Introduction to Crowdfunding - National Crowdfunding Association...

Date: December 9, 2013

Prepared for: Employment and Social Development

Canada - Phase IV, 6D359, Gatineau, Quebec

Prepared by: Craig Asano

Introduction to Crowdfunding

Introduction to Crowdfunding

• Part 1: Introduction to NCFA Canada

• Part 2: What is Crowdfunding?

• Part 3: Benefits and Challenges

• Part 4: Industry Overview

• Part 5: Regulatory and Market Overview

• Part 6: Questions and Answers

• Part 7: Appendices

Slide | 2 Employment and Social Development Canada

Presentation Outline

PART 1

Part 1: NCFA Canada Introduction


• Canada’s leading Crowdfunding Industry Association

• Cross-Canada non-profit with a growing National membership

of over 600+ industry stakeholders, SMEs and investors with a

wide social media reach

• Broad-based representing all forms of crowdfunding

• Community-based, membership-driven, collaborative,

transparent, inclusive and dynamic

• Support innovation, small businesses and entrepreneurship

and advocate for a dynamic, robust, harmonious and

protective Crowdfunding industry in Canada

• We serve industry, government, academia, small to mid-size

enterprises, innovation hubs and investor communities

Slide | 4

Who is NCFA Canada?

Employment and Social Development Canada

Slide | 5

NCFANot-for

Profit

* All resources are voluntary except for executive

management and any contracted services

Community-based

Industry Partners

� Sponsors

� Members

� Ambassadors

� Business associations

� International affiliates

Eco-system Partners

� Federal Government

� Provincial / municipal –

Regional Innovation centres

� Universities

Programs and

ServicesAdvocacy

Education and

Research

Networking and

Connecting

Industry News

Canadian Directory

Research & Analytics

Online and Offline

courses

Media Interviews

Public Relations Voice

Lobbying

Legal Framework

Regulations

Partner development

Lead generation

Introductions

Hosted Events

Ambassador Workshops

Community Building

* 2014 goals

Online marketplace

for discounted services

Programs

* Executive Management

Advisory Committees

Non-voting National Membership

NCFA Canada - NFP Structure


PART 2

Part 2: What is Crowdfunding?


Slide | 7

What is Crowdfunding?

Definition: “Pooling of small amounts of capital from a large number

of people (known as ‘the crowd’) using the internet and social media”

Basic Models:

Primary Participants:

• Industry Stakeholders: Portals, providers

and enablers

• Fundraisers: Individuals or companies

that are seeking funding

• Investors: Retail or accredited

��


�

Legally permitted

Not legally permitted

Permitted in Saskatchewan and via OM Exemption in some provinces

��

�

�

Slide | 8

Does Crowdfunding Work?

Source: Kickstarter Campaign page Rewards-based Canadian Example


Slide | 9

Sharing Economy

Moores Law

Virtual Startups

Maker Faire

Dragon’s Den

Disruptive Innovation

Social Enterprise

Key Drivers – Advancements in Technology

Highly Connected World


Slide | 10

The Brain Drain

Key Drivers – The Funding Gap

The Funding Gap

� Decline in innovation, capital

drain, negatively impact job

creation

SMEs are the backbone of

the Canadian economy

� Need capital to innovate

and compete globally, yet

they face HIGH BARRIERS

Risk?


Slide | 11

Donation-based Canadian Examples

Finance private citizens to affect political change

• St. Joseph’s Fleming Long Term Care Facility, ON

• Campaign to raise $25-100k to change federal laws

to protect seniors from abuse in long-term care

homes.”

