POWERFUL NEW “CROWD FUNDING” MODEL FOR START-UPS -- Will Canada Keep Up with the U.S.? Will Next Generation Start-ups Get Their Financial Wings?
January 31, 2012

“The process of aggregating small amounts of money from a large number of people to accomplish great things” (Lee Barken, San Diego, CPA)

January 31, 2012    

U.S House of Representatives has passed H.R., 2930, the Entrepreneur Access to Capital Act as a new capital formation pathway

Contact: Emily Boucher, Media Adviser at
 eboucher@cata.ca or  902-401-3671

Read News Coverage: U.S. proposal for ‘crowd funding’ via social media prompts CATA alert

   (Vito Pileici, Ottawa Citizen)
                                          Legalize Crowd funding or risk losing startups to the U.S.   (Christine Wong, IT Business)

Ottawa, ON ...CATAAlliance -- The Social Media paradigm is now extending to the funding of start-up companies, according to Canada’s largest high-tech organization, and Canada is in danger of falling behind the U.S. in enabling small business to access capital.

“Today CATA has launched an advocacy Campaign to encourage provincial securities legislators to adopt approaches similar to the H.R. 2930 U.S. Entrepreneur Access to Capital Act,” said
CATAAlliance President John Reid.

The Entrepreneurs Access to Capital Act, recently passed in the U.S House of Representatives with overwhelming support, will serve as a new capital formation pathway that makes it easier for business to be crowd funded. A bill to enact the Act, as well as a similar Senate bill (S. 1791) is currently before the U.S. Senate. President Obama has issued a statement of support for crowd funding legislation.

Peter Andrews, CATA Director and Regional Director, Corum Group Ltd., said “the crowd funding model is like a bake sale, where people pitch in a small amount of money to get a project off the ground.  The big difference in the case of the recent U.S. legislation is that instead of offering a service or product in exchange for money received, companies will be selling equity to get their idea off the ground. More investors are motivated to invest more if they receive an equity stake.”

While crowd funding is not a new concept, in recent years the social media explosion has added “jet fuel” to the model because innovative ideas can instantly meet thousands and thousands of people (i.e., Facebook, Linkedin & Twitter followers) willing to support them.

The New Legislation

Key features of the new U.S. crowd funding legislation include:

• $1,000,000 limit on the amount an issuer can raise through the exemption in any year (or if the H.R. 2930 scheme is endorsed by the U.S. Senate, up to $2,000,000 if the issuer provides audited financial statements); and,
• limits on the amount sold to any investor in any year (in H.R. 2930, the limit is the lesser of (a)$10,000 and (b) 10% of the investor’s annual income).

The legislation includes an array of safeguards for investors, including provision of warnings to investors, requirements to provide information to the U.S. SEC, resale restrictions, and disqualification criteria based on the disciplinary history of the issuer or certain related persons.

A recent issue of Small Business Report provides additional insights into Crowd Funding and Start up Capital.

Access to Capital: The Crowd Funding Campaign

The Campaign aims to encourage the adoption of similar approaches  across Canadian jurisdictions and is an integral part of the industry's Competitive Innovation Nation program launched under the tutelage of Canada's leading entrepreneur, Sir Terence Matthews that lays out what we must do as a nation to move us from a 13th place ranking to first place in innovation rankings.

The industry is also calling for the introduction of a shared federal/provincial "Venture Capital Investment Tax Credit" system based on the very successful model currently operating in B.C. 

William Hutchison, member CATA Innovation Leadership Counci, said, “Crowd funding promises to offer new revenue opportunities to the vital start-up sector of our economy -- a stimulus at the time when it is most needed." 

He added, " At the very least, we should be offering all the options that our neighbour to the south offers. The i-CANADA Advisory Board, made up of Premiers, Mayors and thought leaders lends its support to the adoption of a Crowd Funding model for Canada. ”

CATA CEO, John Reid, said “Many Canadian start-ups have great ideas, but they never get funded. Our under-capitalized companies compete against U.S. firms that have about three times their funding.  And now the U.S. will add new legislation that will make it easier for small investors to invest in early stage companies.  Technology entrepreneurs are highly mobile and may simply decide to start their new businesses in the U.S. if that is where they have access to start-up capital. We are being left behind and our commercialization gap will further widen.”

He added, “If we adopted a similar approach to the Entrepreneur Access to Capital Act in the U.S., this new avenue for capital could significantly change the fundraising atmosphere in Canada making investments in startup ventures accessible to the general public. Thousands of new jobs will be created and retained in the process. Let’s not be left behind.”

Peter Andrews speaks on Crowd Funding

Peter Andrews, Regional Director, Corum Group Ltd. & Access to Capital Champion speaks to this issue in a recent CATAnet TV video interview. 

View Video  

++ Action Required:

The Canadian Securities Administrators and provincial legislators are urged to immediately undertake public consultations for the introduction of crowd funding exemptions to existing securities laws and regulations. This activity should be expedited given the advanced state of parallel U.S. legislation, to avoid putting Canadian start-ups at a competitive disadvantage when it comes to access to capital. This will also give our securities regulators the opportunity to thoughtfully design crowd funding rules for Canadian investors – rather than trying to play “catch up” once on-line crowd funding platforms are popularized south of the border.

Reid concluded, "If Canada is to become a Competitive Innovation Nation, we've got to do a better job of supporting, growing and retaining our high tech companies and the people that power them. We must do all in our power to give startups their financial wings." 

++ Action Required:
MP and Community Mobilization
Please send electronically and/or print out and fax the Access to Capital: The Crowd Funding Campaign communiqué and follow up with a phone call to your local MP (federal and provincial members), Mayors, media and network of contacts, inclusive of posting on your social media. In support of the communiqué, we are also providing support documentation upon request.   Please email jreid@cata.ca with Access to Capital: the Crowd Funding Campaign in the subject line.

We will be sending shortly details of a TeleForum Conference Call to discuss the Campaign, provide updates and offer a Q&A with industry experts.

Ps A Note from the Desk of CATA CEO, John Reid, to all our email subscribers: Join the CATA Social Network on Linkedin: 
CATA is now providing a number of social networking forums for executives to connect, inform and inspire others to individual and organizational success. In order to benefit and be first in line for critical updates, please join the CATAAlliance main social networking group (3900 current members) on Linkedin at: 

Note also that CATA in partnership with the TSX  is holding the second of a new and innovative series of investment opportunity events aimed at aligning Canadian entrepreneurs with interested capital investors from some of Canada’s leading Investment Banks.