Barry Choi: Ever used Kickstarter or GoFundme? Crowdfunding can now be used to invest in private companies

·5 min read

You’ve probably taken part in crowdfunding at some point. Have you ever used Kickstarter to support a service or movie that someone is trying to get off the ground? Have you ever donated money for a medical emergency via GoFundMe?

These are the two most traditional uses of online crowdfunding, where users are free to submit as much money as they wish to a desired cause. There are also membership platforms — such as Patreon and Substack — that allow content creators to get paid by offering subscriptions to their fans.

While these platforms are a great way to give fans exclusive access to content and products, it doesn’t provide any equity. You won’t own a part of a company by donating through GoFundMe.

However, there are new portals emerging that allow investors to also own a piece of a company. Equity crowdfunding platforms are becoming more common in Canada, and it’s allowing everyday investors to own part of the action that was once reserved to accredited investors.

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How it works

In the past, direct investing in Canadian starts-up was limited to wealthy individuals, accredited investors and venture capital. Oh and the cast of “Dragons’ Den.” But that changed in 2021 when the provinces harmonized their rules around who can contribute to equity crowdfunding, and how much they can contribute.

With equity crowdfunding, a large number of investors can contribute to a business via platforms like FrontFundr or Equivesto.

When investors contribute to a business through an equity crowdfunding portal, they receive a stake in the business. Equity crowdfunding allows start-ups to raise funds without loans, while investors are able to gain equity in a company for a fraction of the price of a traditional buyout.

With equity crowdfunding, Canadian start-ups are allowed to raise up to 1.5 million dollars during a 12-month period.

For everyday investors, you can invest up to $2,500, per start-up, per crowdfunding campaign or “crowdfunding distribution.” For example, a start-up could seek crowdfunding March 1, then Dec. 1, then Feb. 15. Those three “crowdfunding distributions” fall under the 12-month timeline where the company can raise $1.5 million. Everyday investors can then invest $2,500 in each of those distributions, for a total of $7,500 over a 12-month period.

While the new harmonized rules outline a standardized maximum investment for the average investor, some crowdfunding platforms may also have their own rules that allow higher levels of investment.

Frontfundr has three different investor levels — eligible, retail and accredited — that each have different requirements for qualification, along with different contribution limits. The contribution limits are also affected by your province of residence.

Opening up private capital markets in Canada

Equity crowdfunding doesn’t only make it easier to contribute to individual companies, some view it as a key to giving consumers more economic power.

“The democratization of the private markets enables the public to vote with their investment dollars for companies that they believe could bring positive change, become successful and create attractive returns,” says Peter-Paul Van Hoeken, founder & CEO of FrontFundr.

“Investors can make investments in private companies for as little as $100.”

Getting funding can be essential for entrepreneurs to survive, but not all companies will qualify for crowdfunding platforms.

“We evaluate whether the type of business, products and services, and stage of development are a fit,” says Van Hoeken, who says that they vet the businesses by learning about their management teams, and gather materials to determine their current and potential future health as a business. One factor they consider is whether they believe the company is ready to raise capital, and is a viable investment opportunity.

Risk and reward

The idea of investing in private companies and getting equity is exciting for many people, but like any investment, it comes with risks.

There’s always a chance that the company you invest in fails, causing you to lose your investment. This is a risk with all investing, but is more likely for start-ups and early-stage businesses.

There is also the risk of unregistered funding portals; sites that are set up to take investments but are not registered with the appropriate securities commission. If you’re ever in doubt about the legitimacy of a portal, it is best to contact the CSA.

As a general rule, it’s usually advised to make relatively small investments in multiple companies, instead of going all-in on a single one.

Crowdfunding real estate

To a certain extent, crowdfunding is also available for real estate. Considering how much it costs to buy a home in Canada these days, it shouldn’t be a surprise that companies are now offering fractional homeownership.

Companies such as Willow and Addy split properties into equal shares and make them available to the public. If they buy a property for $500,000 it could then be split into 500,000 units. That means you could own a part of a home for as little as $1. Once you purchase a share, you get a proportionate share of rental income. You can also get paid if the property is sold for profit.

Not only do you get fractional ownership in a property, but you don’t have to deal with lawyers, realtors, or land transfer taxes when selling your units.

The cost of getting into fractional home ownership is quite low, but it’s worth noting that additional fees apply, like transaction and management fees, or annual membership fees.

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Doing your due diligence is paramount

Even though companies and properties are vetted in advance on crowdfunding platforms, you should always do your due diligence. Research the companies you’re interested in to understand their business model, competition and marketing strategy. You can also request financial statements from companies, and comb through the statements yourself — or get a professional to do it — in order to make sure they have enough cash flow to continue operating.

Investment crowdfunding may be new, but with standardized regulations, more Canadians are becoming interested. Only time will tell how entrepreneurs and investors do, but it’s an exciting time that allows anyone to sit in the “Dragons’ Den.”

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.