As an early or growth-stage impact entrepreneur looking for investment capital, you might think your only options for cash are friends, family and wealthy folks kind enough to give you a few moments of their time. But after a few uncomfortable afternoons talking business with your Uncle Morty, you may want to think about getting your capital from the crowd.
The crowdfunding marketplace is exploding in Canada and around the world with platforms like Indiegogo and Kickstarter leading the way. Crowdfunding offers entrepreneurs a new means of raising funds via online communities and social networks to a single request location, providing multiple channels to connect with a vast group of potential funders and/or investors.
The process is fairly simple. You select your platform, develop your pitch, set your funding target, pass the platform screen and animate your campaign (typically 60 days or less). Once you hit your established funding target, you can access your funds (minus any applicable fee).
There are a lot of different models you might consider. And they are often agnostic to corporate form, working for both non-profit and for-profit ventures.
You can raise straight donation-based funds to support your project or enterprise. You might be looking to raise $50,000 to finance a kitchen upgrade for a social enterprise bakery or $10,000 in startup funds for your sustainable honey bee business.
You can also use the crowd to presell products or product licenses. The Pebble watch is one of the most commonly cited examples of success, raising over US$10 million in presales in a matter of weeks
In Canada, SoKap is a crowdfunding platform pioneering an innovative approach to micro-licensing for creative products in designated geographic areas. If you are keen to explore other Canadian crowdfunding platforms, you can find a comprehensive list on Techvibes.
So what’s next?
The crowd is looking to go beyond donations and presales to making investments. This is where things get really interesting. It is already possible in Europe, where 15% of all platforms focus on crowd investing. And the ground is shifting quickly in the United States for businesses struggling to access capital and average investors looking to place capital in local impact ventures.
After months of debate, the US government passed the Jumpstart Our Business Startups Act (JOBS Act or HR 3606) in spring 2012. The new legislation was designed to modify existing securities regulations to “make it easier for smaller businesses and startups to raise money from the public.”
So what are the key changes?
It will be easier for ventures to raise startup and growth capital as there will be fewer legislative requirements for ventures to raise capital from investors. Enterprises will be able to raise up to $1 million without audited statements, or up to $2 million with audited statements from an unlimited number of non-accredited investors. The JOBS Act outlines additional disclosure requirements for issuers related to the investment offering. Previous prospectus and offering requirements could be very costly for smaller entrepreneurs.
It will be easier for Americans to invest in small and medium-sized local businesses. Individuals earning less than $100,000 will be able to invest up to 5% of their annual income or $2,000, whichever is greater, during a 12-month period. Individuals with incomes above $100,000 could invest 10% of their income or up to $100,000 during the same time period. Previously, these types of investments were limited to accredited investors, which include wealthy individuals, angel investors or large institutional investors like pension funds. (If you are interested, you can see who qualifies as an accredited investor in Ontario).
It will be possible to set up online crowdfunding platforms for ventures and investors. The JOBS Act outlines the parameters for establishing online intermediaries, with requirements including registration with the US Securities and Exchange Commission, risk disclosures, issuer reporting and investor income verification.
Within less than a year, an industry of crowdfunding platforms will be established in the United States. Americans will be able to go online to make an investment in local impact ventures in their communities and beyond.
Why is this important?
We could also make it easier for local impact ventures and funds to raise investment capital and easier for average Canadians to make investments in these ventures and funds. Although they are not harmonized, there is already significant alignment with securities regulations in both countries.
There is already public pressure to do so. In a borderless online world, Canadians wonder why we cannot do the same. If we do see movement, there is tremendous potential for all Canadians to drive the development of impact investing, given the level of public demand and interest. Think of the potential of going online and investing in a local affordable housing project, a startup renewable biogas firm or a local, organic dairy that is a B Corp.
But we must be careful when considering these changes.
There have been identified winners and losers. There are potential risks, and any changes to our securities laws must ensure appropriate investor protections, disclosures and declarations of risk. We want to connect money with meaning, but we also want to make sure it is done safely. We are Canadian, after all.
If these changes are made, it will be another pathway for local impact entrepreneurs to access capital that could allow them to generate positive social and/or environmental impact alongside the potential for financial return.