The fast-evolving field of equity crowdfunding was the hot topic at the inaugural Canadian Crowdfunding Summit in Toronto earlier this week.
A capacity crowd of nearly 350 filled the MaRS auditorium for a full day of crowdfunding-related speakers, seminars and product pitches hosted by the National Crowdfunding Association of Canada.
Dominating the summit was discussion about the potential benefits and pitfalls of the emerging field of equity crowdfunding, which lets individual investors fund startup companies and small businesses online in return for equity.
Of the $5 billion global crowdfunding marketplace in 2013, Funding Portal CEO Teri Kirk estimated that equity crowdfunding comprised only 4% of the total, compared to 96% in non-equity crowdfunding that consist of product pre-sales, donations and rewards. However, with the global crowdfunding marketplace projected to grow to $96 billion by 2025, she noted that a 4% share still represents a huge opportunity, without even factoring in the accelerated growth anticipated for equity crowdfunding worldwide.
NEW EQUITY CROWDFUNDING VARIATIONS EMERGE
The summit showcased equity crowdfunding platforms focused on various investment vehicles, structures and capital pools. CEO Matthew McGrath’s Optimize Capital Markets specializes in institutional crowdfunding that typically invests in proven technology companies, infrastructure projects and large real estate developments. With so many platforms and structures opening up for equity crowdfunding, he said many emerging companies are spending too much time on finding the perfect financing vehicle, instead of promoting their business opportunity to investors. “
At the end of the day if your opportunity is not good, the financing structure is irrelevant,” said McGrath.
Contrasting McGrath’s institutional investing focus was Seattle-based InvestorNextDoor, an equity crowdlending platform for small businesses that uses a peer-to-business model. CEO Tabitha Creighton said her firm aims to provide reasonably priced capital to small businesses who can’t access sub-$150,000 loans from banks and must rely on merchant cash advances. Meanwhile, each peer lender benefits from returns that are structured as fixed income securities, adding, “we’re doing direct security ownership which is incredibly interesting because you have the ability to trade it, to securitize it.”
Sunil Sharma said his venture capital firm Extreme Venture Partners shares many parallels to the equity crowdfunding approach as it invests in seed-stage startups and draws capital from a similar investor base of high net worth individuals. Sharma says equity crowdfunding allows significant numbers of people to become online angel investors.
“We all want this private unlocked capital that’s literally in households across the country to start fuelling disruptive next-generation technology,” he says. “I think equity crowdfunding is a big step in that direction.”
REGULATORY GREY AREAS PERSIST
Public interest in equity crowdfunding is often driven by individuals seeking to participate in investments traditionally only available to elite venture capital funds pursuing extremely high rates of return. And while the potential upside of equity crowdfunding was the summit’s recurring theme, concerns frequently arose about the increased risk individual investors can face when chasing these higher returns.
Ontario Securities Commission representatives Rick Whiler and Denise Morris presented various proposals under consideration that seek to strike a balance of addressing the equity crowdfunding risk to individual investors while simultaneously enabling the free flow of capital. Yet Saskatchewan remains the only Canadian province to have implemented equity crowdfunding legislation.
Cassels Brock lawyer Brian Koscak said the OSC has messaged that they could publish exemptions relating to equity crowdfunding this summer, though it is possible that another round of comment will be required which would push a regulatory decision further into the future.
And though government regulation is struggling to keep pace with the rapidly changing crowdfunding scene, by the time they finally catch up, crowdfunding will have no doubt evolved into something new again.