We’ve all heard the word “crowdfunding”, but does it really apply to our business? The first ever Canadian report on crowdfunding was released at the end of 2016 by the National Crowdfunding Association of Canada, and it predicts that once all of the numbers are finalized, crowdfunding will have reach $190 million in 2016. If raising funds for your business could give you the fuel that you need to propel you to new heights, then crowdfunding — collecting financial contributions from many strangers not usually connected to the financial sector — represents an alternative to traditional forms of financing your business dream.
Crowdfunding is primarily accomplished over the Internet via various crowdfunding platforms, for a fee, or as the old adage goes, “There Ain’t No Such Thing As A Free Lunch (TANSTAAFL to Robert Heinlein fans)”. Equity crowdfunding is available in British Columbia, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia. It is currently under consideration by other provincial and territorial securities regulators.
Many factors contribute to a successful campaign, including the number of people who see your campaign, and whether they buy into your idea. Telling a compelling story and raising awareness about your campaign are vital, so tools such as social media have an important role in promoting your campaign. Be sure to do some research to find the right crowdfunding platform to showcase your idea.
There are four distinct crowdfunding models:
Donation/ Reward Model
This is the original model that most of us are familiar with which the non-profit sector was the first to successfully employ. It continues to be the largest crowdfunding category worldwide in terms of existing platforms; however, it does not represent the majority of capital raised. Further, only 10% of these campaigns have raised over $10,000 (USD).
The Lending Model takes on many forms. There is the traditional lending agreement where there is an expectation for a monetary reimbursement in the form of interest, with a loan that may or may not be guaranteed. Then, there is the forgivable loan, which just as its name implies may or may not be reimbursed based on pre-defined conditions. Next, there is the pre-sales agreement, where the finished product is promised in return for the contributor’s funding.
Needless to say, The Lending model poses a number of problems, including breaches of securities regulations and also raises questions about IP ownership and creative control. Not all forms of this model are always allowable in all or in some cases any jurisdictions in Canada.
Investment (or Equity-based) Model
The Investment Model has been the most successful in terms of the number of campaigns and the average funding raised per campaign. This model accounts for over 80% of the global Crowdfunding campaigns having raised over $25,000 (USD) each. However, the Investment Model poses many of the same serious problems as did the Lending Model, including breaches of securities regulations, IP ownership and creative control. As noted above, likewise, not all forms of this model are allowable in all or in some cases any jurisdictions in Canada.
As its name implies, there have been a number of creative hybrid models that combine some form of the above three models. For example, innovative distribution rights models that allow investors to participate in profit sharing without following a traditional investment model which is currently not legally permitted in Canada. Creative business people will continue to explore this model in the future to provide them with the funding they require to reach their goals.
While originally crowdfunding was used to raise money to fund the development of a well-defined, singular project, these new forms of crowdsourced private financing have lowered the barriers to entry not only for financing projects, but also for the average citizen to play the role of investor. Crowdfunding also has a unique dual function of providing both private financing and generating publicity and attention for a project.
While crowdfunding will not work for every venture, it can be a way to test and validate your ideas, promote your business, and provide you with the funding needed to take your business to the next level.