Businesses interested in using so-called crowdfunding websites to raise capital are renewing calls for Canadian authorities to loosen securities regulations, following a dramatic example of the internet's potential to raise big money through many small contributions.
Online donors raised more than $500,000 in 24 hours to help an American school bus monitor who was bullied by schoolchildren, an incident viewed by millions after video was posted Tuesday to YouTube.
The video prompted a Toronto man to set up an online vacation fund for Karen Klein, 68, on a website called Indiegogo. He asked donors to contribute in the hope of raising $5,000 so that Klein could take a vacation.
Within days, the plea had garnered more than 100 times that amount.
It’s the latest success story from a growing number of website devoted to crowdfunding, in which social media is used to raise money from a large group of people contributing small sums.
Pledges for money can be undertaken for charitable reasons, as in Klein’s case. But small companies can also use it as a tool to raise capital for new endeavours.
One of the most popular crowdfunding websites in the U.S. is Kickstarter, which allows people with plans for a creative project a chance to pitch their ideas for support. Since its inception in 2008, the website says it has helped raise $261 million US in pledges.
JOBS Act recognizes potential
The crowdsourcing phenomenon has led to a change in U.S. regulations. President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law on April 5. It allows companies to raise as much as $1 million via online "portals" and sets limits on the amount an investor can sink into crowdfunding projects based on his or her annual income or net worth.
The portals will be regulated by the U.S. Securities and Exchange Commission, which was given 270 days after the legislation became law to change its regulations.
'What’s happening in the United States will impact Canada, whether Canada likes it or not.' —Technology lawyer John Wires
The Canadian Advanced Technology Alliance (CATA), an industry group representing high-tech companies, is worried that the JOBS Act will lead to brain drain if local companies opt to incorporate south of the border so they can engage in equity crowdfunding.
In Canada, companies are allowed to solicit money through crowdfunding websites in exchange for goods or other perks, but it’s illegal for them to offer an equity stake in return.
John Reid, CATA's president and CEO, said Canadian high-tech companies have been "actually routing crowdfunding through the U.S. by getting a partner there so that they could work around the regulatory barriers in Canada."
"This is something the marketplace wants," he said.
Questions over risk
Critics warn there are risks involved with crowdfunding, since startup companies have a higher chance of failing.
But John Wires, a lawyer who has been lobbying for Canadian authorities to relax the rules around equity crowdfunding, said that "what’s happening in the United States will impact Canada whether Canada likes it or not."
Wires believes the JOBS Act will accelerate the growth of crowdfunding in the U.S., and he wants provincial securities regulators here to pass similar laws, provided investors are protected from fraudulent schemes and other "abuses of the system."
Earlier this month, the Ontario Securities Commission (OSC) announced that it will "consider developments in other jurisdictions," and it singled out the U.S. JOBS Act in particular.
"At this point, no decisions have been made and it will be important for us to obtain input from investors, issuers and other stakeholders," a spokesperson for the OSC told CBC News in an email.
Meanwhile a number of Canadian entrepreneurs are wading into the fray.
A cattle farmer from Prince Edward Island recently used crowdfunding website Indiegogo to sell $12,660 worth of organic beef. And last month, a Vancouver-born entrepreneur used Kickstarter to raise $10 million for the company he founded, which makes watches that can connect to a smartphone.