Have you ever been on the receiving end of the "the informal pitch"? You know, that painfully awkward scenario when a good friend or family member pitches you on their game changing business idea. And of course, with that pitch comes the million dollar question, can you help me? Now up until a few years ago the term "help" had one of two meanings. Firstly, you were perceived as affluent enough to fork over a cheque to cover most of the damage. But unless you're Kevin O'Leary on the set of Dragon's Den, investing a sizable sum of your hard earned cash into venture capital might not be your thing. Secondly, you were perceived as a well-connected mover and shaker who has "rich friends".
A fate much worse than the former given you're leveraging something much more important than your money, your name. Sure you might love your crazy nephew who dropped out of college to find himself, but maybe not enough to go pitch his hipster vaportini bar to your golf buddies. Fortunately, the advent of social media also spring boarded another market for investing, Crowdfunding.
With sites like Kickstarter and stories like the Pebble Watch or Oculus Rift, we've all heard of the success and riches one can attain from Crowdfunding. But just in case you're a little fuzzy on the subject here's a quick crash course, courtesy of the National Crowdfunding Associate of Canada (NCFA) website. Crowdfunding involves the raising of funds through receiving many small contributions from the general public (i.e. the crowd). Crowdfunding models can be Donation/Reward based (most popular worldwide because of sites like Kickstarter and Go Fund Me), Lending based (very similar to micro financing in developing countries), Equity based (the most successful method for raising funds), and finally a Hybrid based method of the aforementioned models.
So while you must be thinking to yourself "wow this is great stuff", there a slight catch. Unlike the US who has recently passed Regulation A+, which helped legitimize and simplify the crowd funding process by providing regulations to support adequate funding and a secondary market for trading, Canada is way behind the curve. More specifically, Canada's lack of drive both from a political and regulator standpoint has led to the incredibly slow development of its own set of Crowdfunding rules, Multilateral Instrument 45-108 or MI 45-108. Granted, it is a step in the right direction, MI 45-108 falls short on many principles including: limiting capital to be raised within a given year, high transaction costs, and limiting each individual investor's contribution. To paint a picture of how tough these constraints are, within a given year a company could raise a maximum of $1.5 million, bringing with it close to 600 shareholders and a whopping migraine from all the required communications.
While the Canadian landscape for Crowdfunding is somewhat bleak, there is a silver lining. The NCFA is in full force pushing forward and driving for better regulations at a national level. In researching this post I had the pleasure to speaking with a few of their advocates, and within minutes I can tell their fully committed to driving for better reform. Until then, Canadians will just have to be patient and possibly sit through another pitch or two. In the mean time I highly recommend you check out the NCFA website for more on the industry and what to come.
Until next time…
Member of the Advisory Board of the M&A Club