What are the real risks of investing in the equity of start-up companies?
Investing in start-ups is absolutely the riskiest type of equity investing, however if you have a good understanding of an investment and you feel that the idea and/or business model of the company is attractive in the context of your understanding, your odds of success might increase. Remember that you are entirely investing on your own as far as the law, the regulators, the company, and the portal are concerned…you have no recourse to anyone if things don’t work out unless you can prove outright fraud on someone’s part. Investments of this type sit on the far risk/return edge of a balanced portfolio and are generally considered to serve as total return enhancers should one happen to succeed.
How does the portal make its money?
The portal takes a listing fee from each issuer company plus a percentage of any successful raise.
What is the “investment proposition” that I see at the top of each deal page?
The offering investment proposition is the way that the promotors of the deal are suggesting that you might make money on your investment in their company if things go as planned or even better. Most of the time the idea will be that the company will experience a series of senior rounds of financing that will increase the valuation of the original equity, eventually leading to a buyout of the first investors at a great profit. In the investment world this is also known as the “exit strategy.” Sometimes offerings suggest that you might realize income in the form of dividends along the way to a profitable exit. In any case, the investment proposition is pure conjecture and so is presented as what might happen, not what will happen.
Tell me more about the minimum raise, and is there a maximum raise in the same event?
The idea behind start-up common equity crowdfunding is that the company is raising a certain amount of money for certain specific uses that will propel the company to the “next level,” whatever that is, and this constitutes the minimum raise. If the company is unable to make its minimum raise, it will be unable to afford the specific things that it had projected needing for its present purposes. So, if the raise does not make the minimum, it fails. Money raised beyond the minimum up to whatever maximum is set is simply a vote of confidence in the company’s business model and its leaders. It just gives the company more resources to pursue its goals.
What happens to my money when I decide to make an investment in a listed company on the portal?
You pay for your investment either via an Interac bank transfer or debit card…our portals do not accept any credit cards (which would create a margin transaction) or electronic payment programs such as Paypal. Your funds go into an “in-trust” depository account at the Bank of Montreal that is owned and administered by the portal where they are held until the raise event is concluded. If the raise succeeds, that is it makes at least its minimum invested funds within the 90 day raise period, the funds are dispersed to the company less costs of the raise and you are registered as an owner of the company and an electronic share certificate is sent to you. If the raise fails to make its minimum within the 90 day raise period, all invested funds are returned to the investors without offset by cheque.
If I invest, what kind of voting rights would I have in the management of the company?
The voting rights that attach to any of the equity securities sold through this portal are described in the Offering Document for the particular company listing that is available for viewing from the deal description page for the listing. For the most part, equity securities sold on this portal will not have voting rights or any influence on the management of the company. For the most part, you can think of it this way…if you buy 10 shares of Apple stock, how much influence will you gain in the running of Apple? ZERO. You are invested in Apple for economic gain alone not to participate in the management of the company…and you are similarly invested in start-up equity crowdfunding shares for the same reason.
Can I sell my shares after I buy them, and if so, to whom?
You can only sell your shares in Canada to family members, close business associates, or under certain conditions to a buyer of or major investor in the company. Ultimately, there is no secondary market for your shares. If your company goes public in a real IPO, your shares will become fully liquid…that is you can sell them to anyone at any time on the exchange(s) that they are traded. You can sell your shares to anyone at any time outside of Canada.
What is the company actually offering for my investment?
Equity shares representing a partial ownership in the company as described in the offering documents.
What kind of company can raise this type of funding?
The company must be a corporation or a corporate subsidiary of a corporation whose head office is located in one of the participating provinces of BC, SK, MB, QC, NB, or NS. The company cannot be an investment company or any sort of “blind pool” entity.
How much can a company raise?
A company can raise up to C$500,000 per calendar year in up to two maximum C$250,000 raise events that come after one another (they cannot occur at the same time).