Guest Contribution by John Wires – @johnwires

Canadian Business, Startup, Tech and Sports Lawyer

 

*This is not legal advice, retain le

gal counsel before relying on any information in this article.

 

Crowdfunding is becoming all the rage and so it should, its a game changer.

 

It started with micro-financing for charitable purposes on sites like Kiva.org, moved to aiding artistic, gaming and technology projects like those on Kickstarter.com but last month the US JOBS Act, (specifically Title III, the Crowdfund Act) was signed by President Obama allowing start-ups to crowd fund their ventures online in exchange for equity positions.

 

The power of online crowdfunding is nothing short of amazing. On Kickstarter.com for example, some projects are raising over $1.0 million (without giving up equity) from thousands of “funders” in less than 30 days. Funding initiatives are all based on a profile video and project descriptions.

 

This project by Double Fine raised $3.3 million from over 87,000 people to develop a new computer game and again, gave up %0 equity. Crowdfunding poses as a massive disruption to the traditional models of funding business and its only going to grow as a means of raising capital now that “funders” can take an equity share.

 

To me it’s exciting, and for entrepreneurs, it should be liberating.

 

How The Act Plays Out & the Implications for Canadian Start-ups

 

The big question is how will crowdfunding play out under the new legislation? In particular, what does it mean for Canadian start-ups?

 

The mainstream media highlights that the new legislation allows “emerging growth companies” to raise up to $1.0 million from up to 2000 investors online with limits on the amount each individual can invest.

 

What isn’t mentioned is that the new ventures looking to crowdfund must do so through what the Act defines as “funding portals” or funding websites. Funding portals will be heavily regulated and must be registered with the US Securities Exchange Commission (“SEC”).

 

Its not simply a matter of popping online and asking people to fund you.

 

While crowdfunding will be closely watched and regulated by the SEC, there may be very few measures to stop Canadians from incorporating in the United States to be listed on the coming wave of funding portals.

 

For that reason, David Geertz, the Vancouver based founder of a Canadian crowdfunding site called SoKap, sees a brain drain full of Canadian start-ups heading south.

 

Now that the Act is signed, the SEC has 270 days to put together the rules and regulations for funding portals, aside from those already specified in the Act.

 

For example, the Act requires funding portals to provide certain disclosure information to investors and investors will be forced to acknowledge the risk of investing in growth companies. Portals will be responsible for collecting information about the businesses they list on their website, including:

 

  • business plans;

  • income tax statements;

  • financial statements;

  • target offering amount;

  • deadline to reach the funding goal;

  • how the shares are valued;

  • how much equity is being offered;

  • the names of shareholders with over 20% of shares;

  • the risk of the company issuing more shares;

  • the risks of being a minority shareholder

  • the physical address;

  • names of directors; and
,
  • how much money has been invested in the company to date.
 

Perhaps the most interesting issue moving forward will be who jumps on the opportunity to establish funding portals. Under the Act, funding portals, which in essence are intermediaries, cannot offer investment advice, pay anyone to promote the investments or handle the investor funds. That takes the appeal away from Wall Street and the big banks, although traditional “brokers” may still have a place in establishing funding portals.

 

While the fear of an increase in fraud is likely legitimate, it will be interesting to see if the SEC can find the right balance in drafting the rules and regulations between promoting growth and discouraging fraud.

 

It will also be interesting to see whether the online power of what Rachel Botsman coined “reputation capital” and “trust mechanics” can keep company directors in line.

 

A Canadian Response

 

Witnessing the development of new and progressive crowdfunding laws south of the border, has prompted calls in Canada for similar legislation.

 

However, the crowdfunding issue in Canada is quite unique. Canada doesn’t have a national securities regulator, and as of 2011, the Canadian Supreme Court said the Federal Government can’t step on the provinces’ toes by creating one (see Reference Re Securities Act, 2011 SCC 66).

 

That means that any legislative initiatives to allow for crowdfunding would have to come from individual provinces.

 

From the author’s point of view, the provincial legislatures should be racing to the front of the line to address crowdfunding legislation. The intent of which will be to generate an entirely new wave of crowdfunded businesses and divert the brain drain to flow inter-provincially as opposed to internationally.

 

About the author: John was called to the Bar of the Law Society of Upper Canada in 2011. He is a member of the Advocates’ Society and practices corporate commercial law with a focus on internet and tech start-ups, insurance, sports and entertainment. He has appeared in the Ontario Superior Court, the Ontario Court of Appeal and private arbitrations. John graduated from law school with first class honours specializing in both International Trade and Corporate Commercial Law. During his undergraduate degree he played Division I NCAA hockey in New York and later for the Owen Sound Attack in the Ontario Hockey League (OHL)

Rich Text AreaToolbarBold (Ctrl + B)Italic (Ctrl + I)Strikethrough (Alt + Shift + D)UnderlineUnordered list (Alt + Shift + U)Ordered list (Alt + Shift + O)OutdentIndentAlign Left (Alt + Shift + L)Align Center (Alt + Shift + C)Align Right (Alt + Shift + R)Insert/edit link (Alt + Shift + A)Unlink (Alt + Shift + S)Insert/edit imageEdit CSS StyleInsert More Tag (Alt + Shift + T)Insert Page break (Alt + Shift + P)Toggle spellchecker (Alt + Shift + N)▼
FindToggle fullscreen mode (Alt + Shift + G)Add NextGEN GalleryInsert WP Socializer buttonsWP UI widgets▼

