If you are someone that spends a fair amount of time online and on social media, you’ve likely heard the term crowdfunding. You might be wondering: What is it? How is this different from other types of investing? Is it legal in Canada?
Though the specifics in each case can be different, here’s a quick breakdown:
Crowdfunding is essentially a process whereby a person or company asks for small amounts of money from a large number of people (often via social media) for goals such as providing funds for an event, an organization, or even disaster relief. The individuals involved (both those being asked for money, as well as those doing the asking) sometimes share a common interest, whether it be a charitable cause, cultural or artistic project, or event.
Sometimes people want to use crowdfunding to raise money for a business, for example, a start-up company or an existing business that is struggling. In some cases, people are merely asked to donate money . The proverbial hat is passed around via social media.
In some cases, “securities” are being issued in exchange for investing in the business. These kinds of transactions must comply with securities laws. Loans, promissory notes, shares, and units are just a few of the examples of things that are considered securities. But it doesn’t really matter what creative name is given to it, if you give someone money and expect to make a profit from their efforts or those of a third party, it’s probably a security and they’ll need to comply with securities laws.
In addition, anyone in the business of helping to find investors for persons or companies needing funding or advising people about investing may also be subject to securities laws and may need to be registered, for example, as investment dealer, adviser or an exempt market dealer – unless they are relying on an exemption from the registration requirement.
The bottom line is, if people are being asked to make a loan or other investment, securities laws need to be addressed. If those asking for the money can’t explain how they are complying with securities laws that should probably set off some warning bells for you.
Remember that even if a crowdfunding deal is structured to comply with securities laws, it’s still always important to determine what your goals and risk tolerance levels are before investing. Participants who are considering providing money via crowdfunding should be aware that there are risks involved, as there are with any investment. Anyone telling you differently or downplaying the risks to convince you should be treated with caution.
So do your research, look into the backgrounds of those offering such opportunities, and never provide more capital than you can afford to lose.
Crowdfunding is a complex topic, so if you need more detailed information, or have questions about a specific investment you are considering and the application of securities laws, please contact me via the ASC’s Public Inquiries Office at 1-877-355-4488 or firstname.lastname@example.org.
Hello, Don Rodgers here and I am the Public Information Officer for the Alberta Securities Commission (ASC). Before coming to work for the ASC, I was a trader and taught technical analysis. I also wrote for two on-line investment websites. As such, I have a great deal of interest in the securities industry and a desire to help answer questions which you may have.