Crowdfunding – A Useful Tool for Business Startups

The internet has been proven to be a great way to reach out to people. The idea of crowdfunding is a good example of that. The way it works is that – a person gets an idea, floats the idea on the internet asking people to make a donation to help make the idea a reality and promises something in return, like a free sample of the eventual product.

If that person does not have the connections to reach a wide number of people, there are several sites available to help. Some of them include Kickstarter, WeFinder, Startup Addick, Believers Fund, Quirky and many others. They exist for different reasons. Kickstarter, for example, stresses the development of ideas for Creative Products. WeFinder is for business startups as is Startup Addick. Quirky is for inventors. All of them try to promote products that have a broad appeal and therefore might motivate people generally to throw in some cash.

They can’t buy into the companies, however, at least in Canada, because that would contravene the Securities legislation and regulations. Any public offerings – and what could be more public than the internet – must be made in the form of a properly prepared and registered prospectus, a large and often complex document that is very expensive to prepare.

This is changing in the US, where the Obama government brought in legislation, referred to as the JOBS (Jumpstart Our Business Startups) Act, which allows some companies in certain circumstances to make public offerings through approved channels over the internet. It is well known that small business provides 75% of all the new jobs in the US and the stats for Canada are similar. That’s an important part of economic prosperity!

Venture capital for new business startups in Canada has always been difficult to obtain. Many new business startups are financed by loans or investment by parents and other family members. A large number of them are financed by – brace yourself – credit card advances. Surely one of the worst ways to borrow money.

The ability of startups to raise significant amounts of money is seriously curtailed by the securities legislation. While this is for the protection of investors, and they need the protection, there needs to be a balance between this need for protection and the opportunities made possible by newer technologies.

The Securities and Exchange Commission is now working out the rules that will apply for crowdfunding under the JOBS Act.  The Canadian Securities Administrators (the CSA) are, in the traditional Canadian manner, waiting to see what happens in the US.

Meanwhile, the success stories keep hitting the news. Eric Migicovsky raised more than $10 million for development of his “Pebble” wristwatches, which connect to smartphones and other mobiles using Bluetooth. Kelvin Geis raised $35,000 in a few weeks to complete his stylus for iPads. One expert predicts that crowdfunding sites will raise more than $2.8 billion this year.

Can we afford to ignore this movement?