• Appeared on ‘The Crowd funder Show’ launching

September 22, 2013

Community Aide (Alberta Arts Flood Rebuild)

• Seeking $500,000 to rebuilt the arts sector from

damaged or destroyed homes, venues, equipment

and lost contracts

• Industry dollar-for-dollar matching incentive

programs by Suncor Energy and Alberta Foundation

for the Arts


Slide | 12

Social Impact Crowdfunding Examples

Social Impact: Breast Cancer Detect Innovation

• Live campaign – raised over $50,000 towards

launching first clinical partner study

• In collaboration with regional innovation centre,

MaRS, hospital clinic and a group of universities and

breast cancer patients

Dutch city Rotterdam Crowdfunds a Bridge

• Raised $130,000 in 4 months to pay for planning,

design and development

• “The more you donate, the longer the bridge”.

Individuals and organizations sponsored planks of

wood with their name on it

• Civic project bringing the public and city together


Slide | 13

Peer-2-Peer Lending Portal Example


Funding Circle : Online marketplace for

small business loans

• Launched in 2010 and is backed by large VCs

(i.e., Union Square Ventures) and prominent

British entrepreneurs

• Facilitated £183 million pounds of small

loans between 60,000 members

Used by UK Government as Loan Channel

• Investors get an average net return of 5.7%,

access to their funds and can manage risk

• Borrowers get quick access and competitive

rates independent from the bank

Canadian P2P example

• Community Lend – P2P exemptive relief order from the Ontario Securities commission

Slide | 14

Canadian Equity Crowdfunding Portal Example


Goals:

• Generate positive social and

environmental impacts

• Build a scalable social

innovation model that can

operate in other provinces,

states and nations

Social Venture Exchange (SVX):

• In Sep 2013, the SVX received an exemptive order to operate as a Restricted Dealer in

Ontario only. Initiative in collaboration between MaRS, TMX and SVX groups

• Single access point for impact ventures, funds and investors

• During pilot year, their goal is to register 30 issuers, 100 accredited investors, and mobilize

at min $2.5 million in capital for at least 10 ventures and funds on the platform

Slide | 15

Canadian Equity Crowdfunding Portal Example


The Exempt Capital Network

• Launched in 2013, based in Calgary and in

partnership with an EMD

• Brings together corporate issuers, exempt

market accredited investors and industry

professionals

Optimize Capital Markets

• Launched in Sep 2009, Optimize is a

marketplace where accredited investors

and institutions can trade in private

investment opportunities

• Operate in Ontario, Quebec, Alberta and BC

PART 3

Part 3: Benefits and Challenges


• Access to a new source of capital to fill a critical funding gap � Efficient, transparent, cost effective

� Mobilize funds to non-traditional groups (e.g., rural areas, local)

• Crowdfunding helps get new businesses off the ground� First customer traction and pre-order sales (reduces risk)

� Help raise early stage funding (VC feeder system)

� Market driven valuations

� Organizational preparedness

• Market research and product validation� Crowdsourced feedback ‘intelligence’ (bolsters confidence, or

demands that entrepreneurs pivot their business model)

• The power of the crowd: social media / marketing mavens� Once committed investors become avid supporters, promoters and

connectors for the project

Slide | 17

Crowdfunding Benefits for Startups and SMEs


• Support innovation and entrepreneurism in Canada

• Participation in more opportunities (96% of Canadians are non-

accredited investors)

• Direct connection with project founders (engagement)

• Wide range of projects to invest in (diversification)

� Spread risk in a self-directed manner

� Choose a portal and project that suits their investment profile

� Organizational preparedness

• Standardization, tracking and transparency� Technology will professionalize and streamline investor relations

� Standardize shareholder agreements and legal documents

• Direct access to other investors� Angel group syndications, lead investors versus the general crowd

• Go beyond geographic boundaries� Easy access to deals

Slide | 18

Crowdfunding Benefits for Investors


• Fraud and investor protection� Crowd intelligence and due diligence

� Insurance

• Concerns of illiquid nature of crowdfunding investments� Purchase risk acknowledgement

� Strong case to develop a secondary market

• Increase in business failures and investor fatigue

• Large number of investors � Can be organized into a trust (single controlling member)

