The Social Media paradigm is now extending to the funding of start-up companies, according to Canada’s largest high-tech organization CATAAlliance, 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, Chair of i-CANADA, a community focused initiative to boost the competitive performance of Canada’s cities, 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.”