Is Crowdfunding the Answer to Private Equity Investing? CATA Comments
July 5, 2012
By Peter Lindfield, published in the Telegraph-Journal 3rd July 2012
There is widespread agreement that Canada has been falling behind in innovation and entrepreneurship support. At the same time, the availability of private equity investment has been declining for small and medium businesses in Canada. Angel and venture capital investors have reduced early stage investments over the course of the last decade.
Even though there is recognition among business analysts and industry leaders that we need to accelerate the growth of startups in Canada, the more rapid pace of change in other jurisdictions means that Canada risks losing next-generation leaders to more sophisticated funding environments.
Some business leaders think a new investment phenomenon is a potential answer to Canada’s perennial problem of the shortage of investment capital for innovative entrepreneurs. A powerful new merger of social media and finance known as crowdfunding promises to accelerate the growth and support of innovative startups. Crowdfunding involves the collective co-operation of people who network and pool capital to support startups. Proponents of this investment approach argue that it allows good ideas to be funded even when they do not fit the pattern established by conventional investors.
The U.S. JOBS Act, which allows for a wider pool of smaller investors with fewer restrictions, recently was signed into law by President Obama and the U.S. Securities and Exchange Commission (SEC) and will establish specific funding rules. But crowdfunding has not received regulatory approval in Canada.
John Reid, president and CEO of the Canadian Advanced Technology Alliance(CATA), thinks Canada needs to adopt crowdfunding to allow this country’s emerging small- and medium-sized companies to keep up with the pace of change. “Frustrated Canadian entrepreneurs will see the advantages offered by the crowdfunding provisions for raising capital when those provisions are implemented in the United States, and they will take their best ideas to the U.S. to develop and commercialize,” said Reid.
Proponents of crowdfunding such as CATA and Invest Crowdfund Canada (ICC) claim that if securities regulators approve crowdfunding in this country, the new investment vehicle will help establish new markets, create new jobs and connect buyers with sellers in lower cost models. ICC is comprised of national industry leaders who have volunteered to create legislative change to legalize investment crowdfunding and bring Canada forward in its support of growing startups.
Crowdfunding is not without its disadvantages for startups. There is a requirement for the startup to publically disclose the intellectual property of the business opportunity for which the funding is sought. This can be a significant drawback for companies seeking to protect their innovation portfolio. At a very early stage, an organization’s intellectual property may be less defensible, exposing the organization to the prospect that the intellectual property can be copied and developed more rapidly by better-financed competitors. Similarly, making public such guarded information as business plans and financial statements can present real risk to startups.
Another significant challenge to crowdfunding is securities regulation. Soliciting investments from the general public in most jurisdictions requires that the opportunity is filed with the appropriate securities regulatory authority. TheNew Brunswick Securities Commission has not yet provided its approval for crowdfunding.
Investment capital is in short supply in New Brunswick. Is crowdfunding the answer? Innovative firms may never fully develop if they are not carefully provided with financial support. But financing is not the only problem facing many startups. Management experience, developing defensible intellectual property and early operational expertise are needed for startups to survive.
However, adequate investment is critical in New Brunswick where many local firms are likely to be small with few financial resources relative to the established firms against which they have to compete. The transition to broader competition needs to allow time for these small firms to adapt and improve themselves. Underfunding at an early stage simply exposes startups to greater and unnecessary risks of failure. If crowdfunding is approved as an additional investment method, we may make greater headway to support the entrepreneurship this country critically needs.
[Header image courtesy of www.crowdsourcing.org]