� Streamlined communications, voting, reporting and tracking

• Regulations need to match equity crowdfunding models� In the US, SEC/FINRA slow to finalize and only recently released equity

crowdfunding rules and regulations

� Canadian regulators are assessing the need for proposed frameworks of a

specific crowdfunding exemption versus permitted under existing

prospectus exemption (i.e., the OM exemption by an EMD)

Slide | 19

Crowdfunding Challenges


PART 4

Part 4: Industry Overview


Slide | 21

Funding Volume

Grew by 81%

$2.7 billion in 2012

$1.5 billion in 2011

Distribution

60% North America

35% Europe

5% Other

Total # of Portals

Grew 80%

813 in Mar 2012

452 in Apr 2011

Source: Massolution Apr 2012

Global Funding Volume by Region (2012)


Slide | 22


Accelerating

81% y-o-y growth

In 2012

Distribution

Lending - $1.2b (44%)

Donation - $980m (37%)

Reward $383m (14%)

Equity $116m (4%)

Fastest Growing

Lending 111%

Global Funding Volume by Model (2012)



Slide | 23

Total Campaigns

1.1 million worldwide

North America (625k)

Europe (470k)

Total # of Portals

Grew by 50%

542 portals in Apr 2011

813 portals in Mar 2012

Average Campaign Size by Model


Slide | 24

Vibrant Growing Industry• 300%+ growth in donation/reward portals since April 2012

• Several niche portals such as student scholarships, sports

athletes, not-for-profits and crowdfunding research

Canadian Industry – Portal Distribution

Reward-based:

Equity-based via Dealer:


Industry

• Growing eco-system� Financial providers, consultants, placement agents

� European crowdfunding network and rise in Asia

� Iterative equity crowdfunding regulations (cost of capital vs need)

• Big data from ‘investment profiles’

• Live Crowdfunding

• Enterprise Crowdfunding� CSR (e.g., Microsoft’s ‘Chipin’ student laptop program)

� Consumer centric (Dodge Dart CF purchase of a vehicle)

� Crowdsourcing input, contests (Doritos revenue share)

• Mainstream Crowdfunding� A&E Project Startup; CNBC Crowdrules

� Celebrity (Donald Trump – fund anything)

Global Crowdfunding Trends


Portals

• More dealer-broker models (EMDs, IIROC)

• Feeder systems and aggregation models

• Increase in niche, community and hybrid platforms

• Direct Crowdfunding (white label, widgets, plugins)

• Cross-border crowdfunding

Issuers and Investors

• More competitive = will need to be more prepared

• Accredited investor equity crowdfunding

• Optimize long term online strategy (engagement)

• Predetermined entry / exit strategies

• Integrated funding strategies (government + CF + VC)

• Member-driven investor syndicates

Global Crowdfunding Trends


PART 5

Part 5: Regulatory and Political Overview


• Events and conferences are springing up across the globe

• Increase in the number of start-ups (i.e., Maker Faire movement)

• SMEs are seeking education to learn best practices for launching a

successful crowdfunding campaign

• Licensed Dealer-Brokers are partnering with Crowdfunding platforms

in the U.S. and new portal registration category created like AngelList

• Online investment communities are forming syndicates

• The largest and most successful portals are aggressively targeting to

expand globally including to Canadian markets

• VC funds are investing in equity crowdfunding portals, such as Union

Square Ventures led $7.5m in CircleUp

• Title II of the JOBS Act commenced on Sep 24, 2013 allowing private

companies to advertise and solicit to the general public for investments

provided that ultimately only accredited investors invest

Slide | 28

Market Overview: High Demand and Activity


• Crowdfunding is a hot topic amongst start-up, new venture, finance,

technology, marketing, government and academic circles

• OSC has taken a leading role in engaging public discussions. Released a

consultation paper in Dec 2012 and received 100+ responses, as set out in its August

2013 progress report

• CSA viewing Offering Memorandum exemption as Canada’s equity

crowdfunding exemption

• CSA released a blanket order that relaxed some financial reporting

requirements last Dec 2012 and is reviewing OM exemption options

• Jun 17, 2013, OSC issued an exemptive relief order for MaRs SVX to sell

securities over the internet to Ontario AI investors for ‘social impact’ deals in

