Crowd funding takes big steps in U.S.
Startups in Canada may be left behind
When Eric Migicovsky raised $4.5 million US for his startup recently, the money didn’t come from a private-equity firm or a handful of angel investors, but from about 30,000 people he has never met.
Through U.S. crowd funding website Kickstarter, users have pledged amounts ranging from $99 U.S. to $10,000 U.S. to support the University of Waterloo grad’s project to make a smartphone-compatible watch dubbed the Pebble. Migicovsky’s Palo Alto, Calif.,-based company Allerta Inc. had hoped to raise $100,000 US over the course of about five weeks, but the product quickly attracted attention on the Internet and enthusiasm for the project was soon overwhelming. It plowed past the $1-million US mark in 28 hours, and in less than a week it surpassed $3.34 million US to become the most-funded project to date on the site.
In exchange for their support, backers will get from one to 100 of the watches, but with instant market feedback like that, many may be wishing they could buy stock in the fledgling company instead.
Recent changes to legislation in the United States mean that private companies will soon be able to solicit investment from “the crowd.” The shift to permit non-accredited investors to take small equity stakes in private companies has some suggesting Canada’s own startup scene will be left behind if similar changes aren’t enacted north of the border.
The worst-case scenario, they say, is startup and high-growth companies that can’t find capital in Canada defecting to the more accommodating climate in the United States.
One of the loudest voices calling for change is the Canadian Advanced Technology Alliance (CATA), which has launched a public campaign to urge change to securities laws to permit equity investing via crowd funding.
“We made it very clear that growth capital is perhaps the No. 1 driver of locations particularly for startup companies. We are in a digital world, so we should look very carefully at what our international competitor nations are doing,” says John Reid, chief executive of CATA. “Instead of falling behind, why don’t we try to make Canada the destination for emerging growth companies?”
Prior to his run with Kickstarter, Migicovsky had trouble finding funding for his three-year-old company. His first product, the Blackberry-compatible inpulse watch, didn’t take off the way his latest innovation has.
Allerta did Y Combinator, the Mountain View, Calif.,based seed-stage funding boot camp (typical investments range from $17,000 US to $20,000 U.S.), and “raised a very small intro round after that,” he said in an interview.
But attracting investors was “very difficult,” he said. “Especially for a hardware company, no one wants to invest in a hardware company.”
So he turned to Kickstarter, one of the bestknown crowd funding websites, which helps developers of creative projects raise money by soliciting pledges on the web. In exchange for support, backers could get a promise a project will get made, a copy of an album, a credit in a film or a watch, for example.
Kickstarter charges a five per cent fee and Amazon. com takes between three and five per cent to process the payments. But the developers retain full ownership of their project, which must hit their minimum funding target by a set deadline or no money changes hands.
With the deadline to fund the project still a month away, as of Wednesday afternoon, 31,738 people had pledged $4,568,573 US to support it. Beyond the promise of a cool watch, backers of projects like this could soon be investors in the United States.
On April 5, President Barack Obama signed the Jumpstart Our Businesses Startups (JOBS) Act into law. Among other things, the legislation will allow companies to raise up to $1-million U.S. from small-stake investors.
The Securities and Exchange Commission is undertaking a 270-day rule-making and review period before the law will be implemented.
In Canada, there are limited circumstances in which investors can buy securities in a private company without the prospectus required as part of a traditional initial public offering.
Exemptions from the prospectus requirement vary across jurisdictions and include friends and family raises. Two exemptions that apply in all of the provinces are for accredited investors — those who have either a net worth of more than $1 million or annual income of more than $200,000 — or for a minimum investment of at least $150,000.
The rationale behind both is that they indicate either sophistication or the financial ability to absorb a loss or seek professional advice.
The Canadian Securities Administrators, the umbrella group for the country’s 13 provincial and territorial regulators, is in the midst of reviewing these two exemptions with a view to narrowing the class of investors who can buy securities absent a prospectus.