implemented in the private capital markets reducing costs for investors and issuers. In our opinion, intermediaries will have to adapt and what is lost in revenues per transaction will ultimately be made up by multiples in volume.

 

SeedUps – Early Traction

Earlier this year, SeedUps Canada launched its online marketplace where ordinary individuals and sophisticated investors come together to discover, evaluate and invest in young private companies. We set out with a mandate to lower the cost of raising capital, simplify the capital raising process and broaden the investor base for early stage companies. We developed a platform where companies can prepare for a capital raise, attract investment from interested investors, raise the capital and manage the shareholder relationship post close. The platform addresses the funding gap – the challenges SMEs face when seeking early-stage funding in the range of $250K and $2 million.

Companies looking to raise capital on SeedUps utilize exemptions available through National Instrument 45-106, Prospectus and Registration Exemptions (NI 45-106), most predominately the Offering Memorandum Exemption (OM) as well as BO 45-512, Exemption from certain financial requirements of Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers. These exemptions allow the company to attract investments from qualified ‘ordinary’ investors rather than relying only on investment from Accredited Investors.

In developing our technology we considered the compliance requirements of National Instrument 31-103, Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) focusing intently on the following:

  • Registrant compliance for Exempt Market dealers
  • Investor qualifications and risk tolerances
  • Issuer disclosure and transparency, and
  • Issuer / Investor relationship post close

Investor access is restricted to individuals based on their jurisdiction, their investor qualifications, the type of exemption and the jurisdiction of the Offering.  Investment is allowed only by those individuals that meet such qualifications and are deemed suitable for the investment upon review of their personal finances, investment portfolio and risk tolerance as gathered through the client onboarding process. It is important to note that all investments on SeedUps are considered high risk and only suitable for investors who acknowledge such, and who can, and are prepared to lose their entire investment.

Traction

Entrepreneurs

Since launch, our platform has attracted interest from 150 companies seeking equity raises of up to $2 million, with the majority having a target raise of less than $500K. We’ve received the most interest from BC, Alberta and Ontario with smaller interest from the other jurisdictions.

We are currently working with several companies that are preparing their OM documents and some Alberta companies that are preparing their offering documents in accordance with BO 45-512 and expect to have several ready to present their offerings in the next several weeks.

Investors

We currently have 900 investors registered on the platform, with 50% of those certified as eligible and accredited investors. Alberta represents 60% of all investors with Ontario at 20% and BC at 14% respectively.

Most interestingly, B.C. investors investing in qualifying B.C. early stage companies can take advantage of the B.C. small business venture capital tax credit that encourages equity capital investments in B.C. small businesses, to give these companies access to early-stage venture capital.

We feel this will have a big impact for BC businesses and investors but we have not promoted this tax incentive heavily at this point as we have yet to profile a company that qualifies for the EBC.

The Typical Private Capital Raise

Any company that has been through a capital raise knows there is a process to raising private capital.  Whether online or offline, investors can be defined in three specific segments; Management’s network, the Network’s network and the Crowd.

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 – management’s network. Once these investments have been secured, the new investors share their investment story and create further interest in the company at dinner with friends, while watching a soccer or hockey game, at the nail salon – wherever. They also introduce the company to Business Angels and other sources of large capital – their network’s network. Then finally, interested and engaged investors learn about the deal, request information about it and ultimately get involved – the Crowd.

The premise of an online platform like SeedUps is to replicate this model in an efficient online environment that can harness the power (and capital) of the true Crowd.  Online platforms can give the Company access to thousands of potential investors in an online investment community.   Instead of running from board room to coffee shop to pitch the Company’s story, management post’s their opportunity on an investment platform where their network, their network’s network and the Crowd can review and evaluate the investment opportunity.

The Crowd can monitor the process of the capital raise and engage in dialogue with other investors and the Company’s management.  As the investment dollars come in – the Company thermometer moves toward the target raise. They learn more about the investment, become more engaged in the opportunity and may ultimately invest.

Where the Investors Come From

How Much They Are Investing

SeedUps investors register as Ordinary, Eligible or Accredited and come from a variety of backgrounds and investing experiences and to date have invested between $1,000 and $25,000 per investment. Investors are presented with the appropriate subscription agreements and offering documents based on their jurisdiction of residence and their qualifications to invest.

What’s Next?

We need to spread the word – so share our story so we can introduce this next generation of private capital investing to entrepreneurs and investors. We want to help Canada’s young companies raise capital and democratize the private capital markets to include ordinary investors who want to invest in companies they believe in or have a product or service they believe would make their friends and families’ life better. By my calculation, if just 1% of those individuals invested relatively small amounts into Canadian start-ups; that could translate into $1.5 billion in new capital for the very companies that will add jobs, grow their businesses and have a chance to become the next Big Thing!

 

Securities offered through Waverley Corporate Financial Services Ltd., an Exempt Market Dealer. Investment opportunities on SeedUps Canada are suitable only to investors who are qualified to purchase the securities and who arefamiliar with and willing to accept the high risk associated with private investments.  Investing in early stage companies is risky. You will have to complete and sign additional documents to determine your suitability to makean investment.