What is equity crowdfunding?

Equity crowdfundingEquity crowdfunding Equity crowdfunding allows new business or start-ups to raise capital by selling many small stakes,…+ read full definition is a way for start-ups or early-stage businesses to raise money from a large number of people. It allows you to investInvest To use money for the purpose of making more money by making an investment. Often…+ read full definition in a business. In return for your money, you are given a small stake in the company, essentially becoming one of its owners. Equity crowdfunding has been an option to retail investors in Ontario since 2016.

There are two other types of crowdfunding:

1. Donation-based crowdfunding is strictly charitable. It allows people to give money to fundraise for a cause or assist someone in need, with no expectation of receiving anything in return.
2. Reward-based crowdfunding sees individuals or organizations providing rewards in exchange for people contributing to their projects. These projects can range from creating a new type of kitchen gadget to publishing a cookbook. Successfully funded campaigns may provide backers with exclusive products, such as an early edition of the gadget or a first-run copy of the book.

Warning

Participating as an investor in equity crowdfunding comes with high risks. However, it can also be a way to support innovation and become part of a community of entrepreneurs. Always remember to consider your risk tolerance when choosing any new investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition.

What are the rules and regulations for equity crowdfunding?

A type of prospectus exemption in Ontario allows equity crowdfunding. Investors can buy stakes in a prospectusProspectus A legal document that sets out the full, true and plain facts you need to…+ read full definition exempt business through equity crowdfunding. There are fewer requirements imposed on businesses using prospectus exempt investment opportunities.

Anyone can buy securities under the crowdfunding prospectus exemptionCrowdfunding prospectus exemption In Ontario, the crowdfunding prospectus exemption allows Canadian companies, particularly start-ups and businesses in early…+ read full definition, but there are limits.

• You can invest up to $2,500 per investment but not more than $10,000 in total for all investments under the crowdfunding exemption in a calendar year.
• If you have an accredited investor prospectus exemptionAccredited investor prospectus exemption In Ontario, the accredited investor prospectus exemption allows companies to sell their securities to individuals…+ read full definition, you can invest up to $25,000 per investment but not more than $50,000 in total in a calendar year.
• Certain very large investors, such as banks and governments, can invest any amount.

These limits are in place because of the high-risk nature of equity crowdfunding, but they won’t protect you from all risks associated with equity crowdfunding. So before you consider any equity crowdfunding offering, know and understand the risks.

If you change your mind after you invest, you have 48 hours to cancel the deal, starting from the date you agree to make the investment.

How are equity crowdfunding transactions conducted?

Equity crowdfunding transactions are conducted over the internet through a funding portal. The funding portal must be registered with the Ontario Securities CommissionOntario Securities Commission An independent Crown corporation that is responsible for regulating the capital markets in Ontario. Its…+ read full definition if it is operating in Ontario or if it is selling to investors in Ontario. You can confirm this by contacting the Ontario Securities Commission or by going to CheckBeforeYouInvest.ca.

Funding portals have duties to perform, including:

• Conducting background checks on the companies and their executive officers.
• Collecting an offering document from the companies and ensuring information is available to people before they invest. This document includes information about who controls and runs the company, what the company does, why it is raising money, how much money it needs to raise, and how it plans to use the money raised. It is not as detailed as a prospectus would be.
• Notifying you of any changes to the offering document if you previously purchased under the original offering document.
• Providing you with a Risk Acknowledgement Form that lists the principalPrincipal The total amount of money that you invest, or the total amount of money you…+ read full definition risks associated with equity crowdfunding. You must complete this form and confirm you understand the information in the crowdfunding offering document before you are allowed to make an investment.

Crowdfunding offering documents versus prospectuses

A prospectus is a comprehensive disclosure document that sets out detailed information about the company and its business and describes the securities being issued and the risks associated with purchasing those securities.

A crowdfunding offering document includes information about who controls and runs the company, what the company does, why it is raising money, how much money it needs to raise and how it plans to use the money raised. It is not as detailed as a prospectus would be. But it does provide people with information in order to make an investment decision.

What are crowdfunding issuer obligations to investors?

