Is equity crowdfunding safe? The risks, stated plainly

Yes, all of it. A start-up crowdfunding investment buys a stake in an early-stage private company, and if that company fails, its shares can end up worth nothing. The Alberta Securities Commission's investor site lists start-up failure first among crowdfunding risks, noting that a high percentage of start-ups fail.^[6]

Every purchaser on every start-up crowdfunding portal in Canada completes that form, Form 45-110F2, before each investment. In it, the investor confirms they understand that they may lose all their money, may never earn income such as dividends or interest, may never be able to sell, may receive no ongoing information, and are buying something no regulator has approved.^[1]

Income is not assured either. If a company cannot pay interest, dividends or distributions except by selling more securities, its offering document must say in bold that it does not currently have the financial resources to pay them and may never have them.^[1]

The rule that limits the damage is the per-offering cap. On Backers, one investor can put at most $2,500 into any one offering, whatever their income or accredited status. How much you can invest explains the limit in full.

Possibly never. Item 11 of every start-up crowdfunding offering document must carry the same bold statement: the securities are subject to a resale restriction, and you might never be able to resell them.^[1]

The restriction comes from NI 45-102. Except in Manitoba, securities bought under the start-up crowdfunding exemption can be freely traded only once the issuer has been a reporting issuer for four months, and start-up crowdfunding issuers are not reporting issuers.^[2] Until that changes, a sale needs another prospectus exemption and a buyer willing to take it.

There is no resale market on Backers. An exempt funding portal may facilitate start-up crowdfunding distributions only, so Backers lists new offerings and does not match buyers and sellers of securities already issued.^[3]

Illiquidity

The risk that an investment cannot be turned back into cash when its holder wants to, or at all. Form 45-110F2 calls it liquidity risk and asks every purchaser to confirm they may never be able to sell.^[1]

Losing the whole investment and being unable to sell are the two risks every investor is asked to accept in writing. Three others shape what a stake turns out to be worth.

Dilution

A company that issues more shares later, to new investors, employees or advisers, reduces each existing shareholder's percentage of the company. Start-ups usually raise money more than once, and a start-up crowdfunding investor typically has no right to take part in a later round or to block it.

The portal's own fee can be equity too. Before a company's first equity offering opens on Backers, it issues Backers 1% of its fully diluted equity, once, and pays Backers a cash success fee of 8% of the gross amount raised at each closing. Item 8 of every offering document sets out what the company pays its portal.^[1]

Little ongoing information

A start-up crowdfunding issuer is not required to provide financial statements to investors with its offering.^[3] Item 10 of the offering document says what the company intends to report after closing, how often and where, and Form 45-110F2 asks every investor to confirm they may receive no ongoing information at all.^[1]

Limited legal rights

A start-up crowdfunding purchaser does not have the rights of someone buying under a prospectus or through a stock exchange, and Form 45-110F2 asks them to confirm they understand that.^[1] Item 12 of each offering document sets out the rights the purchaser does have, including the withdrawal right.

Fraud

The Alberta Securities Commission warns that the risk of fraud from scam artists grows as crowdfunding becomes more popular.^[6] The defence is to invest only through a portal you have checked, using the steps in how to check a portal.

NI 45-110 does not protect the value of an investment, but it fixes how every offering is presented and how purchaser money moves, on every portal that relies on the exemption. The table shows each rule and how it runs on Backers.

The withdrawal right is the one protection that lets an investor change their mind. After confirming on Backers, an investor has until midnight on the second business day after the day they invest, and a fresh window if the company amends its offering document.^[1] How start-up crowdfunding works follows the money from subscription to closing.

Before closing, purchaser money is not the portal's money. NI 45-110 requires an exempt funding portal to hold each purchaser's assets separate from its own, in trust for the purchaser, and to publish its procedures for notifying purchasers and returning their assets if it becomes insolvent or discontinues operations.^[1]

Backers' regulatory page states that Backers maintains those procedures, and sets out how purchaser money is held and who runs the portal. Purchaser money on Backers sits in a designated trust account, and the trust ledger that records it is append-only.

