How Equity Crowdfunding in Ontario Will Allow the Economy to Prosper - Essay Example

How Equity Crowdfunding in Ontario Will Allow the Economy to Prosper Introduction Crowdfunding can be described as a collection of finances from backers in a “crowd” by means of initiatives that typically take place on an internet platform through which the backers are gathered and united and can pool together resources (Mollick 2). The objectives for the funding could be for purposes of profit or nonprofit projects with the latter including initiatives to fund political candidates or collect support someone in need of medical attention. Furthermore, it can also be used to gather funds for a startup; a common alternative definition of the concept is as a practice where two or more people use the internet to gather funds for a common services product or investment (Mollick 2). The crowdfunding initiative models can involve wide alley of participants who can be people or organizations that propose ideas of projects that need to be funded, the crowdfunding initiative must be supported by an organizations which provides a platform on which they project initiators and the crows can be brought together. The origins of crowd funding can be traced back to the concept of crowd sourcing, this is essentially more intricate concept where and individuals can achieve a fiscal goal through receiving and weighing in of small contributions from several parties (Bannerman). The earliest versions of crowd sourcing can be traced back to the 19th century where the American committee for the statue of liberty had to source for funds from the public as they had run out before the pedestal had been completed. In total, the contributions amounted to over $100,000 in 6 months which was sent in by over 125,000 people most of whom contributed around a dollar less each (Bannerman). Today, there are numerous of websites designed to promote crowdfunding and in the period between 2010 and 2013, over 3 billion dollars have been collected through crowd funding in North America alone (Ordanini et al 44). Equity crowdfunding derived from crowdfunding is a form of financing for business in which entrepreneurs make open calls for funding on the online with the intention of attracting large investor groups (Ahlers et al 4). Some of the popular platforms include crowd cube, through which transactional means and legal frameworks are provided for investors. In the last few decades, there has been a notable increment in the use of equity crowdfunding as an alternative means through which startups can generate enough capital with the volume being estimated to double each year for the last 5 (Ahlers et al 4). It is estimated that in 2011 over $88 million had been raised through equity crowdfunding platforms and after the JOBs was passed in 2013 legalizing crowd funding the number has increased considerably (Valanciene and Sima 41). This is because in most cases, it is small investors who are looking for support for their startups and since they often lack the capacity for extensive research and investment research, they tend to depend on equity crowd funding to successfully gather funds. Despite its apparent popularity in North America more so the United States, it is only recently the Crowd funding has been legally recognized as a legitimate way of both funding startups and investing in a company through online platforms. One of the only few places where crowd funding is legal in Canada is Saskatchewan; however, in the face of recent developments, Ontario is soon expected to be the second province in which crowdfunding will be allowed with many more set to follow in its wake. The security exchange commission in Ontario claim that they have worked closely with their counterparts in Quebec and New Brunswick and other parts of the country to come up with rules that will ensure a degree of uniformity in the long run should they also decides to go the crowd funding way (Gustke). Under the current proposed rules, firms may be allowed to raise as much as 1.5 million by means of portals dedicated to equity crowdfunding. Consequently an individual investor will be allowed to invest as $2,500 in a single offering with individual investors being allowed an upper limit of $10,000 annually (Michelucci and Francesca). These rules are being set up to protect the investors since the government recognizes that the crowdfunding initiatives tend to have relatively higher than normal investment risks (Gustke). Furthermore, the OSC has provided in its proposal that investors must have a 48 hour window in which to determine if they still want to invest of will pull out. The legislation stipulates that the crowd funding will only be allowed for firms that have been incorporated in Canada and whose physical offices are also based there will be allowed to make offerings of their securities through crowdfunding portals (Bannerman). In addition, equity crowd funding offering will be monitored so that they have a time limit, the OSC has recommended a maximum of 90 days; furthermore, the companies are expected to establish a the minimum they want to raise through the crowdfunding effort and unless they can raise the minimum themselves, they would not be allowed to receive any funds from investors (Ahlers et al). According to the OSC, there should be a limit on the securities that can be issued through and equity crowd finding round, novel or complex securities such as derivative are banned and the OSC has also set up numerous rules for the portals to host the crowdfunding initiatives. These are expected to be subject to the same regulations that are applied to market dealer and licensed securities dealers that sell securities which do not require a prospectus. Indeed, key behind the Ontario crowd funding proposal is the prospectus exemption; this is because traditionally companies that issue securities are expected to show a prospectus to prospective investors; however this is often difficult if not impossible for startups that are usually low on revenues (Cumming and Sofia 362). Among the requirements that a