March 5, 2014 By Krista Bulmer
Have you ever had a great idea for an aviation-related business but did not know how to secure the funds to get started?
Have you ever had a great idea for an aviation-related business but did not know how to secure the funds to get started? Aviation is a business that requires technological and other forms of innovation. It is possible that many of you have thought of a great idea yet were discouraged by an inability to secure adequate funds to make that idea a reality. If you have never considered crowdfunding before, it may be time to sit up and take notice.
Crowdfunding is a process through which small- and medium-sized businesses might secure funding for their business or project by appealing to the public to invest through an online portal. Today, crowdfunding in Canada is done through websites such as Indiegogo.com or Kickstarter.com. However, these websites facilitate donations to an idea or a project or the pre-purchase of a product. Because of securities laws, investors are unable to buy shares in a company in this way.
I was recently struck by the story of Terrafugia, a company based in Woburn, Mass., that plans to have a flying car for sale to the public and ready to ship in 2015. This company turned to crowdfunding on a site called Wefunder.com to find additional money to achieve its funding targets. On Wefunder.com, the company was seeking $500,000 in additional funding. To date, they have raised more than double their target.
Until the American Jobs Act is in force, only “accredited investors” can invest in this company through the web portal, so investment is not currently available to the average person. But in mid-2014, it is expected that everyone – not only sophisticated investors – will be able to put their money into start-ups in the U.S.
Canada is undergoing its own exploration of the crowdfunding model for startups to raise capital. The legal question becomes how crowdfunding ought to be regulated in order to protect investors from fraud, while at the same time ensuring that start-ups are not overly burdened by the levels of disclosure normally required by our securities regulators.
The Ontario Securities Commission (OSC) engaged in a public consultation process in 2013 with respect to crowdfunding and has sought the input of various stakeholders into what kind of regulations would be appropriate for new start-ups, and whether the exemption from prospectus requirements ought to be broadened for crowdfunding purposes.
The initial concept created for the purposes of the OSC consultation included restrictions on the issuer such as the requirement that the issuer be incorporated and have its head office in Canada, that it have a $1.5 million cap on the funds raised in a 12 month period, and that it cannot advertise an investment outside of its own website or the funding portal. It also included investor protection measures such as placing a dollar limit on how much a person can invest in a single transaction or in a calendar year, disclosure about the offering, the issuer and the funding portal as well as certified or audited financial statements. Investors would have to sign a risk acknowledgement and would have two business days to withdraw from their investment decision. The issuer would also have to provide ongoing disclosure such as financial statements and would have to keep records with certain information about the securities issued, names of security holders and the size of their holdings and the use of the funds raised. The portal itself would have to be registered in the manner required by the OSC as a dealer or adviser.
Based on the results of its public consultation, the OSC has directed its staff to develop a crowdfunding regulatory framework and will build on the initial concept with a focus on the following areas:
- Developing a regulatory framework for funding portals that will include the due diligence portals will be required to conduct on issuers and their management as well as the viability of the issuer’s business;
- The screening of investors to ensure they understand the risks associated with investing in the business.
- The additional services to be provided by the portal to enhance investor protection.
The regulator has its work cut out for it. At the end of the day, if regulators make the process too burdensome, it will inhibit participation and it will also inhibit innovation, yet a lack of reasonable controls or regulations will put investors at risk. The OSC appears keen to find a way to facilitate the crowdfunding equity model and is proactively addressing major stakeholder concerns. If things continue to progress at this rate, a new source of equity financing may be on its way that can turn your idea into reality. So if any of you have ideas for flying cars, or any other innovative aviation ideas, you should keep your eyes peeled for the latest legal developments in crowdfunding.
Krista Bulmer is a lawyer practising aviation law, business law, and civil litigation with the law firm Wires Jolley LLP in Toronto. This is not a legal opinion. Readers should not act on the basis of this article without first consulting a lawyer for analysis and advice on a specific matter.