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What is Crowdfunding?

posted Apr 3, 2013, 4:45 PM by Andrew Manzo

The current economic climate has encouraged many people to become interested in striking out and starting their own businesses. Technology has grown to the point that many people can start businesses, and earn money, with the help of the Internet. For those working from home, costs might be low initially, but expansion might require something more. And, of course, if you are a small business starting out in a different location you need start up cash immediately.

Getting that cash can be difficult if you can’t the angel investment you need, or the venture capital you require. And what if the bank turns you down for a loan? Small business fundingisn’t easy. However, with the help of crowdfunding many businesses are starting to get off the ground.

What is Crowdfunding?

Crowdfunding works in much the same way as microloans for the poor. You receive a large number of small cash infusions, rather than one or two large ones. Multiple investors can band together to pledge amounts of money ranging from one dollar to thousands of dollars. Web sites like Kickstarter have really taken off in the United States. In Canada, though, the trend is slow to catch on. Sites like Ideavibes and Startup Fuel are offering crowdfunding services, but the regulatory situation in Canada provides challenges to crowdfunding.

How Does Crowdfunding Work?

In some cases, efforts to fund an enterprise are more like donations. Contributions to the startup are made, and the person giving the money may only be listed as a supporter, and receive no tangible benefits. In other cases, business owners offer finished products, or provide discounts, in return for financial support. So, an “investor” might not own equity in the company, but he or she can expect to be among the first to receive a product, or get some other special perk. (I funded a friend’s comic book at a level that allows me to be a background character and get artwork on top of a free copy of the comic.) This type of crowfunding is popular because securities regulators don’t have to get involved. “Investors” receive “gifts” or recognition, and that is the end of it.

The United States just recently passed a law that eases requirements for crowdfunding that involves an equity model allowing investors to receive an actual interest in the business profits. This is where regulatory agencies come in. The United States just passed a law that helps exempt crowdfunding from some of the more onerous requirements of business and investors involved. In Canada, the snag is that there is no national regulatory agency.

Crowdfunding and the Equity Model in Canada

With the equity model, investors truly are investors, and receive some sort of interest in the company, and receive an on-going benefit. However, in Canada the ability to raise funds for your business with the help of crowdfunding is limited by the fact that you would have to meet requirements in 13 different provinces and territories. Unlike the U.S., one rules change doesn’t solve the issue. There would have to rules changes with each of the Canadian securities regulators. And, if one province/territory changed the rules, the funding could only be raised in that region; no nationwide push for funding.

So, while crowdfunding might help your business, it might take a while for it to really catch on Canada — especially if you want to pursue the equity model.

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