Equity Crowdfunding Panel:  Take-Aways and Then Some

Theres nothing I enjoy more in conferences than engaging discussion in a panel. I have to say this time, I was a tad reluctant. The idea of discussing a crowd-triggered financing model without the presence of the main concerned the crowd or the ordinary investors was not my idea of collaborative work.  But being true to myself, I was curious to hear what VCs and lawyers had to say of the current proposed regulation on equity crowdfunding in Canada. More importantly, to see how their position evolved from last years AMF public session. And I was also there to learn, to validate my understanding of the REG 45-108  and to share my findings with the broader audience.

Considering I had only two hours to take in as much as deemed possible, small talk was not an option. I attended two panels: one with Patrick Théoret which was more a fireside chat, the second with Robert Brouillette  (Anges Quebec), Sophie Forest (Bright Spark Ventures) and JS Cournoyer  (Real Ventures) moderated by Diane Bérard  (Les Affaires).

Patrick Théorêt (AMF) explained the decisions with regards to investor and issuer caps. In short, the proposed issuer cap for start-ups of $150k is to be in line with Saskatchewan and the low investor caps for start-ups and other businesses of $1,500 and $2,500 respectively are the result of a survey that I have yet to see the source.

I personally would like to extend my thanks to Patrick Théorêt who played along graciously with our many questions, at times double-sworded. I take away from this conversation that

1. there is a dire necessity to analyze the successes across the globe and to consider, perhaps, that what works elsewhere may be worth a try here
2. the working committee responsible for this regulation should be broadened to include businesses (start-ups, retailers, corporations) and citizens. It appears that some rules were defined in-house with no outside consult, e.g. the owner of the platform must be a restricted dealer. Why not look in Australia where ASSOBs CEO is not a broker yet deals with sponsors  (brokers) and the model works on a shared-commission basis?

Yes, there will be chaos. Yes, there will be order.

The a-ha moment I believe was in the following panel. Whilst I could not stay for its entirety, I highlight here the probing moments. First, some context. From the outset when, we, entrepreneurs, began advocating for the legalization of equity crowdfunding two years ago, there was a divide:

• Those who believed that not all businesses should have access to equity crowdfunding and that ordinary investors were not knowledgeable enough to purchase shares
• Those that agreed with the latter yet believed that crowdsourcing could elevate collective knowledge. With knowledge comes the power to make the right decisions for both issuers and investors.

Back to our panel, I hear the concerns of some of the panelists that the ordinary crowd may be exposed to bad investment decisions due to lack of information or that the average company may not be the right fit for this model. I agree with those statements. Lets imagine the future:

Business ABC  launches an equity crowdfunding campaign, does not disclose sufficient information thinking no one will know and eventually the crowd finds out and games over.

Or the investor that puts his lifes savings in a local store expansion expecting a return in the following year but then recession strikes, and the company is forced to downsize. No return on investment here.

There is a probability that these predictions may come true, and that during the first years of equity crowdfunding, there will be chaos. But chaos and order can co-exist. The crowd has the power of choice and will exercise that choice in both

rational and irrational ways. Moving forward, lets think up solutions to help the crowd make better decisions. In response to one of the panelists concerns, one solution would be  crowd coaching  businesses that for a lesser fee can provide guidance to the ordinary investor. Your thoughts?

I’m not advocating that regulators shouldn’t do whatever they can to protect investors. But one thing is certain, if we try to control everything, chaos will find a way to penetrate our order. Because, it is the natural order of thing.

So now lets imagine the other future further down the line:

Business XYZ  shows transparency in all counts (including disclosing not so attractive financials) and a real motivation for bettering the region through its solution. They gain respect from the community and successfully raise the funds.

Or the investor that believes in that business/entrepreneur and for that reason (not only), invests an amount he can afford and with that, comes the pride of contributing to economic wealth for him and perhaps the generations to come.

These stories pull us away from todays definitions of profit (exits and public trade). And thats fine. Because, not every entrepreneur is looking to raise billion dollar businesses.  That does not make them less of an entrepreneur.  It just makes them consider other variables. Lets seejob creation, innovation, giving back to the community, family.

Two Worlds Colliding is a Good Thing

In closing, it is a difficult task to carve out a new framework that both protects investors and stimulates the economy. I commend the AMF and the other Canadian Securities Commissions for taking a crack at it. I also commend them for putting startups in their agenda. Its difficult because two worlds collide: one with tight processes and  a history full of hard lessons, the other who thinks out of the box and for whom the only limit is the sky.  That is why I think that events such as these would have gained at hosting a more diverse audience to hear their concerns and outlooks.

It makes for a  co-constructed framework from the ground up  and history shows that that is the key to success. The investment industry is changing, the boundaries are slowly falling and before we know it, ordinary and accredited investors will be conversing and envisioning the future together. Whos in?