After closing, the money belongs to the company that raised it. The trust account protects an investor until the offering closes; from then on, what the investment is worth depends on the company, not on the portal.

In Canada, a start-up crowdfunding portal is either operated by a registered dealer, which must advise you on whether an investment is suitable for you, or relies on the exemption from dealer registration, in which case it is prohibited from giving that advice.^[4] Both kinds can be checked in a few minutes.

1. 1

   Step 1: Search the National Registration Search

   The British Columbia Securities Commission points investors to the CSA's National Registration Search (opens in a new tab) for the list of start-up crowdfunding portals permitted to operate.^[4] Search the portal's legal name and check the category and the provinces it covers.

2. 2

   Step 2: Read the portal's status statement

   An exempt portal must state on its platform that it is not registered under securities legislation in any jurisdiction of Canada and relies on the exemption, and must make you acknowledge that before you enter.^[1] A portal that calls itself registered while relying on the exemption has its status wrong.

3. 3

   Step 3: Find the trust account and the principals

   The platform must say that purchaser money is held in trust in a designated account at a Canadian financial institution, and must name each of its principals with contact details.^[1]

4. 4

   Step 4: Check what it charges you

   An exempt portal may not take any commission or fee from a purchaser.^[1] A request for an investor fee is a reason to stop.

5. 5

   Step 5: Look for the two forms

   Every offering must show a Form 45-110F1 offering document, posted on that one portal only, and every subscription must start with a Form 45-110F2 risk acknowledgement.^[1] Form 45-110F1 and F2 explained shows what both contain.

Backers Securities Inc. appears on the Alberta Securities Commission's crowdfunding page in the category Start-Up Crowdfunding Portal - Exemption, and the same page points to the National Registration Search to confirm a portal's status.^[5] Backers is not registered under securities legislation in any jurisdiction of Canada; it operates under the start-up crowdfunding exemption, and accepts investors resident in Ontario, Alberta and British Columbia where the offering lists their province.

What Backers checks before an offering goes live

• The company's founders: at least one founder applies for a criminal record check from the RCMP, the FBI or local police.
• The company's preparation: a 21-day Bootcamp must be complete before any offering can go live.
• The offering itself: staff review and approve every offering, the company certifies its offering document, and Backers checks the raise against the $1,500,000 limit, counting the company's other offerings on Backers.
• Every investor: identity is verified in-house before an investment can start and is checked again at Confirm.

These checks decide whether an offering can be listed on Backers. None of them is a judgement on an offering's merits, and Backers cannot say whether any investment is suitable for an individual investor.

NI 45-110 also covers non-convertible debt linked to a fixed or floating interest rate, and that is what a business note on Backers is: a business issues the note on Backers and investors fund it.^[1] Backers is the portal, never the lender.

A note's risk is a different shape from a share's. A share's value depends on what the company becomes; a note sets out fixed terms the business has agreed to pay. On Backers each note states its own coupon, fixed at approval, its term of 3, 6, 12, 24, 36, 48 or 60 months, and how often it is repaid: in equal weekly instalments by pre-authorized debit on a 3 or 6-month note, and monthly on a longer one.

A fixed coupon is a term of the note, not a promised result. If a business misses an instalment, the instalment is still owed and collected in a later debit; if a re-presented debit is also returned, Backers can open a default case, accelerate the note and notify every holder, and anything recovered is shared among holders in proportion to their principal. A business that fails may never repay in full.

Every protection in this guide applies to notes exactly as to shares: the same $2,500 cap per offering, the same Form 45-110F2, the same trust account, the same withdrawal right and the same resale restriction.^[1] No note has been originated on Backers yet, so there is no repayment or default history to report. Investing in business notes covers the terms in detail.