Experts See Little Upside in Equity Crowdfunding

finance | BCBusiness
Jonathan Bixby, executive director, GrowLab

Panellists say there may be gaps in matching startups with investors, but crowdfunding isn’t the answer

At a forum of experts discussing equity crowdfunding in downtown Vancouver this morning, panellists representing angel investors and startup companies saw little of value in a proposal currently circulating for comment.
The forum, hosted by the National Crowdfunding Association of Canada and the Vancouver Economic Commission, met at the Delta Vancouver Suites Hotel to discuss a proposal issued by the B.C. Securities Commission last March.
Leslie Rose, senior legal counsel for the BCSC, kicked off the event by describing mechanisms already in place that would allow certain securities dealers to operate an online portal through which companies could issue shares without the onerous requirements of issuing a prospectus.
“But we’ve heard a great deal in recent years, not only from public markets but also from private markets, that there are funding challenges,” Rose said. While acknowledging that the BCSC is “having difficulty determining the cause of that funding challenge and what is the right step for us to do,” she went on to describe the crowdfunding proposal that is currently circulating for comment.
The proposal drafted last March would allow companies to raise a maximum of $150,000 up to two times a year through an online portal; each investor would be allowed to invest up to $1,500 per offering.
Paul Geyer, CEO of Lightintegra Technology Inc. and himself an angel investor, said he would not personally take advantage of the proposed online equity crowdfunding.
“I see a number of issues around due diligence,” Geyer said. “If you look at the management team, that means you’re meeting with those people and they’re giving you a feeling of whether they’re going to be able to carry out their goals. I don’t see how that can happen in the crowdfunding area.”
Jonathan Bixby, executive director of GrowLab Ventures Inc., a startup accelerator, noted that having dozens or hundreds of unsophisticated shareholders would be an impediment to the future growth of a company. “Shareholders are a pain in the ass,” Bixby noted. “The question is, Why do you want more of them? The reason to have more has to be worth more than $1,500 per person.”
Geyer pointed to the long odds of startup investing: even among sophisticated angel investors, maybe one in ten investments will work out, he said. Crowd investment platforms might work for those pursuing a “spray and pray” strategy, he said—or those who put little amounts of money in lots of places—but not for those hoping to pick a few successful startups.
Bixby added that he was surprised recently to hear a discussion of equity crowdfunding on CBC radio. “So now a 66-year-old grandmother in Moose Jaw is thinking about crowdfunding,” he said. “You have to understand that tech investment in general is a losing game…. That $1,500 might be a lot for Grandma in Moose Jaw, and if she’s going to make one bet, she’s going to lose pretty much every time.”
Geyer said he could see equity crowdfunding unfolding in one of two ways. The happy scenario would be that it finds its appropriate niche, both on the investment side and the investor side, and everyone wins.
“The other way is that it goes off the rails and you end up with very unsophisticated investors and very sad stories, and a bad name. I hope it doesn’t go that way, but I don’t think there’s anything you can do from a regulation side to guide that. I think it’s more on how companies use these tools and how investors see those tools and finding the right formula so that it’s a win for both.”
The BCSC proposal and request for input can be downloaded here. the commission is gathering input until June 18.