Font sizeFont size▼
FormatFormat▼
Paste as Plain TextPaste from WordRemove formattingInsert custom characterPrintSelect text color▼
Select background color▼
EmotionsSuperscriptSubscriptInsert / edit embedded mediaUndo (Ctrl + Z)Redo (Ctrl + Y)Insert/Edit AttributesHelp (Alt + Shift + H)
Inserts a new tableTable row propertiesTable cell propertiesInsert row beforeInsert row afterDelete rowInsert column beforeInsert column afterRemove columnSplit merged table cellsMerge table cellsDelete tableInsert/edit anchor

Guest Contribution by John Wires – @johnwires
Canadian Business, Startup, Tech and Sports Lawyer

*This is not legal advice, retain legal counsel before relying on any information in this article.

Crowdfunding is becoming all the rage and so it should, its a game changer.

It started with micro-financing for charitable purposes on sites like Kiva.org, moved to aiding artistic, gaming and technology projects like those on Kickstarter.com but last month the US JOBS Act, (specifically Title III, the Crowdfund Act) was signed by President Obama allowing start-ups to crowd fund their ventures online in exchange for equity positions.

The power of online crowdfunding is nothing short of amazing. On Kickstarter.com for example, some projects are raising over $1.0 million (without giving up equity) from thousands of “funders” in less than 30 days. Funding initiatives are all based on a profile video and project descriptions.

This project by Double Fine raised $3.3 million from over 87,000 people to develop a new computer game and again, gave up %0 equity. Crowdfunding poses as a massive disruption to the traditional models of funding business and its only going to grow as a means of raising capital now that “funders” can take an equity share.

To me it’s exciting, and for entrepreneurs, it should be liberating.

How The Act Plays Out & the Implications for Canadian Start-ups

The big question is how will crowdfunding play out under the new legislation? In particular, what does it mean for Canadian start-ups?

The mainstream media highlights that the new legislation allows “emerging growth companies” to raise up to $1.0 million from up to 2000 investors online with limits on the amount each individual can invest.

What isn’t mentioned is that the new ventures looking to crowdfund must do so through what the Act defines as “funding portals” or funding websites. Funding portals will be heavily regulated and must be registered with the US Securities Exchange Commission (“SEC”).

Its not simply a matter of popping online and asking people to fund you.

While crowdfunding will be closely watched and regulated by the SEC, there may be very few measures to stop Canadians from incorporating in the United States to be listed on the coming wave of funding portals.

For that reason, David Geertz, the Vancouver based founder of a Canadian crowdfunding site called SoKap, sees a brain drain full of Canadian start-ups heading south.

Now that the Act is signed, the SEC has 270 days to put together the rules and regulations for funding portals, aside from those already specified in the Act.

For example, the Act requires funding portals to provide certain disclosure information to investors and investors will be forced to acknowledge the risk of investing in growth companies. Portals will be responsible for collecting information about the businesses they list on their website, including:

business plans;

income tax statements;

financial statements;

target offering amount;

deadline to reach the funding goal;

how the shares are valued;

how much equity is being offered;

the names of shareholders with over 20% of shares;

the risk of the company issuing more shares;

the risks of being a minority shareholder

the physical address;

names of directors; and
,
how much money has been invested in the company to date.

Perhaps the most interesting issue moving forward will be who jumps on the opportunity to establish funding portals. Under the Act, funding portals, which in essence are intermediaries, cannot offer investment advice, pay anyone to promote the investments or handle the investor funds. That takes the appeal away from Wall Street and the big banks, although traditional “brokers” may still have a place in establishing funding portals.

While the fear of an increase in fraud is likely legitimate, it will be interesting to see if the SEC can find the right balance in drafting the rules and regulations between promoting growth and discouraging fraud.

It will also be interesting to see whether the online power of what Rachel Botsman coined “reputation capital” and “trust mechanics” can keep company directors in line.

A Canadian Response

Witnessing the development of new and progressive crowdfunding laws south of the border, has prompted calls in Canada for similar legislation.

However, the crowdfunding issue in Canada is quite unique. Canada doesn’t have a national securities regulator, and as of 2011, the Canadian Supreme Court said the Federal Government can’t step on the provinces’ toes by creating one (see Reference Re Securities Act, 2011 SCC 66).

That means that any legislative initiatives to allow for crowdfunding would have to come from individual provinces.

From the author’s point of view, the provincial legislatures should be racing to the front of the line to address crowdfunding legislation. The intent of which will be to generate an entirely new wave of crowdfunded businesses and divert the brain drain to flow inter-provincially as opposed to internationally.

About the author: John was called to the Bar of the Law Society of Upper Canada in 2011. He is a member of the Advocates’ Society and practices corporate commercial law with a focus on internet and tech start-ups, insurance, sports and entertainment. He has appeared in the Ontario Superior Court, the Ontario Court of Appeal and private arbitrations. John graduated from law school with first class honours specializing in both International Trade and Corporate Commercial Law. During his undergraduate degree he played Division I NCAA hockey in New York and later for the Owen Sound Attack in the Ontario Hockey League (OHL)
Path:

comments