Last March, the Quebec Securities Commission (AMF) held a public consultation to discuss Equity Crowdfunding and its applicability. Our team has been working tirelessly since July for this moment. With “success stories” multiplying across the globe, we, too, want our SMEs and start-ups to benefit from this model. Enabling them to raise funds online and individuals to become investors without having 1M$ in assets. Angels and VCs around the table agreed that this model complements the existing ones, and that it is a necessary component to our ecosystem…”we fund 30 out of 1300 startups. What happens to the remaining 1270?” one angel asked.
You will find a recap of the session on our partner site, National Crowdfunding Association. The following outlines some of the principles raised in session and that you will find in our upcoming positioning paper:
- Notion of risk. A business is pitched on a crowdfunding portal. There is always a potential risk notably if the business is early stage (prototype, beta) that the investor may not see a return. The investor must be at ease with this and rely on his own knowledge or seek council. On the other end of the spectrum, a business that has sales to show for, will be expected to justify its valuation and have the figures to back it up. Transparency is key.
- Trust the crowd (unaccredited investors). We do not expect a perfect fit in year 1 of adoption. There will be growing pains as there were for e-commerce in the late 90’s. The important is to leverage these and build best practices. You may find investors that are not satisfied with their choices and may blame others. We believe that this learning phase will be a confidence builder and they will find, with time, better sources of advice on and off line.
- Higher Cap . To ensure a higher penetration rate and fulfill the needs of both start-ups and SMEs, we recommend raising the investment round to 1M$ on a 12-month period.
- Relying on social networks. This is where the paradigm shift must occur. I understand that it may hard to believe that online conversations can help detect fraudulent practices but it is a fact. As Kickstarter’s founder said, “People have called them out and they don’t get funding. The internet asks questions.”
- The shareholders agreement generated much discussion among the securities lawyers present at the session. Experience shows that agreements are source of fraud either through restrictive clauses or fine print. Hence they believe that Invest crowdfunding may be the host of such practices. We recommend having standard shareholder agreements (same format for all) to reduce collateral dammage. This point remains to be discussed and should not be a barrier to adoption.
- The status of Equity Crowdfunding portals is an important issue.We believe that portals, as in England, France, Finland, Belgium and Australia, should stand as a matchmaking site – nothing more, leaving advisory to others. It is the investor’s responsibility to seek council (cf. point #2) and the issuer’s to pitch/explain in layman’s terms. To restrict portals to traders only or to restrict portal usage to accredited investors is taking the crowd out of crowdfunding. It’s VC online, as provided by FundersClub. Portals in Quebec, Ontario and Alberta are in the works . They are waiting for the green light.
At Invest Crowdfund Québec, we will continue our work with regulatory bodies and remain optimistic about the prospect of equity crowdfunding in Canada.