At its core, crowdfunding is a simple concept: an individual or organization can raise money over the internet by asking a large number of people each for a small contribution. There’s a long history of projects and initiatives that have been funded through crowdfunding campaigns, but using this concept as a model for investing is something that’s new for Canada. You may have participated in a crowdfunding project in the past, but you likely received a gift or some other token of appreciation in exchange for your pledge. That’s because there are a few different types of crowdfunding models, and each is distinguished by what (if anything) you received in return for your money.
Equity crowdfunding, is where the goal for a new business or start-up is to raise capital by selling many small stakes in their business, usually in the form of shares, to a large number of investors over the internet. Instead of making a donation or funding a specific project in exchange for a reward, you’re investing in a business, essentially becoming one of its owners (shareholders).
Why would a business use equity crowdfunding to raise capital? The answer is in how expensive it can be for a new venture to get off the ground. Bringing investors on board is one way that these businesses can fund their early operations, but selling investments to the public is a process that’s subject to a number of legal and regulatory obligations that can take considerable time and money.
Equity crowdfunding allows these early-stage businesses to streamline those obligations in order to raise money (capital). Equity crowdfunding in Canada is regulated by the various securities commissions, with specific requirements imposed upon the businesses offering these investment opportunities. This opens the door for everyday investors to support homegrown innovation and have a chance to participate alongside Canada’s community of entrepreneurs and investors.