You have a great idea for your business, have a solid business plan but are broke and are living in your parents’ basement. Well maybe things aren’t that bad but you need seed or expansion money to get your business really going or to develop your proof of concept or prototype. What do you do and where do you go? Well up to very recently you dip into the savings, borrow from parents or in-laws, head to the bank and/or perhaps bring in some investors. Investors at this stage are usually friends, family, and insiders. Yes, that’s a pretty limited group to tap into, but don’t despair as we finally have a 21st century equity fund raising option in Ontario – crowdfunding!
Crowdfunding is the internet/social media phenomenon of raising money through small contributions of the many through a funding portal. Alternatively, portals can cater accredited investors (investors that meet wealth and sophistication tests set out by the OSC) or a mix of the two. As you can imagine raising capital this way should provide new measures of flexibility and an audience of potential investors unheard of to start-ups and small and medium sized businesses.
Obviously in order to protect investors there are some rules that apply to raising capital in Ontario through an OSC registered funding portal. Some restrictions and conditions that you will face will include that your company is required to be incorporated and organized in Canada with its head office located in Ontario. Only simple securities only will qualify, such as common shares or preferred shares. You can only offer up to $1.5 Million in securities in any 12 month period and you can only advertise through the approved portal (i.e. term sheet or video). You also need to provide your investors with annual financial statements and must maintain proper books and records.
If you are a non-accredited investor you can invest no more than $2,500 in a single investment and can purchase no more than $10,000 of the security in any calendar year. You must complete a risk acknowledgement form as prescribed by the OSC confirming that you understand that you may lose your entire investment, that you can bear that loss and understand that the investment is illiquid. You will be provided a two business day cooling off period to cancel your investment should you have any lingering doubts or concerns. If the distribution does not take place within 30 days of the end of the distribution period then the funding portal is required to return your funds.
At the point when the securities are sold a streamlined information statement must be provided to the investor, which will have basic information about the offering, the issuer, the funding portal and any related registrant, the principal risks facing the issuer and one year of financial statements.
Leveraging technology and raising funds online should lead to efficient and low cost alternatives to traditional capitalization. It’s early days, but crowdfunding should open a new world to small and medium sized businesses to raise those necessary benjamins and for investors to truly get in on the ground floor.
This blog post was written by Andre Martin, a Partner in the Business Law team. He can be reached at 613-369-0370 or at andre.martin@mannlawyers.com.
