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A Primer on Crowdfunding in Canada
In April 2012, the JOBS Act was swiftly signed into law in the US by President Obama with bipartisan support. The speed at which the act went into legislation and the strong support that the act gained in its short legislative history was truly unprecedented.
For those you who’ve been out of the loop, the passing of the JOBS act into law means that small businesses in the US will now find it easier to raise capital from non-accredited investors through regulated online platforms. These platforms connect thousands of investors to a range of innovative projects and startup businesses in diverse sectors (cultural, social and for-profit) and have enabled an entire ecosystem of entrepreneurship and information exchange between funders and business founders that simply did not exist at this scale just a few years ago – in a nutshell, this is ‘crowdfunding’.
Turning the model of venture capital or traditional commercial lending on its head, crowdfunding gives the reins in the hands of the entrepreneur. For example, take an entrepreneur who has a clear business plan to create and commercialize an educational tool that uses innovative techniques to teach science and mathematics to kids. His first roadblock would likely be the inability to raise capital through commercial means – with an idea in the start up phase, and no cash flows, lending would simply be too risky. Also, he may not have a personal network wide enough to obtain enough funds that would get the idea off the ground.
Here’s where crowdfunding can play a pivotal role – through an online platform accessible by people from across the country, and potentially from all over the globe. The entrepreneur pitches his idea, and if it sells itself to enough people (through its own merit and through the financial and social returns it can potentially generate if it is successful), he is likely to obtain the required amount of seed capital. For those investors who want to invest in the idea for the long haul, the business could also offer equity, hence creating a private corporation that is accountable to its shareholders. This is turn could have the potential to create considerable social impact in the education sector, create jobs and fuel further innovation.
While the US, UK, Australia and other developed nations race ahead to pass legislation to facilitate crowdfunding, we might be left pondering the repercussions that lack of easy access to capital will have on early stage social entrepreneurship and innovation in Canada. While local crowdfunding platforms that allow raising donations (e.g. Small Change Fund) and license distribution of end products (e.g. SoKap) do exist, current regulations do not allow these start ups to give equity to investors in exchange for their monetary investment.
The need for crowdfunding in Canada is being publicized by bodies such as CATA Alliance, but there are several barriers which may delay the passing of legislation that allows crowdfunding – the biggest one of which is the lack of a federal/national securities regulator. This implies that each province will have to independently implement legislation to allow for this alternative source of raising capital from the crowd.
However, momentum is gathering pace, particularly in the tech circles where there is a very palpable threat of Canadian entrepreneurs moving to markets where access to seed capital is far less restrictive. According to CATA CEO, John Reid, “Many Canadian start-ups have great ideas, but they never get funded. Our under-capitalized companies compete against U.S. firms that have about three times their funding….we are being left behind and our commercialization gap will further widen.”
Similarly, for the social finance and entrepreneurship sector, easier and less stringent access to capital could make all the difference. Going back to my previous example – with access to a credible online crowdfunding platform, an entrepreneur with a compelling vision for social impact can bring his idea to life; with a few proactive supporters promoting his idea within their networks, the idea can gain considerable traction as more and more likeminded individuals pitch in their contributions.
This truly democratizes the case for the formation of a new enterprise – if the crowd believes in the impact the idea can have potentially have, they will vet it and ensure that it gets funded. A great example is the success of Dave Meslin’s project, The Fourth Wall, an exhibit that put forward various proposals to transform local democracy. Sending a powerful and compelling message to the community, The Fourth Wall has garnered financial support from across Ontario which has enabled the development of an official website and funded an extended tour that will take the exhibit across the country.
However, Dave’s project did not intend to give back to its contributors in the form of financial returns; it sold itself on the merit of its social impact on the wider community. This makes for an even stronger case for crowdfunding social enterprises, where potential investors are given online access to a social entrepreneur’s business plan and revenue model, and are transparently explained the path to sustainability and ensuing social impact if the project is to succeed.
Time will tell how quickly the government can realize the impact crowdfunding can have on the growth of entrepreneurship and innovation. In the meantime, we’ll look to our neighbor south of the border and observe whether this movement will help create the next generation of social entrepreneurs!
Photo credit: http://www.flickr.com/photos/41358216@N06/6128717899/
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Ammara Niyaz MBA Graduate, Schulich School of Business, York UniversityAmmara Niyaz MBA Graduate, Schulich School of Business, York University
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