Ontario only ($25-50k/year cap) – relief from Suitability

• Jul 9, 2013, FCAA in Saskatchewan issued a new proposal for comment, which

has been called ‘Crowdfunding lite’

• Canadian deal flow is going South to raise capital on US rewards-based portals

such as Indiegogo and Kickstarter and equity portals such as AngelList

Slide | 29

Market Overview: Strong Political Incentives


Slide | 30

(See Appendices: 1-4 for more details)

Canadian Crowdfunding Regulations

OSC CSA BCSC FCAA

Notice

Reference

Exempt Market Staff

Consultation Paper 45-

710

Multilateral Blanket Order

45-311 to OM - Exemption

from certain financial

statements

National instrument 45-

106

Proposed exemption to

assist capital raising for

small businesses

Equity Crowdfunding

Proposal

Date Issued Dec 2012 Dec 2012 Feb 2013 Proposal Jul 2013

Status Proposal In effect Proposal [LIVE] Dec 6th, 2013

Jurisdiction OntarioCanadian Securities

AdministrationBritish Columbia Saskatchewan

Issuer

Cap per year < $1.5 million < $500k < $150k

Restrictions

Excludes reporting issuer,

investment fund,

mortgage or real estate

entity

Excludes reporting issuer,

investment fund,

mortgage or real estate

entity

Up to twice per year

Incorp Canada Office Yes

AdvertisingPortal and issuer site

only

Audited >$500k None

Certified <$500k $<500k

Complex Securities No No No

POS Disclosure Yes Yes Yes Yes

Risk Ackknowledge Yes Yes Yes Yes

Investor

per deal < $ 2,500 < $ 1,500

per year < $10,000 < $ 2,000 < $ 2,000 Unlimited

Restrictions Accredited or Retail Accredited Accredited or Retail Accredited or Retail

Cooling off period 2 days

Portals Registered Registered Registered

No investment advice

Pre-notice filing

No Registration


PART 6

Part 6: Questions and Answers


Craig Asano is the Founder and Executive Chair of the

National Crowdfunding Association of Canada (NCFA

Canada), a cross-Canada non-profit with the mandate to

provide education, advocacy and networking opportunities

in the emerging Crowdfunding industry. Craig has 15 years

of experience as a marketing strategist, software

technologist and start-up entrepreneur in technology,

finance, manufacturing and real estate sectors.

He is actively involved in developing the Canadian

Crowdfunding industry at a grass-roots level connecting with

industry stakeholders, leaders and key participants across

the country. He regularly participates at crowdfunding

events and has spearheaded multiple programs and

initiatives including Canada’s largest Crowdfunding

Directory, a National Ambassadors outreach program, and

NCFA Canada’s advocacy efforts to advance equity-based

Crowdfunding regulations in Canada.

Slide | 32

Craig Asano: Contact Information


Brian Koscak is a Partner at the law firm of Cassels Brock

& Blackwell LLP located in Toronto, Ontario and practices

in the area of corporate and securities law. Brian is the

Chairman of the Exempt Market Dealers Association of

Canada, a national non-for-profit organization

representing exempt market dealers, issuers and

compliance professionals across Canada. Brian is also a

member of the Ontario Securities Commission’s Exempt

Market Advisory Committee which is considering new

ways to raise capital in Ontario, including through equity

crowdfunding.

Brian is actively involved in developing a viable

Crowdfunding framework for Canada. He has spoken at

numerous Crowdfunding conferences, events and

webinars, met with securities regulators across Canada to

discuss the many aspects of Crowdfunding and is actively

engaged with clients in the space and more generally with

the prospectus and registration issues involving selling

securities over the internet.

