The humble beginnings of any start-up company that grows into a powerhouse business always become legendary. The garage where Bill Gates and Paul Allen started building Microsoft. The apartment where the founders of Airbnb rented out their first mattresses. The bedroom is Steve Jobs’ mother’s house where he and Steve Wozniak built the first 50 Apple computers.
These are all stories that start-up founders know and cherish. This is how they see themselves—using every ounce of creativity and ingenuity to bring their idea to the light of day, doing everything it takes and more. But these companies didn’t go from a bootstrap start-up to successful, industry-defining companies overnight or without help. Instead, all these companies raised equity through investors to fund and grow their ventures. The necessity of raising equity capital cannot be understated.
That is why the recent changes to the Canadian investing landscape has everyone talking. These changes will make this critical part, the raising of capital, more accessible and more equitable. This is a welcome change that is being heralded as a major milestone for the Canadian start-up market.
How the CSA has Made Crowdfunding Easier and More Accessible to Canadian Companies
The Canadian Securities Administrators (CSA) have set in place new rules and regulations around securities crowdfunding, which have come into effect as of September 21, 2021. Start-ups and investors alike are rejoicing as the changes have made the investing landscape more accessible to regular Canadians and have given Canadian start-ups more avenues to raise capital through equity crowdfunding.
These rules have the benefit of being regulated and monitored from a federal level. The Start-up Crowdfunding Registration and Prospectus Exemptions is a welcome change as the previous regulation system was done on a provincial basis. While provincial regulation authorities do have their place, the equity crowdfunding world is not one of those places!
Where you would once find a patchwork of provincial regulations that often didn’t match up well with other provinces, you now have a consistent set of guidelines and framework for equity crowdfunding to take place. So how exactly does this help Canadian companies?
Remove the red tape of regulation for certain businesses
The ability for a co-operative or association to use the crowdfunding model to raise capital, from a regulation standpoint, was limited or non-existent. With the changes recently introduced, these regulatory hurdles are removed, opening a whole new pool of capital for these companies to draw from.
Increases to the maximum amount of dollars an individual can invest in a company
For individuals looking to invest through a crowdfunding model, you were once limited to $1,500 per person. Not anymore! The new regulations have lifted that to $2,500 and increased to $10,000 if a registered dealer has advised them that the investment is sound and worthwhile.
Increases to the limit of investment companies can raise every year
The previous limit for equity fundraising was $500 000 per issuer to $1.5 million. This has tremendous positive effects on start-ups looking to raise significant capital from crowdfunding markets.
Create a framework of certification to protect investors and certify companies raising capital
Companies looking to raise capital from crowdfunding must certify that they have operational capital for a period (6 months) and that they have operations outside of their acquisitions to gain access to the Crowdfunding Prospectus Exemption.
Companies That Have Used Equity Crowdfunding to Raise Capital in Canada
Other countries have made the crowdfunding model easy and accessible for years to benefit their start-up business culture. For example, the United Kingdom and the United States business ecosystem have all thrived due to centralized crowdfunding rules, and the Canadian start-up environment is ready for the change.
Hardbacon, a Canadian financial company, has raised $2.3 million across three equity crowdfunding rounds. They have used these injections of capital to expand their offerings and grow their presence in the Canadian market.
FrontFundr, a Canadian crowdfunding platform, raised $1.78 million on its own crowdfunding platform in a wonderful display of entrepreneurial confidence! Better yet, that brings the total funding they have raised, on their own platform, to $5.48 million. They have been major advocates for these changes in Canada and are, in their founders’ words, “missionaries to spread the word around crowdfunding” and are more than happy to “do the heavy lifting” to be trailblazers.
Dealmaker is another great example of crowdfunding success. The Canadian start-up works in the Canadian and American markets, facilitating smooth and effective equity crowdfunding campaigns. They were featured in an InvestorWire article as ”One to Watch” due to their great track record of consistent positive growth and its “market-leading technology.” They also mention their ability to help raise capital across a diverse set of markets.
Why Crowdfunding is a Great Option, Specifically for Canadian Companies
Those who are well versed in start-up culture, and investing in general, know the term angel investor well. These individuals, typically of high net worth, take an interest in a start-up and provide the necessary capital to either get it off the ground or bridge the financial gap during a challenging period of business growth.
These investors are a true treasure for start-ups because of their willingness to invest in a promising company. In exchange for their capital, they receive equity in the company and receive all the accompanying benefits and risks.
Friends and family rounds are also a common option used to raise capital for star-ups. These options are great, but they are less common in Canada than in the US or the UK. This is due to the lack of large numbers of ultra-wealthy people in Canada. Without the same number of angel investors or friends and family capital rounds, fewer start-ups get their critical early-stage funding.
That is why these changes around equity crowdfunding will have such a profound impact on the Canadian entrepreneurial culture. With access to crowdfunding on a large scale, these companies can get the capital they need when they need it, making for a more competitive and robust marketplace. That is what the future of Canada, its entrepreneurs, and the rest of the world deserve.