Crowdfunding in Canada: Opportunities and Hurdles

May 11, 2012

Crowdfunding platforms raised $1.5 billion and successfully funded more than one million campaigns in 2011. Those numbers are forecast to double in 2012. The biggest player is Kickstarter.

TechCrunch suggests that with the US JOBS Act becoming law, the tech industry (and the economy at large) are headed for some big changes. Namely, the legalization of crowdfunding in startups for non-accredited investors has come to pass. In terms of its compound annual growth rate (CAGR), the North American crowdfunding industry is growing at a rate of 63% in terms of the total amount of funds raised.

“Crowdfunding itself has become a viable alternative for capital formation for new commercial ventures,” said Carl Esposti, the CEO of Massolution.

In the USA, the SEC is currently working out how it will regulate crowdfunding under new the JOBS Act Era. Massolution expects securities-based crowdfunding to increase significantly in 2013 and will begin creating a host of new funding sources for many startups and early-stage businesses over the course of next year.

For VS star Fred Wilson, “If these crowdfunding markets really do develop into these vibrant markets… maybe the answer is to leverage that capital and do something interesting there as opposed to going out and raising money from the institutions.” Thus, GigaOM suggests that a possible model could be a scenario in which a VC spots an interesting deal in the crowfunding market and offers to sponsor the deal with one-tenth of a $1 million round, he said, potentially making it easier for the startup to raise the remaining $900,000. The hypothetical VC could also join the board and get added equity for the expertise.

SITUATION IN CANADA

The Globe and Mail reports some hurdles in the growth of crowdfunding in Canada. A new law similar to the one in the USA is unlikely in the short-term because the regulators are spread in all 13 provinces and territories.

The lack of a national regulator like the SEC requires more lobbying for pro-crowdfunding supporters. Furthermore, the Canadian market is smaller and angel projects would raised thousands of dollars, not millions like in the USA.

Crowdfunding sites are paid by commissions, so the Canadian market is definitely less attractive. While some analysts doubt that crowd can be wise investors and do serious due diligence, it has so far been very beneficial to charities and it could become for tech entrepreneurs by improving access to capital and reducing dramatically paperwork.

The Canadian Advanced Technology Alliance has begun a campaign to bring crowdfunding to Canada. The group plans to fan out across the country, putting pressure on provincial governments to change their securities rules to match those in the U.S. JOBS Act.

Canada’s technology industry fears capital eager to get a piece of the next Facebook will rush to the U.S., leaving Canada further behind than it already is. “We have to do this at the same pace of the U.S. or we’ll get so far behind that we’ll never catch up,” said Barry Gander, executive vice president at the technology alliance.

So far, Canada’s securities regulators are distant observers of what’s happening in the United States. Crowdfunding would be “a pretty big leap, I think, for us to take, but we would be interested in seeing where it goes,” Bill Rice, head of the Alberta Securities Commission and chairman of the Canadian Securities Administrators, noted.

Here are some crowdfunding web sites available to Canadian businesses: