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Crowdfunding for businesses would give small investors a stake in a company

By: LuAnn LaSalle, The Canadian Press

Sunday, Mar. 17, 2013 at 5:01 AM | Comments: 0

MONTREAL - Social media wants to meet up with corporate finance on the Internet to let startup and small businesses raise money online.

It's called equity crowdfunding — different from Kickstarter which funds creative projects like movies, games or music and — because it would give these online investors shares in a company.

CEO and president Chad McMillan of Canada Gold Corp. (TSXV:CI) said equity crowdfunding would bring in more investors contributing smaller sums of money, spreading the risk.

"Crowdfunding is an innovative technique using modern technology that provides an opportunity to do that," he said in an interview.

He said it would help democratize investing, allowing small investors help get companies off the ground.

"I believe there are people who would love to have access to those opportunities as opposed to it just being reserved for the distinguished few."

McMillan said publicly traded junior mining companies such as his own, start-up technology and resource companies and any number of businesses would benefit.

"Many companies are finding it quite difficult to access and raise capital to advance their projects or their ideas," said McMillan, whose company is based in Vancouver.

Equity crowdfunding is already allowed in Australia, United Kingdom and the Netherlands. Italy is implementing and the United States also has laid groundwork for it.

In Canada, a number of provinces looking at it, including Quebec, Alberta and Ontario.

The Ontario Securities Commission is considering new rules to allow small and medium-sized companies to raise money from the public via the Internet, up to $2,500 for a single investment.

The securities commission notes these types of businesses are major job creators in Canada's economy and could provide a new source of capital, but said there is cause for concern over raising capital on the Internet.

"The concerns include the risk that crowdfunding will be subject to fraud and abuse," the OSC said in a recent report.

The OSC also said it could require a two-day period cooling off period to let investors reconsider and get their money back.

"Investors need to understand that they could lose all of their money and it is important that they are able to withstand that loss."

The National Crowdfunding Association supports a regulated pilot project with background checks on the issuers.

But the power of the crowd will also play a role, said Craig Asano, the association's founder and executive director.

"The principal that there is a greater number of eyes through the crowd could collectively help prevent potential acts of fraud or abuse quickly," Asano said from Toronto.

Asano also said crowdfunding would benefit newcomers to Canada starting businesses.

"The old communities know each other and not necessarily the new immigrants."

So what would be different about this kind of equity funding?

There likely wouldn't be a prospectus, a disclosure document that provides detailed information to investors about the purchase of a company's public offering and is costly to produce.

Technology analyst Duncan Stewart said there could be an offering memorandum with less information that costs a company much less.

"What this would be is some form of offering document that would be more than 'Give me money' but less than a prospectus," said Stewart, director of research at Deloitte Canada.

Stewart said it doesn't compete with venture capital funding, which usually starts in the millions. This is the first $150,000, $250,00, $500,000, he said.

"The transformative part is getting the retail investor with the $1,000 or $2,000 to participate in the creation of new companies," he said.

Cindy Gordon, national chair of Invest Crowfund Canada, said this kind of crowdfunding will also help companies create jobs. She added there will be regulatory oversight for companies setting up portals to raise money from the public over the Internet.

"This isn't like you're buying a lottery ticket and the moms and pops can go set up a portal," said Gordon, also co-founder of iCrowdfund Social Media Inc. website.

Gordon also noted that while equity crowdfunding will attract small investors, it will also attract those with deep pockets.

"The key thing that most people don't understand even in these models is that there are still two or three major shareholders that write big cheques."

Gordon said provinces are at different stages of considering crowdfunding, but she expects uniform rules for investors no matter where they live.

For his part, Canada Gold's McMillan notes that crowdfunding has already taken hold elsewhere.

"Why is it then in Canada we're always so slow to act where the opportunities lie?" he asked.

"I would say that all great companies started as a small company."

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