Last week a potential client called me up and asked what I knew about crowdfunding.

“A little bit,” I said. “My son is running a GoFundMe campaign.”

He then invited me to attend the VanFUNDING 2015 Crowdfunding conference as his guest. I could hardly refuse…

In May of this year, six Canadian provinces, including BC adopted new exemptions for startup companies to raise up to $500,000 per calendar year through online funding portals. My client’s company happens to fit within the guidelines and is eligible for this exemption.

This opens some big doors for startup companies who can figure out how to use crowdfunding as a way to raise capital.

When we think about crowdfunding, most of us see the Kickstarter model. A person or company has brilliant idea for a product. They put up a campaign on any of the platforms and hope to raise enough money to turn the idea into an actual product they can ship.

If the company raises the required money, the campaign is a success and the person/company can then manufacture the product.

In return for their donation, the donor receives the product when it launches. This model is known as the Reward model of crowdfunding.

Pretty straightforward. And lots of companies have been started this way.

But, that’s only ONE model for crowdfunding. There are three others:

• Donations: You see these a lot on GoFundMe and other platforms. Someone has a crisis in their life. Anything from an ill child to a fire that destroys everything. A family member or close friend starts a campaign asking for money to cover expenses. These kinds of campaigns appeal to our desire to help others and can raise a lot of money in a short period of time. The campaign doesn’t have to be about crisis, I’ve seen lots of campaigns for people who want to give back in some way. Generally, these are for individuals, not companies. Sometimes called, “pass the hat” funding.
• Debt: This is a takeoff from the traditional model of debt financing where the company would go to a bank where they borrow a certain amount of money and pay it back with interest over a certain term. With crowdfunding, the borrower goes to a platform which expressly raises capital through crowdfunding. Usually the terms are stricter (higher interest rate and shorter repayment schedule) but they are more willing to look at true startups who have no proven track record.
• Equity: This is where the new exemptions will have the biggest impact. Companies seeking funding are no longer limited to asking for money from accredited investors – that is investors who have an annual income over $250,000 and a net worth of $2,000,000 or more. That limits companies to less than 3% of potential investors. The startup exemption allows companies to now seek funding from what are called the “Mass Affluents” – those who earn $150,000 and have a net worth over $500,000. This is a huge, untapped market for many companies seeking investment. At the same time, the exemption limits individual investment to a maximum $1500 per round at two rounds per year. This is to protect the investor. The company can only raise a maximum of $500,000 through this channel.

Here are some other things about crowdfunding I bet you didn’t know…

1. Crowdfunding is a relatively new phenomenon. Especially in the equity sector. Many of the platforms we spoke with at the conference were in their own startup phase. In fact, one company has only put together two deals so far. Since it’s so new, there is a lot of opportunity to learn and grow in this market.
2. It’s critical to have your legal paperwork done correctly. Shareholder agreements, Memorandums of Understanding and everything else you need. While the startup exemption does reduce the number of documents you need, it does not release you from your obligation to follow the law.
3. Investors still need to do their due diligence.
4. Set realistic targets. If you go into a campaign with an outrageous goal and don’t meet it, you may not get anything. It is better to set a lower target and oversubscribe than to have an unsuccessful campaign.
5. Successful campaigns are all about good marketing. No one wakes up in the morning and says, “Gee, I think I’ll invest in a startup today.” Companies are SOLD, not bought.

And finally, your best chance at success is having a great story and a large audience. A good copywriter helps you tell your story in such a way that it engages your audience, compels them to take action and can help with the rest of your marketing – everything from case studies and brochure to boosting your social media presence to attract more investors.

That touches the basics of crowdfunding.

After the conference my client and I spoke with a few of the speakers about an idea we had come up with while attending. It’s something none of them had thought of, but they all thought it was brilliant and a great way to get exposure AND capital without giving up too much equity. If it works for his company, it may work for yours too. But it’s too early to share it yet.