Crowdfunding or risk losing startups to U.S.: If Canada doesn't enact similar legislation our tech startups will lose out to U.S. rivals in the race for seed capital: Christine Wong, IT World
February 2, 2012

Canadian tech entrepreneurs will lag behind their American rivals if Canada doesn't mirror U.S. moves to allow online crowdfunding for startups, the Canadian Advanced Technology Alliance warns.

Under current U.S. and Canadian laws, startups can only accept equity investments from venture capital funds or small angel pools like friends and family. Any large scale equity fundraising outside of those sources requires a company to go through the lengthy and expensive process of filing a prospectus with securities regulators. 

The Entrepreneur Access to Capital Act could change all that in the U.S. It would allow American businesses to raise startup equity capital by accepting small, direct, lump sum investments from a large volume of people over social media networks. The bill has already been passed by the U.S. House of Representatives and is now before the U.S. senate – a pace that has some Canadian tech watchers anxious to enact similar laws here. 

“We don’t want to have this launched in the U.S. and then have to play catch up,” said CATA president John Reid. “It’s time that Canada is not continually playing innovation catch up and funding catch up.” 

CATA is lobbying provincial securities regulators to make similar changes here. While the new American legislation would be overseen by a single national watchdog, the U.S. Securities and Exchange Commission, Canada still has no national regulator, after a Supreme Court decision recently declared such a body unconstitutional. 

CATA is throwing its weight behind the movement for practical as well as philosophical reasons. 

“CATA discussed with one contact how we could create a crowdfunding platform to help small companies grow. We were advised by legal counsel that if we were to do this we would be breaking the law,” Reid said. 

The issue is also a pressing one for Paul Dombowsky, founder and CEO of Ottawa startup Ideavibes. Last February his company launched, a crowdfunding site for non-profit causes. Now his firm has developed a similar social media platform aimed at equity crowdfunding for startups.  But it can’t deploy that platform because Canadian law bans startups from offering equity shares or a percentage of revenue in exchange for money raised through crowdfunding. 

“I believe the Canadian government is very behind in this and should be pushed harder because access to capital is a big issue. Making it easier for startups to get that money is important,” said Dombowsky, who emphasized it was tough for him to get his own company going with just $30,000 of seed money.

No Wild West wanted

Many crowdfunding sites have sprung up recently on both sides of the border. All are careful, however, to closely straddle the line of what’s legal. The Canadian version, which raises money for artistic projects like films and plays, states that investors can receive “rewards” like copies of artistic works or “fun experiences” in exchange for their financial contributions. But it also spells out that “offering financial incentives, such as ownership, financial returns (for example, a share of profits), or repayment (loans) is prohibited.” (Brackets are shown here as they appear on the Kickstarter site.)

Launched in beta mode just weeks ago, Canadian site Springboard uses crowdfunding to raise seed capital in sectors as diverse as hospitality, publishing, music and technology. Investors can only receive “rewards” such as gifts, products or services worth a maximum of $2,000 as long as “the project owner retains 100 per cent ownership and no debt or equity changes are involved,” the site states. 

Although CATA wants legal changes it isn’t looking to create a Wild West frontier of all-you-can-raise crowdfunding, Reid said. 

“You have to do this with safeguards and in the U.S. they’re pretty specific about what some of those safeguards are going to be,” he said. 

The U.S. bill, for example, would cap the amount of capital a startup can raise through crowdfunding at either $1 million or $2 million per year depending on whether the company provides detailed financial statements to regulators. The amount each investor can contribute per year ould also be limited to $10,000 or 10 per cent of their annual income, whichever amount is lower. In addition, startups would have to post warnings on crowdfunding sites about possible risks to potential investors.

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