Crowdfunding

Crowdfunding’s Potential for the Developing World

From May 2012 to August 2013 I backpacked around the world, traveling in Africa and Asia learning about emerging economies and social ventures. When I returned to Canada I consulted for an Equity CrowdFunding portal under construction for 4 months. I knew the potential that increased capital could have in the countries where bank loans are above 20% but wasn’t aware of a recent World Bank Report. I’m in the process of reading the report and will blog in more detail later but I wanted to post a quick blog to bring it to your attention, (for the full World Bank report by click here).

What people in North America don’t realize is that credit isn’t available in most of the developing world. There are no credit card machines with Square readers at fruit stands, homes are built over years without loans, and without credit the ability to create cash which spurns demand is limited. (Not to mention only a small percentage of the population is banked limiting the ability for banks to leverage savings.) As Africa’s emerging middle class receives credit the money supply will increase, they’ll spend more, crediting more demand, more jobs and more middle class individuals. This increase in consumption will increase the demand for resources, but long term sustainability is another story. Increased spending encourages business owners to be more efficient as more competitors enter the markets due to increased volume, this will drive down prices, in my experience many businesses in Africa operate on a high margin low volumes model.

But Ryan, doesn’t Africa need clean water, food, and education? Although these basic necessities are still elusive or are of low quality in many of the countries a lack of capital stagnates growth. An increase of capital has the potential (if invested wisely) to increase business, which will generate wealth, and consumption leading to long term stability across the continent. This wealth will then be taxed (collecting taxes is another issue) and reinvested to improve infrastructure, and schools. Creating a tax base also makes government officials accountable in comparison to aid revenue.

Where does CrowdFunding fit into the picture? Kiva kicked off the concept with micro loans split among many individuals but imagine if you could invest directly into an African solar venture or Agriculture firm online via a CrowdFunding portal. Equity Crowdfunding has the potential to allow strong entrepreneurs to source capital from outside of Africa and altruistic investor to find new investment options. In the future many individuals will look beyond Blue Chip stocks to find a gem that matches their interests and personal beliefs.

In my next post on the subject I will go into the World Bank report and outline some of the main points.

 

CrowdFunding Updates – Early May

During the last two weeks the first “CrowdFunded” investment from a non-accredited investor took place on SeedUps Canada. The brief Globe and Mail article (Click Here) interviews the investor, a mother looking to learn more about her portfolio than the banks were providing. This opens the gates for many opportunities in the industry.

If you are looking to follow the space as it evolves make sure to attend an event. There are a few upcoming Equity CrowdFunding events in Vancouver during the next two to three weeks. View below.
NCFA Event – May 21st

Canadian Crowdfunding and Taxes

As CrowdFunding’s popularity increased it was only a mater of time before the Canada Revenue Agency (CRA) clarified legislation. In October of 2013 Revenue Canada stated that crowdfunding income is taxable. The Income Tax Act  (subsection 9(1)) defined crowdfunding as business income, most campaigns provide a good or service to backers in exchange for funding. Campaign organizers can deduct any expenses related to the campaign and only the profits are taxed (demonstrated in the example below).

Are there any exceptions?…Yes.

  1. Donations only Campaigns (no exchange of goods and services, ex. medical campaign)
  2. Political Campaigns
  3. Equity CrowdFunding. The sale of shares is not taxed, although equity crowdfunding is not yet legal in most of Canada.

How do taxes affect crowdfunding?

1)    Rewards Costing: If you are trying to make 1000 dollars profit, make sure you take into account the amount of taxes you will need to pay the CRA when setting your reward levels. If you are just looking to break even this is less important. The tax percentage depends on many variables, how much your will raise, where you are located, are you a company or individual? These are questions best suited for an accountant.

2)    Personal Income Tax: Make sure to record the income you receive as a salary or fee after your campaign is successful on your personal income taxes.

TIP: Keep your receipts, and expense what you can while working on a campaign!

For example:

Campaign: You are raising funds to produce a new documentary on Vancouver’s Craft beer scene. You reach your goal of $10,000, and finish the campaign with $11,298.

