Crowdfunding for Individuals
On May 14, 2015 British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia announced early stage companies can use online portals to raise $500,000 per calendar year. With equity crowd funding, non-accredited investors will be able to invest up to $2,500 per company. In British Columbia the restriction is $1,500. Additionally, provinces restrict the type companies seeking funding. Basically an investor with annual income and or net worth less than $100,000 can invest 5% of his net worth or maximum of $2000 in a 12-month period. If the individual investors annual income is or net worth is greater than $100,000 then the individual can investment up to 10% of his annual income. Regardless of how wealthy an individual is no one is allowed to invest more than $100,000 in a startup using an online equity crowdfunding portal. Companies raising money have to follow strict filling requirements before and after the distribution of shares.
Valuing businesses and conducting due-diligence are critical skills required for investing in small businesses. Since the investments are small, all due diligence tasks must be completed by the individual investor as it may be too difficult to hire a lawyer or accountant to assist. Investors are required to understand and acknowledge all risk and warnings associated with the investment.
Usually private equity investment has been available only to accredited high net-worth individuals and institutional investors. With equity crowd funding individual investors can invest in startups and established small businesses looking for funding. Private equity investments are a good way to diversify because they are not co-related to public markets. In some cases, they can even be negatively co-related to stocks and bonds. However, investing in private-equity (small companies and startups) is a high-risk asset class as the failure rate for these companies are very high. Additionally, private equity investments have limited liquidity. At the moment there are no equity crowdfunding exchanges that allow you to liquidate these investments. Individual investors should also be aware that initial investments will get diluted over time as the company they have invested in raised additional rounds of funding.
Crowdfunding for Businesses
Companies to have to do a lot of work before they can raise funds from the private market. To start with companies, need a business plan that it can share with investors. They need to provide potential investors a solid business plan that includes description of the business, financial plan, marketing plan, competitive analysis and financial statements (Balance sheet, Income statement and Cash flow statement). The business plan is not just a funding tool, it also helps plan operations and determine the company’s valuation.
Crowdfunding equity requires businesses to incur legal fees related to private equity exemptions and standard equity financing. As soon as a company has more than 50 shareholders they automatically forfeit the private equity exemption. In order to raise funds by selling securities in Canada, businesses need to file a prospectus with the securities regulators or their province. However, because this step can be expensive for start-ups and small businesses, the regulators have created “start-up crowdfunding exemptions” for eliminate this step. Under the “start-up crowdfunding exemptions” a start-up is not required to file a prospectus and a funding portal is not required to register as a dealer with the securities commission.
Running a crowdfunding campaign requires significant amount of time and effort. Companies need to determine the type and characteristics of the securities sold, number of securities sold and the price at which they will be sold (valuation). Companies must raise the minimum amount required within 90 days of publishing the offering document on a funding portal Website. Additionally, the businesses need to have a system in place to manage large of share holders after successfully completing a crowdfunding campaign.
BuySellBusinesses.com facilitates equity crowdfunding by aggregating deals from our partners and connecting business investors with startups.