The Promise and Perils of Equity Crowdfunding

Equity crowdfunding | BCBusiness

Equity crowdfunding may spark a gold rush of penny investors, but that doesn’t mean it’s the funding solution startups are looking for

The cosy world of crowdfunding, where neighbours pitch in to support a family in need, or an aspiring filmmaker raises a few thousand dollars to take his documentary to SXSW, is about to enter a whole new era. With the prospect of equity crowdfunding, appeals to support the local soccer team or feed hungry school kids may soon appear alongside offers to get in on the ground floor of the next Google or Facebook.

Last March B.C. joined six other provinces in publishing proposals that would allow companies to raise cash by selling equity directly to investors through online portals. The B.C. proposal would relieve companies from such hassles as registering with the B.C. Securities Commission, publishing a detailed prospectus and regularly issuing audited financial statements. The company would simply fill out a four-page form explaining what it does and why it needs the money, post the form online and wait for investors to click their pledges in return for a stake in the company. The lack of safeguards for investors would be offset by a limit on how much they could lose: in B.C. individual investments would be capped at $1,500, and fundraising campaigns at $150,000. If all goes smoothly, the rule could be enacted as soon as the end of this year.

Startup fundraising has always had its place in the crowdfunding universe, typically in the form of presales: a manufacturer raises cash to take an idea from concept to production by promising future delivery in exchange for cash now. That’s exactly what Liz Dickenson did before bringing her Mio Global heart-rate monitor to market in 2013. Having gone through a couple of rounds of angel funding and one VC investment, she ran out of cash on the eve of bringing her product to market. She overcame the final hurdle by launching B.C.’s most successful Kickstarter campaign to date, raising $321,000 in 33 days.

Having lived through 14 gruelling years of building her company from concept to market success, Dickenson cautions entrepreneurs that equity crowdfunding may not be the easy funding solution they’re looking for. “You marry investors,” she says, pointing out that on average it takes 15 years to bring a startup from concept to market. “If you’re going to be in a long-term relationship, you want to be sure you’re with people who are sophisticated and understand risk, and have the money and accept the risk fully…. It’s hard enough to manage just a couple of investors, never mind a whole bunch of small ones.”

Daryl Hatton is founder of Fundrazr, a Vancouver-based crowdfunding platform that specializes in leveraging social media to tap into local communities. He says he’s seen probably a thousand companies enter the crowdfunding space in recent years, many intent on staking a claim in the rush for online equity platforms. He believes, however, there’s a place for equity crowdfunding that doesn’t include hordes of unsophisticated get-rich-quick investors. He describes the hypothetical example of a remote community that wants to buy a wind turbine: these typically cost around half-a-million dollars, and involve long-term contracts with utilities guaranteeing revenue. An entrepreneur could form a company around the project, and use a site like Fundrazr to fund it.

Hatton argues that the motive for investors doesn’t have to be making a killing on speculative stocks: “It’s about building a community of people that are interested in your product or service or company.”