FrontFundr kick-starts equity crowdfunding in B.C.

B.C. Securities Commission warns startup investing is high-risk

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      When Vancouver-based RentMoola Payment Solutions reached the stage where many technology startups would seek financing from venture capitalists, Patrick Postrehovsky and his team made the decision to try “untraditional” methods of raising money.

      The CEO and cofounder of RentMoola told the Georgia Straight that, after tapping friends and family, the privately held company took advantage of securities regulations in British Columbia that permit it to sell shares to accredited and retail investors. Now, according to Postrehovsky, RentMoola is considering using new rules that allow startups to do equity crowdfunding—which is legal here but not in Ontario and the United States—to raise money in relatively small portions from a large number of people.

      “Typically, if you’re going to raise capital, you go to your VC, you review term sheets,” Postrehovsky said in the Yaletown office of Silver Maple Ventures. “But the biggest reason why we didn’t want to do that, frankly, was the venture-capital term sheet is going to be very dilutive. They’re going to try to take control of your company, and we really didn’t want to do that for our team.”

      Silver Maple is the company behind FrontFundr, a securities-crowdfunding portal that launched in May. RentMoola is one of three local startups hoping to raise capital on FrontFundr, which on June 18 became the first portal in Canada to use what’s known as the “startup crowdfunding exemption”.

      Adopted by the B.C. Securities Commission and its counterparts in Saskatchewan, Manitoba, Quebec, New Brunswick, and Nova Scotia in May, the exemption allows early-stage companies headquartered in those jurisdictions to sell shares, convertible notes, or bonds to investors living in those six provinces via crowdfunding portals without filing a prospectus with their provincial regulator. Using the rules, a startup can raise up to $250,000 per crowdfunding campaign, with two of these permitted in a calendar year. An investor can contribute a maximum of $1,500 per campaign.

      “It allows the broader investor community access to early private companies, and historically that hasn’t been the case,” Sean Burke, chief financial officer for FrontFundr, told the Straight, seated across from Postrehovsky. “There’s been exemptions available that they could use to get that access, but really what our platform does—and the new crowdfunding exemption—is it facilitates the actual process of doing an online investment.”

      Guusto Gifts, one of the startups on FrontFundr, is the first company to attempt to raise capital using the startup crowdfunding exemption. The gift-giving-app maker is seeking to sell three percent of its equity for $50,000 by August 14. The minimum investment is $500, and Guusto must raise at least $20,000 for its offering to close. Guusto aims to gain a further $250,000 from accredited investors (who include people who earn at least $200,000 a year, have at least $1 million in financial assets, or possess at least $5 million in net assets) via FrontFundr using other exemptions from the prospectus requirement.

      Burke said that FrontFundr, which charges startups a commission if their campaign is successful, aims to become the Kickstarter of securities crowdfunding. He remarked that the startup crowdfunding exemption gives retail investors the opportunity to be like the venture capitalists on the reality-TV show Dragons’ Den. According to Burke, “crowdfinancing”—his preferred term for securities crowdfunding—rewards startups with more than cash.

      “By having broader access, you have brand champions,” he said. “People who are invested into the company are your biggest supporters who are going out there and advocating for you, talking about your product.”

      However, Burke noted that responding to an offering on FrontFundr isn’t as simple as donating to a project on Indiegogo. For starters, prospective investors must fill out a questionnaire, which asks them to describe their investment objectives, and produce a government-issued identification document.

      Peter Brady, director of corporate finance for the B.C. Securities Commission, told the Straight that the startup crowdfunding exemption is the regulator’s response to industry pointing out a “funding gap” for early-stage companies. According to him, the older “offering memorandum exemption” allows companies to sell securities online or offline and raise “any amount from anyone”. However, Brady noted that this exemption requires companies to produce audited financial statements.

      “We did hear from early-stage companies that the cost of preparing audited financial statements was sometimes prohibitive,” Brady said by phone from the BCSC office in downtown Vancouver.

      Brady advises investors looking at buying equity or debt through a crowdfunding portal to “do their homework” on the issuer and the portal, read the offering document describing the investment, and pay attention to risk warnings.

      “Only invest as much as you can afford to lose,” he said. “You may lose all your money. Startup investing is high-risk.”

      Watch a video about RentMoola.
      RentMoola Payment Solutions

      RentMoola has developed a platform that allows property managers to accept online payments from tenants. Since the company is already raising capital through the BCSC’s accredited investor and offering memorandum exemptions, Postrehovsky said it doesn’t actually need to avail itself of the startup crowdfunding exemption. Nevertheless, he applauds the new rules.

      “It really just broadens the scope,” Postrehovsky said. “Imagine how many high-net-worth individuals are out there—not that many, right? Suddenly, you’ve opened up the pool. It’s just a lot easier to gain access to capital. For early-stage startups, the biggest issue for them is, ‘Where am I going to get my cash?’ ”