Post also published on DFY

A Look-back at the AMF Public Consultation on Equity Crowdfunding

Last March, the Quebec Securities Commission (AMF)  held a public consultation  to discuss Equity Crowdfunding and its applicability. Our team has been working tirelessly since July for this moment. With  success stories  multiplying across the globe, we, too, want our SMEs and start-ups to benefit from this model. Enabling them to raise funds online and individuals to become investors without having 1M$ in assets. Angels and VCs  around the table agreed that this model complements the existing ones, and that it is  a necessary component to our ecosystemwe fund 30 out of 1300 startups. What happens to the remaining 1270? one angel asked.

You will find a recap  of the session on our partner site, National Crowdfunding Association. The following outlines some of the principles raised in session and that you will find in our upcoming positioning paper :

1. Notion of risk. A business is pitched on a crowdfunding portal. There is always a potential risk notably if the business is early stage (prototype, beta) that the investor may not see a return. The investor must be at ease with this and rely on his own knowledge or seek council.  On the other end of the spectrum, a business that has sales to show for, will be expected to justify its valuation and have the figures to back it up. Transparency is key.
2. Trust the crowd (unaccredited investors). We do not expect a perfect fit in year 1 of adoption. There will be growing pains as there were for e-commerce in the late 90s. The important is to leverage these and build best practices. You may find investors that are not satisfied with their choices and may blame others. We believe that this learning phase will be a confidence builder and they will find, with time, better sources of advice on and  off line.
3. Higher Cap  . To ensure a higher penetration rate and fulfill the needs of both start-ups and SMEs, we recommend raising the investment round to 1M$ on a 12-month period.
4. Relying on social networks. This is where the paradigm shift must occur. I understand that it may hard to believe that online conversations can help detect fraudulent practices but it is a fact. As Kickstarters founder said, People have called them out and they don’t get funding. The internet asks questions .
5. The shareholders agreement generated much discussion among the securities lawyers present at the session.  Experience shows that agreements are source of fraud either through restrictive clauses or fine print. Hence they believe that Invest crowdfunding may be the host of such practices. We recommend having standard shareholder agreements (same format for all) to reduce collateral dammage. This point remains to be discussed and should not be a barrier to adoption.
6. The status of Equity Crowdfunding portals is an important issue.We believe that portals, as in England, France, Finland, Belgium and Australia, should stand as a matchmaking site nothing more, leaving advisory to others. It is the investors responsibility to seek council (cf. point #2) and the issuers to pitch/explain in laymans terms.  To restrict portals to traders only or to restrict portal usage to accredited investors is taking the crowd out of crowdfunding. Its VC online, as provided by FundersClub.  Portals in Quebec, Ontario and Alberta are in the works. They are waiting for the green light .

At Invest Crowdfund Québec, we will continue our work with regulatory bodies and remain optimistic about the prospect of equity crowdfunding in Canada.

Crowdfund Night Recap

I attended Crowdfund Night yesterday at the Notman House and saw familiar faces. The Plebs and Make a Champ crowdfunding platform founders, to name a few. There is clearly a growing trend in Quebec to bypass the current financing structures. For many reasons. One, not everyone gains access to financial programs and two, it can take months until you do receive funding if you are selected. Hence, viable and right-on-target projects often see their days counted and end up in the sewer. Plebes and Make a Champ address those needs. They select their projects carefully, assessing their worth (past, present, future) prior to engaging with them.

This said, the other model Equity crowdfunding or Invest crowdfunding is more complex as it involves securities regulation. Buying private equity online through a web platform is a formidable way of helping businesses scale yet there are potential pitfalls along the way. Last night, I gave a talk on Invest Crowdfunding, the Localvesting model:  how it could create sustainability, how mom and pop investors should have the opportunity to invest in a business they believe in, how fraud is kept to a minimum in invest crowdfunded nations, and social mediasrole. In short, how this model fits well within the Quebec ecosystem. We also discussed what it takes to make it legal in Quebec and the rest of Canada.

Since our last presentation. I got the distinct impression that awareness around this model is growing. Questions from the crowd were more acute. Which sectors will benefit from this model?, Are there support structures in place to help businesses crowdfund?, How does share valuation work?. Its safe to say that grassroot initiatives like ours are beginning to unfold. Public speaking is one facet of our movement. Content generating/curation, all-around networking, engaging within our communities, think tanks and our own professional endeavours are also part of the equation.

At Invest Crowdfund Quebec, our objective remains to inform, educate, and create awareness. At our next team meeting, well be mapping out 2013 action plan. We invite our readers to show their support by attending events, asking more questions on this blog, recommending articles and generating content. These questions and thoughts will contribute to the framework we are building in collaboration with the other provinces. Such a framework is a gateway to convincing our authorities to put  Invest Crowdfunding on the public agenda.

Special Thanks to the organizers Heri Rakotomalala and Bruno Rakotozafy who did an awesome job!