There is a fierce battle going on right
now in Canada's high-tech sector, lobbying for the legislative
changes in the country's security laws to enact, so-called "crowdfunding" or "crowdsourcing"
legislation, which would permit Canadian entrepreneurs
to raise up to $1M for their startups in small chunks solicited (often over the
Internet) from a fairly large number of individuals.
What is the problem,
then? The issue is that
under the current Canadian securities laws, startups
can only raise money by selling equity in their business to so-called
"accredited investors," who are strictly defined and typically
include family members, angel investment firms or venture capitalists. Should
you wish to raise funds from a broader circle of individual investors, your
company needs to go through a process of stock listing on a publicly traded
exchange that is normally prohibitive to the startup. More details on that
is available in an excellent and succinct six-page document, "General Overview of Canadian Securities Laws Relating
to Raising Capital By Early Stage Companies" prepared by FMC Law, members
of the CrowdSourcing Advocacy Committee of CATA and available through their office.
The advancements in internet technology,
however, make it possible these days to approach and raise the required capital
in small amounts from a much broader group of individuals. Why is this approach
important? It all has to do with risk management and sharing. To illustrate the issue let me quote
from my article recently published in The Ottawa Citizen.
"Let's say I need to raise $0.5M for my startup.
I go to you and ask you for the whole sum or just a $100K chunk. Even assuming
you have the means, you are going to agonize at length over your decision.
However, if I ask you to invest $10-15K, you will spend far less time worrying
and be much more predisposed to take the chance. By employing this tactic, an
entrepreneur will likely raise her $0.5M because the risk is shared among many
investors and each of them does not risk that much.
This is exactly how I raised, some time ago, angels
financing for ATMOS Corp. I brought in about 20 private investors, with each
contributing between $10K and $25K. The beauty of this approach is that nobody
is going to loose sleep and the entrepreneur gets his objective accomplished.
In fact, this is the same principle in action that powers the IPOs and
syndicated VC rounds albeit in a smaller scale. It works, therefore, use
it."
As is often the case, our American friends
are much faster on their feet and have already kick-started the required
changes by the U.S. President Obama enacting the Jumpstart Our
Business Startups (JOBS) Act on April 5, 2012. The act includes
provisions to relax rules around online equity crowdfunding and will allow
businesses to raise up to $1-million via online “funding
portals". There is a real risk of Canada falling behind on the legislative side but also,
more importantly, of having Canadian startups falling behind their competitors
in the US. Recently, Andrea Johnson, Partner with Fraser Milner Casgrain,
summarized nicely the risks of falling behind the U.S. in this video interview with BNN.
Given that, unlike the US, Canada has no
federal securities regulator and instead,
securities are regulated at the provincial level, we are likely looking
at a rather fragmented approach to this problem - with some provinces
taking the lead and others a wait-and-see approach. In a typical fashion, it
will likely take about 2 years for Canada to get its act together and catch up.
The only bright side and some hope is the energetic lobbying campaign currently
underway conducted by the Canadian Advanced Technology Alliance (CATA) led by John Reid,
president and chief executive officer. They deserve our strong support so take action today by writing and talking to your MPP
or MP!
In a broader context of supporting and
fostering entrepreneurial culture, why do we often have to be so reactive and lackadaisical in Canada? We need
to create conditions in this country which encourage and make it easy to pursue
new, especially knowledge-based, business creation. How about Canada as a startup
nation? We already have a
reasonably solid R&D infrastructure, we have system incentives, through the
SRED mechanism, to encourage innovation. What we do not have are strong financial incentives that support risk- taking and
capital raising for early-stage companies. This is not rocket science, a number
of attractive measures have been put forward, including the proposed angel financing tax credit or these crowdfunding ideas. We need
to lobby
our politicians to take action now!