Slide | 33

Brian Koscak: Contact Information


Brian Koscak

Partner, Cassels Brock & Blackwell LLP

[email protected]

(416) 860 2955

Cassels Brock & Blackwell LLP

Suite 2100, Scotia Plaza Suite 2200, HSBC Building

40 King Street West 885 West Georgia Street

Toronto, ON Canada M5H 3C2 Vancouver, BC Canada V6C 3E8

Tel: 416 869 5300 Tel: 604 691 6100

Fax: 416 350 8877 Fax: 604 691 6120

PART 7

Part 7: Appendices


Dec 2012: OSC Staff Consultation Paper 45-710

• $1.5 million in any 12 month period

• $2.5k in any single deal up to $10k in any 12 month period

• Incorporated in Canada and head office located in Canada

• Advertising restriction to only the portal and issuer’s website

• Not available to investment funds or complex securities

• Investors can only re-sell securities under existing prospectus

exemptions; they are illiquid investments

• Sign a risk acknowledgement and 2 day cooling off period

• Disclosure at point of sale (financing, issuer and risk factors)

• Deal is <$500K mgt certified statements; >$500k audited

• Portal regulation unclear but will have to register (gatekeeper)

Link to OSC Exempt Market Review (Consultation Paper):

http://www.osc.gov.on.ca/documents/en/Securities-Category4/sn_20121214_45-710_exempt-market-review.pdf

Link to NCFA Canada response:

http://www.ncfacanada.org/ncfa-canada-equity-crowdfunding-principles-response-to-osc-staff-consultation-paper-45-710/

Slide | 35

Appendix 1: OSC Exempt Market Review


Dec 2012: Multilateral CSA Notice 45-311 Exemptions from

Certain Financial Statement Requirements in the OM to

Facilitate Access to Capital by Small Businesses

• Issuer group cap under the Blanket Order < $500,000

• Investor cap of $2,000 of all securities distributed under the blanket order

in any 12 month period

• Issuer cannot be a reporting issuer, investment fund, mortgage

investment entity or a Company engaged in the real estate business

• Issuer is not distributing complex securities

Link to NBSC Blanket Order:

http://www.ncfacanada.org/nbsc-blanket-order-with-important-changes-to-om-exemption-to-facilitate-small-business/

Slide | 36

Appendix 2: CSA Relief Under OM Exemption


Feb 2013: National Instrument 45-106 Proposed Prospectus

Exemption to Assist Capital Raising by Small Businesses

• The issuer need only include unaudited financial statements prepared

using private enterprise GAAP in the offering memorandum and comply

with these conditions:

• Issuer group cap < $500,000

• Investor cap of < $2,000 in any 12-month period

• Issuer is not a reporting issuer, investment fund, mortgage investment

entity or real estate issuer

• Issuer cannot distribute complex securities

• OM contains a bold warning on the front page

Link to BCSC Proposal:

http://www.ncfacanada.org/national-instrument-45-106-proposed-prospectus-exemption-to-assist-capital-raising-by-small-

businesses-request-for-comment/

Slide | 37

Appendix 3: Proposed BC CF Exemption


Approved Dec 6, 2013: FCAA Approves Equity Crowdfunding

Exemption in Saskatchewan

• Investors capped at $1,500 per deal but no limit on how many

investments within any 12-month period

• Issuers can raise up to $150,000 no more than twice per year

• Offering period can be no longer than six months

• No financial statement requirements

• Any type of issuer can use this exemption and issue any type of security

• Portals are exempt from registering with the FCCA, therefore, there are no

“know your client” or “suitability” requirements

• Portals cannot provide investment advice

• Portals can charge fees but no fees are required to be paid to the FCCA

Link to Saskatchewan Crowdfunding ‘lite’:

http://www.ncfacanada.org/wp-content/uploads/2013/07/Proposal-FCAA-Crowdfunding-Exemptions-July-9-2013.pdf

http://ncfacanada.org/equity-crowdfunding-available-in-saskatchewan/

Slide | 38

Appendix 4: FCAA Equity Crowdfunding Exemption


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