firm has to fulfill before they can offer a prospectus is three years of audited financials, understandably this is out of reach for startups which makes the exception critical to them. The Ontario Securities Commission (OSC) proposal allow for these exceptions for crowd funded startups but they are expected to provide some level of disclosure even if not a full prospectus before they can allowed to source for funds. The prospectus exemption is also being considered for situations where a startup wishes to raise money from friend’s family or relatives, in addition to offering an exception for memorandum, this way the company can provide it instead of a prospectus. Companies that are already listed in the Toronto stock exchange will also be expected from prospectus requests if they are already public meaning they can use their old prospectus or not even need to use one. Evidently, the OSC is taking its time before allowing equity crowdfunding into the mainstream, this is mostly because they are working on a series of strict rules to protect investors and given the delicate nature of the venture, this is quite understandable. From an European and American perspective tough, the people of Ontario will enjoy significant benefits once they are able to access the crowd funding platforms, in many parts of Europe and the US, it has been operational for several years and the benefits have proven to be phenomenal for both investors and start up. The crowdfunding venture in Europe tend to place a lot of emphasis on transparency for investors, the funding portals such as crowd cube are very thorough in their due diligence and companies seeking to acquire funding are required to disclose their financial information (De Buysere et al 33). One of the requirements include that a company must produce a business plan for the next 3 years after they acquire the funding, this is a reflection of the requirements by the OSC who in the absence of a prospectus requires at least some evidence of the firms objective and mission before they can allow them to source for funds. For obvious reasons, it is a very convenient source of capita for startup and since it helps entrepreneurs think beyond their own closed or limited networks, in the absence of crowd funding one could only raise capital from friends, or banking institutions, however crowdfunding completely overturns this notion. Through crowdfunding a startup can fund its venture without having to give up equity of accumulating debts and the reward based crowd platforms allow the entrepreneur to raise capital in exchange for simply giving out their tangible products and other relative gifts to compensate the funders in the short term (Prive). Crowd funding is a great way through which risks can be hedged, obviously, starting a company is both a risky and challenging endeavor, in addition to the challenge of accumulating among funding, there is the issue of impossible to forecast expenses as well as challenges in market validation not to mention the fact that most people funding a startup will want to own a piece of it (Ordanini et al 445). Through crowdfunding, risk can be hedged and it serves as a valuable learning experience, it allows entrepreneurs to gain validation while at the same time marinating a grip on their equity and taking the product concept to the market. Equity crowd funding also serves as marketing too since it provides the owner of the startup with an opportunity to introduce the overall mission and objectives of the venture to a wide audience more so on the internet. Given that crowd funding initiatives incorporate a host of media techniques and platforms including and not limited to social media and blogs, it can be a cheap and efficient way through which the startup founders can raise both capital and awareness for their products (Gerber et al 5). This is because in the quest to woo investors, the venture will be viewed by many who may not invest but who will become aware of the firms existence. In addition, the ventures get to host thousands of organic visitors many who are potential funders and customers and who tend to be crucial for viral marketing in that they can spread the word rapidly through social media pages to their friends and connections infinitely increasing the scope of clients for the venture. An equity funding initiatives also serve a s proof of concept in that it helps both the startup founders and the potential investors that of the startup’s validity. The first question people will ask when they want to invest is for proof of concept and the best way to provide this is by showing that the venture has an n extensive crowd funding campaign. This helps nature respect for the venture and it shows the public that the journey that kicks started the venture commenced on the right track. In the US the first people to invest in startups are normally venture capitalists who do it speculatively with the hopes of lucrative returns if the venture takes off and a complete loss if it does not. This are normally referred to as angel investors who are by definition investors who use and risk their own money to fund startups (Gustke). This typically makes it easier for startups to get their funding and although the crowd funding is also popular is it is no as necessary as it is in Europe where the number of angel investors in considerably smaller (Gustke). In Europe, crowd funding has been highly beneficial to many startups that would alternatively not take off at all in given the ensuing difficulty they have when it comes to accumulating capital. While crowdfunding can indeed encourage angel investors by giving them confidence in the venture, this is mostly a European rather than American reality. In the US, angel investors will frequently avoid crowd funded companies since they will prefer to avoid dealing with a large number of shareholders as they prefer to have control over the company before they commit their investments (Gutske). Through exchanging ideas from the various sources the owners of the startup can get exposure to new ideas of their business that had not