Rewards: You provide all backers at 10 dollars and over with a free download of the film. Anyone donating over 25 dollars receives free entrance and a t-shirt at the film’s screening.

How much is taxed? Well this depends on your expenses during the campaign.

Assume the following costs:

  • Film Crew ($5,000)
  • Producer & Campaign Manager ($500 each)
  • T-Shirts ($2,000)
  • Launch Party Venue for Backers ($2,000)
  • Trailer Production for the campaign ($1000)
  • Admin Expenses/Food/Etc. ($300)

In this case the expenses actually exceeded the amount raised by 2 dollars, you wouldn’t have to pay taxes and you’d get to create an awesome project! If your expenses were only $10,000 you’d pay taxes on the $1,298 profit.

The following examples are taxable:

Campaign Type Example
Film Production  Wish I was Here
Advanced Sales  Pebble Watch

The following examples are not taxable:

Campaign Type Example
Political Campaigns  Township Council 2014
Surgery/Medical (Donations) Kidney Transplant
Equity Crowdfunding  (Proposed Legislation)

Why is equity crowdfunding not taxed?

Dividends issued to shareholders are taxed along with the capital gains when the share is sold. Raising money via CrowdFunding is very similar to traditional securities therefore the laws are mostly in existence around how they will deal with shares. The part that is to be determined is how to protect shareholders from fraud which the currently public markets address but crowdfunding is looking to open up a new medium for early stage companies. I’ll make sure to keep readers informed as legislation changes.

Please be aware that the foregoing article provides an overview and is not considered legal or financial advice.

Resources:

1) CBC: Crowdfunding counts as taxable income
2) Are my crowdfunding efforts taxable?
3) Crowdfunding financing is taxable income, CRA says

If you are looking for a CrowdFunding Advisor contact us for more information about Ryan’s rates and services.

Where should I invest? A brief review of Equity CrowdFunding Sites.

Recently I read a statistic that there are over 500 web portals servicing the CrowdFunding space globally, although only a small percentage offer equity stakes. Many are focusing on specific regions or niches, so which one is best for you? Really investing comes down to what you love and what you know, find your passion and it’ll be a lot easier to research the little details. What do you get excited about, what do you read about; knowing the industry will help you define what’s hot and innovative and what will fizzle out in the next two to three years. The difference between those “hot companies” with a 5-20% return per annum that the media covers and a 20X return is that you need to catch a rising star before everyone else sees where the industry is going.

If you created a Social Media platform in 2010, it most likely struggled to gain adoption after Facebook’s first mover advantage. The same can be said about creating a platform in 1999, it was too early for mass adoption and many companies that created the concept lost market share as the second generation of companies figured out their deficiencies and built a better product. There is a ‘Sweet spot” with early stage companies where you enter the market before it’s too crowded, while also not entering so early that your venture runs out of funds before the product is adopted.

Do you want to invest in the latest health product to hit grocery stores or would you rather invest in a drone that delivers tacos on college campuses? What guides your investment decisions, your experience or your interests? If you have worked in consumer retail you might understand the business plan of a new granola bar company, or an electrical engineer might see the value in the latest smartwatch. As CrowdFunding matures more and more niche sites are popping up providing opportunities for all investors. I predict that this will significantly increase the number of accredited investors (doctors, dentists, etc) investing in high risk (high reward) businesses that match their personal beliefs and interests. Currently only 3% of US accredited investors are classified as ‘angels’. Angels invest because they enjoy it, imagine getting to pick the next rock star company and then telling all your friends while also making a fortune. As online investing becomes more social (one of the predictions of the top upcoming 2014 trends) and engaging you will see more people enter the space especially when it goes mainstream after Title 3 of the JOBS act is finalized. Title 3 will allow everyday individuals to invest in private ventures within limitations.

Below I’ve place a very small list of American CrowdFunding platforms. The industry matured significantly in 2013 and we should see more major players emerging while we catch up to Europe where they have been crowdfunding for a bit longer on sites like CrowdCube. To view more platforms check out the crowdfunding resources section on our site.

