MCkercher. Frequently asked questions

Crowdfunding is the raising of capital by gathering funds from a large number of investors (the so-called “crowd”) who individually do not contribute a significant amount of funds. In some cases, the contribution can be as little as a dollar. What the investor receives in return depends upon the “model” of crowdfunding. There are, generally speaking, three models:

1. Donation Model ~ Investor receives nothing in return for their investment. This operates similar to a person giving funds to a non-profit or charity except that the investor will not, in most cases, get a charitable tax return.
2. Rewards-Based Model ~ Investor receives a good such as a copy of a movie production or a prototype of the product for which funds are being sought. This can also be thought of as a “pre-sale” of sorts where investors get a first look at a product being developed.
3. Equity Crowdfunding Model ~ Investors receive an equity (share) interest in the particular company. Unlike the previous two models, this model is highly regulated and involves a number of compliance issues for both the company seeking funds and the investors.

Generally, a prospective entrepreneur will set up a crowdfunding campaign on a crowdfunding website (for example http://www.kickstarter.com/). This is the standard for donation and rewards-based crowdfunding. The entrepreneur will then provide some information about the business, what the investor is getting for their investment (or not getting if it is pure donation), and how much money the entrepreneur is looking to raise. Many sites impose a rule that if the minimum amount of funds desired by the entrepreneur (set by the entrepreneur at the time of the crowdfunding campaign) is not met within a specific period of time (for example, 6 months), then all funds must be returned to investors.

With equity crowdfunding, the picture gets more complicated. Presently, Saskatchewan is the only jurisdiction which permits equity crowdfunding. The Saskatchewan model of equity crowdfunding is explained at length on the website for Saskatchewan’s securities regulator, the Financial and Consumer Affairs Authority of Saskatchewan (see here: http://www.fcaa.gov.sk.ca/crowdfunding). The present impediment to equity crowdfunding in Saskatchewan is that an equity crowdfunding portal does not yet exist. Until such time as a portal comes into existence, equity crowdfunding will not be available to Saskatchewan entrepreneurs. In the other Provinces across Canada, proposals are presently being put forward to develop equity crowdfunding rules in those Provinces. Some are similar to Saskatchewan’s model while others differ markedly.