been considered before and therefore serve as inspiration. Equity crowd funding introduces to the business prospective loyal customers since the founders do not only get to introduce the product but also the idea behind it, those who are inspired by the campaign to take part will often later become customers (Prive). The investors are the early adopters and in any business the role of early adopters cannot be overstated, the will spread the word at no cost and allows their networks to be used in popularizing the products, in addition, they will likely become loyal customers as long as the startup is in operations not to mention influence their friends and associates. As previously mentioned, using crowd funded techniques to acquire capital is significantly cheaper than traditional means of gathering capita such as convincing banks and private backers to support them. In this case it is comparatively easy since one only needs to contact the crowding platform and through it and other media techniques publicize their intentions to the public after which they only need to wait for donations. Typically they only need to make a video giving a powerful message and advertising the product or service they want to launch and trying to convince potential investors that they will benefit from backing them up (Valanciene and Sima 41). While the OSC provides 90 days for an investor to make up their minds, the European crowdfunding rules also allow the investors to carry our due diligence on the company before they invest in it. However in the American scenario, the situation is quite different, many investors actually end up making money by betting against the crowd, in such scenarios, angel investors will invest money on startups that have failed to get support from the crowd. As the crowdfunding initiatives have come to discover in the US and Europe, the momentum that is created through a crowdfunding camping acts as free PR for startups and this makes it easy for them to attract potential investments from even traditional sources. For example when the crowdfunding efforts drum up support for their venture, banks and other traditional backer may be more tempted to put their weight behind them. Success in crowdfunding tends to attract the attention of reporters and get into the mainstream media, as a result, entrepreneurs that strike it big in crowdfunding stand a better chance getting the attention of the traditional backers as well as publicity which increases their customer base in the long run. Launching a crowd funding campaign often involves presenting products to the market before they have been officially lance, as a result the startup can gauge the customer reaction before releasing products or services into the market. This way they are able to make a decision on whether or not to pursue a given concept as well as what they need to improve or adjust their strategies and product technologies. One of the attributes of crowd funding is that it operating on an all or nothing platform, one cannot get the funds until they accumulate the target they had set out to get, if the entrepreneur does not get their intended target, there is no penalty although the contributors each get back their contribution so neither the platform nor the startup ends up with anything. Conversely, if the projects are successful, everyone gets a part of the venture with the average commission for the platform that raised the funding being at 5% (Bannerman), at the end of the day, crowdfunding especially presents entrepreneurs with an avenue through which they can verify, execute and grow their ventures, what started as a social experiment in Europe and America a few years ago has morphed into a mainstream source of revenue for hundreds of startups (Gutske). With time it is evolving and Ontario stands at the brink of joining in a revolusionally method through which its startups can easily and cheaply acquire funding (Crowd Found Beat) The city stands to accrue numerous benefits from allowing the initiatives, for one, many startups entrepreneurs will have the funds they so badly need to get their companies of the ground, in the long run this has the effect of increasing the opportunities available especially to young entrepreneur. This is one of the ways through which the challenge of unemployment not only for the entrepreneurs but also the staff they will employ once their companies manage to successfully get off the ground. Works Cited “Crowdfunding Alert: OSC Allows Equity Crowdfunding Platform For Ontario Accredited Investors”. Crowd Found Beat. 2014. Web. 22 June 2014 Ahlers, Gerrit KC, et al. "Signaling in equity crowdfunding." Available at SSRN2161587 (2012). Bannerman, Sara. "Crowdfunding Culture." Journal of Mobile Culture 7 (2013): 1. Cumming, Douglas, and Sofia Johan. "Demand-driven securities regulation: evidence from crowdfunding." Venture Capital 15.4 (2013): 361-379. De Buysere, Kristof, et al. "A framework for european crowdfunding." European Crowdfunding Network (ECN), available at www. europecrowdfunding. org/european_ crowdfunding_framework. 2012. Print. Gerber, Elizabeth M., et al. "Crowdfunding: an emerging field of research."Proceedings of the extended abstracts of the 32nd annual ACM conference on Human factors in computing systems. New York, NY: ACM, 2014. Print. Gustke, Constance. “What Europeans can teach Americans about crowdfunding”. Capital: BBC NEWS. 2013. Web. 22 June 2014 Michelucci, Fania Valeria, and Francesca Silvia Rota. "The success of non-profit crowdfunding: first evidences from the Italian web-platforms." Mollick, Ethan. "The dynamics of crowdfunding: An exploratory study." Journal of Business Venturing 29.1 (2014): 1-16. Ordanini, Andrea, et al. "Crowd-funding: transforming customers into investors through innovative service platforms." Journal of Service Management 22.4 (2011): 443-470. Prive, Tanya. “Top 10 Benefits Of Crowdfunding”. Forbes. 2012. Web. 22 June 2014 Valanciene, Loreta, and Sima Jegeleviciute. "Valuation Of Crowdfunding: Benefits And Drawbacks." Economics And Management 18.1 (2013): 39-48. Read More