 

Consumer Products

Do you want to invest in the next top vitamin, granola bar or Chai tea…

CircleUp

CircleUp is the early stage mover in the consumer product space with several multi million dollar deals complete. They curate the deals and only accept 2% of applicants. Their focus is mostly on growth financing, taking regional brands to the national or global stage.

 

Tech Companies

Do you want to invest in the next Facebook, Twitter or Google…check out these sites…

FundersClub

FundersClub is the most exclusive and one of the earliest players in the equity crowdfunding space. Their web portal actually restricts access to only a select group of investors; they’ve stated that when Title 3 passes they will not be allowing retail investors onto the platform. They believe that having a hand picked or selective investor base adds value and prestige to the companies that use their service. After launching out of Y Combinator they raised over 8 million for their company, and 11 million for their listed companies. They are seen as one of the front runners having received their ‘No Action Letter’ from the SEC allowing them to operate on March 26, 2013.

AngelList

Angel List is a massive web portal, the LinkedIn of the startup world with individual and company profiles. Most up and coming start ups are listed on the site, many are raising money and they also have a talent section where the fast growing tech companies can find people eliminating the middleman or use of recruiters. They also received their ‘no action letter’ from the SEC on the same day as FundersClub. There site boasts over 12,000 accredited investors and over 80% of Seed and Series A tech deals in the US are being done via Angellist.

Rock the Post

Rock the Post has raised about 23 Million for their listed companies and has a very clean simple layout. Their site is also very informative around CrowdFunding legislation.

Mineral Exploration

Do you ever wonder where stuff comes from? What’s inside that computer or how that frying pan came to be? Check out Exploration Funder, the company funds Exploration companies that send  geologists looking for the next major deposit. (Note: I consulted with Exploration Funder for 4 months.) The platform is currently not operation but is an example of how crowdfunding is moving towards very specific niches.

Exploration Funder

Exploration Funder showcases both private and publicly traded exploration companies with projects all around the world. With valuation trajectories similar to the tech sector if you drill and hit the right mineralization in the ground you can become incredibly wealthy. The site lists curated companies that are deemed to have high potential projects, all listed companies are reviewed by an advisory board of geologists and industry specialists.

Conclusion

These are just a sampling of the new Equity CrowdFunding platforms on the market. These 5 sites will give you an example of how companies are presented, investor registration processes and more information on how to do due diligence as a neophyte investor.

If you are looking to stay up to date on the CrowdFunding industry CrowdFundinsider.com is a good resource and stay tuned to my blog!

Your Investment Portfolio & Equity Crowdfunding

After reading my last post Equity Crowdfunding post you might be interested in putting money into a small scrappy start up company. ‘Angel Investing’ is the term used to describe rich individuals that seed or provide the early stage funds for start up companies to grow big enough to attain financial stability. Angels are often the first stage of financing after ‘family & friends’ and help bridge the gap before Venture Capital funding. They are essential to the start up ecosystem and equity crowdfunding is generating more interest in the space. ‘Angels’ are often retired entrepreneurs providing advice and connection to the (often) younger management team. Angels like advising and staying in touch with the entrepreneurial community without the day to day operational stresses of a new venture. Angel Investing is also quite social, ‘Angel Forums’ in different cities allow for co-investing in several companies to diversify the risk while also sharing information.

In September 2013 the SEC removed the ban on public solicitation, this opens up Angel Investing from a murky old boys club to the modern transparent web portal. Portfolio managers often mention that a small percentage of your assets should be held in high risk high reward areas. It doesn’t take a rocket scientist to realize many people made money on Facebook, and several other of the recent social media darlings. Equity CrowdFunding provides you the opportunity to place your bet on the next hot company and ride the wave. Although ‘Retail Crowdfunding’ or equity crowdfunding for the everyday man will only be legal after the SEC finalizes Title 3 of the JOBS act I’d recommend all investors stay up to speed around the changes in securities laws. Lower ‘buy ins’ via portals also allow investors to spread the risk. Previously if an angel group wanted to place a 200,000 dollar investment into a start up they’d have to pull from their small geographic member base. With crowdfunding portals the minimum investment is as low as 1000 dollars on many sites. This makes it easier to acquire shares in 12-15 companies with 10% of your overall portfolio.