The goal of equity crowdfunding is to raise money by selling stakes in a business to investors, usually in the form of shares. Businesses raising money through crowdfunding are called crowdfunding issuers. The crowdfunding issuerIssuer An organization that offers securities for sale to investors. Examples: corporations, investment trusts and government…+ read full definition must make available certain information to investors, including:

• Annual financial statementsFinancial statements Reports that sum up a company’s financial data and tell you how it is doing.…+ read full definition and an annual notice detailing how the money raised has been spent.
• Notice of specified key events, such as changes in control of the business.

What risks are associated with equity crowdfunding?

Before you consider participating in equity crowdfunding, it is crucial that you know and understand the risks associated with this kind of investing. Below are risks that you should be aware of:

1. High risk of loss – A lot of the risk is because most businesses seeking financing through crowdfunding are start-ups or early-stage ventures. Statistically speaking, most of these businesses do not survive past five years. If you invest in a business that does not succeed, you may lose all the money you invested.
2. Locked-inLocked-in An account that you cannot take money out of until you retire. In most cases,…+ read full definition investment – There’s a good chance that you won’t be able to resell your shares in the business you invested in. Unlike a stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or…+ read full definition, funding portals allow you to buy stakes or interests in a business, but not sell them. You will likely have to hold onto your investment until there is a change with the business — like if it goes public on a stock exchangeStock exchange A market in which securities are bought and sold.+ read full definition. This may take many years to happen or may never happen. Until then, your money is locked in the investment. This is also known as liquidity risk.
3. Lack of information – You should expect to receive significantly less information about your investment than you would with more traditional investment products. Businesses raising capital through equity crowdfunding are not required to provide the same amount of information as a public company. You will receive some information, such as an offering document, annual financial statements, annual updates about how the money is being spent and notices about key events, like change in control of the business.
4. No income – Start-ups rarely pay dividends or interest while they are in their ramp-up or growth stages. If you’re investing for income, a crowdfunded venture is not likely for you.
5. Fewer protections – The offering documents for these investments are not reviewed by a securities regulatorSecurities regulator A government agency that enforces the securities act in jurisdiction it has authority over. This…+ read full definition. You also won’t have the same legal rights that you would have had you purchased under a prospectus or through a stockStock An investment that gives you part ownership or shares in a company. Often provides voting…+ read full definition exchange.
6. No investment advice – Unless the crowdfunding portal is operated by a registered investment dealerInvestment dealer A securities firm that buys and sells a wide range of investments. They are likely…+ read full definition or an exempt market dealer, it won’t provide you with information about whether the investment is suitable for you as an investor.
7. Potential for fraud – Despite checks made by funding portals, crowdfunding issuers with ill-intentions may not be completely weeded out.
8. Dilution risk – Start-ups could issue new shares to drum up more capital or compensate employees. This comes at the expense of existing shareholders like you as your percentage ownership of the company decreases when additional shares are issued by the company.

What are your responsibilities if you’re considering equity crowdfunding?

Only you can decide whether equity crowdfunding is the type of investment you want to make. Every investment decision should be carefully considered and thoroughly researched ahead of time. Equity crowdfunding is just one of several potential investment optionsOptions An investment that gives you the right to buy or sell it at a set…+ read full definition available to you. Many investors opt not to put all their eggs in one basket and instead choose different kinds of investments to minimize their risk. This is referred to as diversification.

Before you invest in equity crowdfunding, consider these steps:

1. Do a self-check on your comfort level with these risks of equity crowdfunding:
   • Can you afford to lose all your invested money? It’s a real possibility.
   • Are you willing to wait, potentially years, before you might be able to get your money out of this investment, let alone a return?
   • Do you believe you understand the information you have received about this investment opportunity well enough to make an informed decision?
2. Take time to thoroughly review the offering document. Make sure you understand what the business’s objectives are and the risks associated with investing in it.
   • How is the business going to grow?
   • How will it make money and within what timeframe?
3. Investigate. You can search the internet for information on the business, the industry, the people managing the business, as well as the viability of the business plan.
4. Research the portal. You can search the internet for information about the funding portal where you see the offering document. Make sure it’s operated by a registered dealer by inquiring with the Ontario Securities Commission or at CheckBeforeYouInvest.ca.

Find out more about Ontario’s equity crowdfunding initiative.

Caution

The OSCOSC See Ontario Securities Commission.+ read full definition has set out rules and restrictions that provide some investor protections because of the high-risk nature of equity crowdfunding. But these rules and restrictions won’t protect you from all risks associated with equity crowdfunding. Before you consider any equity crowdfunding investment, know and understand the risks.