Starting in 2016, the U.S. and Canada are legalizing equity crowdfunding to allow more North Americans to invest in start-ups in return for company shares.
Beginning Jan. 25, 2016, Canadian regulatory changes will legitimize equity crowdfunding in Ontario, Manitoba, Quebec, New Brunswick and Nova Scotia (British Columbia and Saskatchewan recognizes this trend earlier this decade). In the U.S., the SEC approved equity crowdsourcing for American investors and startups (with some limits), a ruling that varies from the SEC’s previous recognition only allowing such crowdsourcing from “accredited investors.”
B2B startups and SMBs may see value in equity crowdsourcing to help fund their operations, in exchange for minority shares. But there are several caveats attached to this option, which we illustrate below in our list on 10 things every business owner should know about equity crowdsourcing:
- Starting February 2016, in U.S., a company can raise a maximum of $1 million through equity crowdfunding in a 12-month period.
- In the U.S., during any 12-month period, an investor is limited to investing:
• The greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth, if either annual income or net worth is less than $100,000; or
• 10% of the lesser of the investor’s annual income or net worth, not to exceed $100,000, if both annual income and net worth are $100,000 or more.
The below table from the SEC clearly illustrates this limit:
- In Canada (all figures Canadian), accredited investors will be able to invest up to $25,000 per company (up to a $50,000 annual total), while non-accredited investors will be limited to $2,500 per investment (and a $10,000 cap in Ontario).
- A Canadian company can raise a maximum of $1.5 million through equity crowdfunding in a 12-month period.
- In B.C., Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia, the so-called startup exemption allows companies in those provinces to raise up to $500,000 per year – but no more than $250,000 in one offering.
- During the course of its crowfunding offering, a U.S. company must makes its initial filing with the SEC on Form C, and then amend its filing to report any material changes. The Form C requires disclosures regarding the company’s size, location, securities offered, and offering amounts.
- The information a company provides to prospective investors doesn’t vary too much between U.S. and Canada, and generally includes the following, which must be posted on the funding portal’s site:
• The name, legal status, physical address and website address of the company.
• The names of the company’s directors and officers (and any persons of similar status and function), and each person holding more than a 20% interest in the company.
• A description of the business and the anticipated business plan of the company.
• A description of the financial condition of the company.
• The target offering amount, the deadline to reach such amount and regular updates about the progress of the company in meeting the target offering amount.
• A description of the stated purpose and intended use of the proceeds of the offering, based on the target offering amount sought by the company.
• The price of the securities offered or the method for determining the price.
• A description of the ownership and capital structure of the company. Financial statements of the company.
- In the UK, equity crowdfunding has been legalized for years, and a study found that more than 80 percent of the companies that crowdfunded between 2011 and 2013 are still trading.
- In equity crowdfunding, this asset class offers limited liquidity. “There’s no secondary market for trading in crowdfunding,” says Michael Pieciak, chairman of the corporate finance section committee of the North American Securities Administrators Association. “If you need to access the cash in an immediate way, then you are in sort of a bind. You can’t go to the stock exchange and trade the shares in for dollars.”
- Indiegogo might get into this game. When the SEC announced its ruling in March, Indiegogo co-founder and CEO Slava Rubin commented: “The balanced regulations announced yesterday will not only protect investors but allow anyone to invest in the ideas they believe in. Our mission at Indiegogo is to democratize finance and we are continuing to explore how equity crowdfunding may play a role in our business model.”
— Mary Taylor (@mary_impraise) December 8, 2015
Photo via crowdfundingframeworks
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