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 Ontario, and it comes with a number of risks and caveats that potential investors need to know about.
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.
New to Ontario is equity crowdfunding, where the goal is for a new business or start-up to raise capital by selling many small stakes, 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.
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 small amounts of money. Equity crowdfunding in Ontario is part of the exempt market, meaning that there are fewer 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 Ontario’s community of entrepreneurs.
The Ontario Securities Commission has introduced some measures to help protect investors who participate in crowdfunding. Despite these measures, equity crowdfunding remains extremely risky for investors. Investors who choose to participate in equity crowdfunding should do so with their eyes wide open.
There is a cap on the amount of money that investors can invest in order to limit the money they could lose. Everyday investors in Ontario can only invest up to $2,500 per investment and cannot invest more than $10,000 in total per year. Certain investors can invest more , but these people must first prove their high net worth and income.
Investors also have an opportunity to change their minds about their decision to invest, and can cancel a deal within 48 hours of agreeing to make an investment.
The funding portal is also required to provide you with a Risk Acknowledgement Form to confirm that you understand the risk warnings and information in the crowdfunding offering document. You must complete this form in order to make an investment.
If you’re familiar with the risks of equity crowdfunding and feel ready to invest, you can start searching for offerings available to Ontario investors on a funding portal. Funding portals are websites that post current equity crowdfunding offerings and are responsible for conducting background checks on the businesses and executive officers behind these ventures. In order for a funding portal to operate in Ontario, it must first be registered with the Ontario Securities Commission. You can confirm whether or not a portal is registered by visiting AreTheyRegistered.ca or by contacting the Ontario Securities Commission.
Funding portals also provide investors with offering documents from businesses selling crowdfunding investments. These documents contain basic information about a business, its activities, its officers, its financial condition, the amount it wants to raise, the investment, how the money raised will be used and the risks. A crowdfunding offering document is not as detailed as a prospectus would be, but it does provide some information that investors can use to get started. If a business makes any changes to its offering document during the offering period, the funding portal is responsible for notifying anyone who had already invested in the business under the earlier offering document.
Offering documents are not reviewed nor approved by the Ontario Securities Commission, so it is up to you to ensure that you fully understand all of the information found in an offering document before you invest.
Only you can decide whether equity crowdfunding is the type of investment you want to make. Every investment decision should be carefully considered and thoroughly researched ahead of time. Equity crowdfunding is just one of several potential investment options available to you. Many investors opt not to put all their eggs in one basket and instead choose different kinds of things to invest in to minimize their risk. This is referred to as diversification.
Learn more about:How Diversification Works
Before you invest, do a self-check on how comfortable you are with the risks of equity crowdfunding. Can you afford to lose all of your invested money? Are you willing to wait, potentially for years, before you might be able to get your money out of this investment, let alone a return? Do you believe you have enough information about this investment opportunity to make an informed decision?
Take time to thoroughly review the offering document. Make sure you understand what the business’s objectives are and the risks associated with investing in it. How is the business going to grow? How will it make money and within what timeframe?
You can search the internet for information on the business, the industry, the people managing the business, as well as the viability of its business plan. You can also search for information on the particular funding portal where you see the offering document and verify that it’s operated by a registered dealer.
More information about Ontario’s equity crowdfunding initiative can be found on the Ontario Securities Commission website.
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For more information about investing, including how to better understand your risk tolerance, visit GetSmarterAboutMoney.ca.