By Martin Yuill | Published: January 16, 2015

At a recent Quarterly Breakfast   event entitled “Crowd Funding: Fact or Fiction? ”,   guest speaker Brian Prill of  BLP Law   explained how the  equity crowdfunding industry is exploding with entrepreneurs, investors, portal operators, third party service providers and experts all jockeying to take advantage of this brand new fundraising channel. Below is an edited version of his presentation

Brian Prill of BLP Law in Toronto

Crowdfunding is a process whereby people make a buying decision based on the wisdom of the Crowd. The more participants there are in a crowdfunding campaign, the more the wisdom of the crowd reaffirms a purchaser’s buying decision.

Potential purchasers can also assess the wisdom of making a future buying decision by conducting online searches of the product or organization engaged in the crowdfunding campaign.

While this process may be adequate when it comes to raising money through Product CrowdFunding or Donation CrowdFunding, this process is somewhat misleading when it comes to Equity CrowdFunding.

Equity CrowdFunding is different because one of the fundamental principle of securities law that of investor protection must be incorporated into the process.

Investor protection is typically accomplished through:

(i) disclosure, whereby investors are informed about a company and the securities being sold through a prospectus; and

(ii) registration, whereby a person selling securities (a registrant) is registered with a regulatory body that has verified that the registrant has the skill to advise the purchaser as to the wisdom of investing in a company.

Because of the cost of preparing a prospectus, many companies raise money from the capital markets through a prospectus exemption. Under a prospectus exemption, registrants can sell securities to qualified investors providing the registrant:

(i) has knowledge of the features and risks of the security;

(ii) knows the investor’s financial objectives and risk tolerance; and

(iii) is able to advise the investor with respect to the wisdom of purchasing the security. Where a registrant determines that a security is not a suitable investment, the registrant has an obligation to advise the investor not to purchase the security. As such, the wisdom of the crowd is replaced with the wisdom of an investment professional.

Equity CrowdFunding is a separate prospectus exemption whereby a company must sell its securities through an online CrowdFunding portal. The principle of buyer beware applies to securities sold pursuant to a CrowdFunding exemption as the portal is not allowed to provide the investor with any investment advice with respect to the investor’s financial objectives and risk tolerance.

Here, the investor is responsible for conducting their own research with respect to the suitability of making an investment in a company.

While the investor could be buying securities in the next great start-up company, there is an equal if not greater chance that the start-up company will be a complete failure and the investor will lose all their money.

Therefore, securities regulators believe that investor protection is best accomplished in Equity CrowdFunding campaigns by limiting the amount of money any person can invest in any company using an Equity CrowdFunding exemption.

However, if a company’s securities are sold online by a registrant pursuant to any other prospectus exemption, not only can the investor increase the size of their investment, they can also rely on the specific investment advice they receive from the registrant, as opposed to making a smaller investment based on the generic investment advice of the crowd.

Investor protection is accomplished by allowing the purchaser to review their buying decision with an investment professional so that they can assess the risk and size of of the investment when compared to the purchaser’s financial objectives and risk tolerance.

In conclusion, while CrowdFunding is the latest hot buzz word, investors and companies need to take care to inform themselves of the risks and rewards associated with participating in a CrowdFunding campaign as opposed to the risks and rewards associated with participating in an online marketing campaign using any other prospectus exemption.

Investors and companies alike need to keep in mind that with respect to Equity CrowdFunding, All That Glitters Is Not Gold!

About Brian Prill

Brian is a corporate and securities lawyer and a Director and Past-President of the Exempt Market Dealers Association. His practice focuses on all areas of corporate finance and securities transactions, which includes exempt market financing, initial public offerings, dealer registration, mining related transactions, tech and start-up companies, mergers and acquisitions, general corporate matters and cross-border transactions. Brian is an accomplished and knowledgeable presenter on dealer registration, the sale of exempt market securities, how to raise capital in the public and private market place and crowd funding.