Am I advocating for you stay away from bonds, GICs, and the conventional stock market? No, but if you are putting away 10,000 dollars a year consider placing 10% in a start up company or two.  The bulk of your portfolio will probably grow slowly with a 2-8% return per annum, but that $1000 will either end up as nothing or (hopefully) an amazing return. Venture Capitalists state that out of every 10 investments they might get 1 ‘home run’. This ONE investment provides a 20-30X return, 50% of the companies will go bankrupt, a few ‘zombie’ investments will neither grow nor die and the remaining will return a modest 2-3X return. Furthermore you can’t retract your investment at any time, early stage companies are very illiquid, meaning that you can’t easily sell your shares. Recently sites including SecondMarket have sprung up, but start up shares are still very difficult to liquidate until an IPO or buyout. Expect any investment in a growing venture to be locked up for minimum 2-3 years. Although you will no longer need to be a ‘sophisticated investor’ to invest via web portals by mid 2014 in the United States you should be a ‘knowledgeable investor’.

Start ups are dreams with explosive potential and you can’t compare them to a traditional business. They won’t have cash flow, salaries will initially be low or non existent on the balance sheet, and they often pivot after starting into something very different. If you aren’t prepared to receive investor updates about your ice cream machine company that just pivoted into a hipster beard cooling device or something equally random the start up scene might not be your ideal investment market.

Equity Crowdfunding

This past winter I consulted with a CrowdFunding platform called Exploration Funder,  which is currently not operational. When asked what I was working on I’d respond, “Equity CrowdFunding” which often received confused looks. This article is to explain the basic premise of equity crowdfunding.

Crowdfunding is the concept of sourcing small amounts of money from many people. The sum adds up to something substantial, crowdfunding originated with Kiva.org. They realized that many people could fund the businesses of overseas entrepreneurs with micro-finance loans. More recently the industry pivoted towards products on Kickstarter, the concept of ‘pre-sale’ or ‘pretail’ allows a company to prove the demand for their product prior to manufacturing.  The newest edition is equity crowdfunding, providing investors the opportunity to receive equity in emerging start ups. Most of what I’m discussing applies in the United States. Canada has backwards and confusing securities policies making it more complicated with a smaller market, although provincial laws are in the process of being updated.

Essentially there have been a few awesome changes in American securities law which are causing some pretty big shifts in how Small and Medium Sized enterprises raise money. In April 2012 Obama passed the JOBS act which stated that the SEC should change a few things and streamline the ability to invest in businesses creating jobs. How could any politician not pass a bill labeled ‘JOBS’…genius! (Jump Start Our Businesses)

It then took the SEC (Securities and Exchange Commission) about 18 months to pull things together and in September 2013 private companies could publicly disclose that they were raising money. Rules around public solicitation had been in place since 1934! This opened up opportunities for web portals to enter the picture presenting a start up from Miami to an angel investor in Boise, Idaho. Accredited investors could now find deals that were previously not accessible. What hasn’t changed, but is in the process of changing is opening the market up to the non-accredited investor. I know most of you are saying stop speaking Swedish! What is an accredited or non-accredited investor? There is a list of criteria that declares you are essentially eligible to invest in a highly volatile or risky new venture. Essentially if you are rich you can waste your money on pipe dreams or make a fortune on the next Google. So do you qualify? Do you make over $200,000/year or $300,000/year/household? Or have liquid assets other than real estate of over a million US? If yes…you are an accredited investor. Since that probably applies to about 1% of my readers the rest of us will have to wait for the JOBS act Title 3 to be implemented.

In October 2013 the SEC announced a proposal regarding how Title 3 would be implemented. The proposal required additional reporting if companies wanted to raise money from non-accredited investors adding an additional burden on any company choosing to pursue non-accredited funds.  This could cause all upper tier or mature companies to avoid average investors and essentially nullify the intended changes to open up the markets and raise funds from everyday individuals. Title 3 also limits the amount invested depending on the investors income level to prevent individuals from loosing everything on a high stakes start up.

If you liked this post my next article will be around the major players in the equity crowd funding space. If you’d like me to dive deeper regarding any of the points mentioned above post in the comments section.