Crowdfunding – Saskatchewan’s Modest Proposal

Note: The rules and law may have changed since this article was first published. It is provided for archival purposes but you should consult with your lawyer for the current state of the law

It’s not very often that securities law manages to capture the public’s attention.  But securities law did manage to capture the attention and imagination of Saskatchewan entrepreneurs, as our province’s securities regulator, the Financial and Consumer Affairs Authority (“FCAA”) unveiled a self-described “modest proposal” to allow for equity-based crowdfunding in Saskatchewan.

Now, you may be thinking that you’ve heard of this crowdfunding thing – where people raise capital for a variety of projects by collecting small amounts of money from a large number of backers, often strangers, using online funding portals. You may have even poked around on a crowdfunding portal like Kickstarter or IndieGoGo, to see what kinds of projects are seeking funding.  But is the FCAA’s proposal that significant?  What’s all the fuss?

Well, for starters, crowdfunding is in vogue. For instance, Stanford University currently offers a for-credit college class on crowdfunding.  And it’s growing in popularity. Worldwide, in 2011, crowdfunding platforms raised $1.5 billion (all figures in USD), on over one million projects. Approximately $837 million of that was raised in North America.  This amount nearly doubled in 2012 to $2.8 billion worldwide.

In 2012 Kickstarter (the world’s most popular crowdfunding portal) saw 2.2 million backers pledge just short of $320 million to various projects. In terms of growth, these numbers represent a 134% increase in backers, and a 221% increase in funds pledged, over 2011 Kickstarter totals.

Certain highly-celebrated projects are very large, such as the successful crowdfunding venture to raise approximately $6 million to fund a “Veronica Mars” movie.  But the vast majority of crowdfunding projects are very small, sized in the thousands or tens of thousands of dollars, and funded in very small increments by hundreds (even thousands) of backers, literally a few dollars at a time.

It does not take long to realize that crowdfunding may be well-suited for businesses attempting to secure small amounts of early-stage product research or development money.  And to a large extent, this is true, but-for one significant limitation – securities laws in North America presently make it very difficult (if not impossible) for these companies to offer securities in exchange for the capital they wish to raise. This severely limits the use of crowdfunding as a capital-raising tool.

To this point, crowdfunding in North America has largely been limited to two types:

  1. Rewards-based crowdfunding – backers donate money in support of a discreet project such as an app, an album or book, and in return, they receive a reward, such as a t-shirt, key chain, public recognition, or the right to acquire the product, once complete, free or at a reduced cost;
  2. Charitable crowdfunding – backers donate to charitable or philanthropic pursuits that resonate with them, such as political campaigns (most notably the Obama 2012 Presidential campaign) or disaster relief, with no expectation of anything tangible in return.

However, Saskatchewan is poised to be the first North American jurisdiction to allow businesses to raise capital by selling securities using the crowdfunding model.  Although details of the FCAA’s  “crowdfunding exemption” are still to be finalized following a public consultation process, the FCAA proposal as currently framed would allow businesses to sell securities through an approved online crowdfunding portal  to a maximum of $150,000, up to twice per year. Backers would be allowed to invest up to a maximum of $1,500 in a project.  A business would be entitled to receive the funds pledged once all (or a stated mimimum)of the desired funds are raised.  Businesses will of course be required to use the funds raised for the purpose stated in the offering.

The FCAA proposal also includes rules surrounding the disclosure required from businesses to describe the securities offered, the nature of the project and the use of funds. Businesses will also be required to file reports of trade following completion of the offering.

The FCAA is committed to moving quickly – it has already completed an initial consultation process, and based upon feedback received, it has published draft terms of the exemption order and disclosure document, once again for review and comment. There is a strong likelihood that by November 2013, Saskatchewan entrepreneurs will be able to access capital markets in a way that no other businesses in North America can.  And in turn, the Saskatchewan investing public will be able to explore and participate in investment opportunities that were previously unavailable to them.  And from both ends, considerable excitement has been generated.  By securities law, of all things…..