Crowdfunding is getting more popular amongst entrepreneurs who try to fund their projects by seeking small investments from a large number of people. Crowdfunding has expanded by the ease to reach a large public through Internet and Social Medias and by the urge for the entrepreneurs to find funding outside the traditional sector. Moreover, it can be very difficult for start-ups to get some financing since they usually do not have any collateral that could potentially attract potential investors.
Furthermore, by using Crowdfunding, entrepreneurs can combine two objectives: fundraising and promoting the project. Recently, it has also been allowed to appeal to Equity Crowdfunding, meaning the entrepreneur does not merely involves contributors through donation or pre-sale compensation but by issuing participation in their enterprise (such as debts securities or shares).
Crowdfunding by way of donation is often called Social Crowdfunding since this type of campaign is usually not only seeking financial support but more broadly to mobilize a community around a project. We can think of a fundraising campaign in order to support a cultural event in difficulty, produce a documentary or raise money for social causes such as research funds to fight diseases or environmental tragedies. In exchange of their contributions, donors may receive a product or their name mentioned in an artistic production for example. Crowdfunding by way of pre-sales is an amazing marketing tool and the scale of prices is a good way for a company to know how much the customer is willing to pay for its innovative product.
This type of Crowdfunding is overseen by the Autorité des Marchés Financiers and by the Regulation 45-108 Regulating Crowdfunding. Some restrictions applies to this specific type of crowdfunding in order to avoid fraud and speculation. To encourage start-up Crowdfunding, this Regulation allows entrepreneurs to seek funds issuing securities without filing a prospectus. A prospectus is a detailed informations’ document that a corporation must produce to get funding from the public in the stock exchange. A prospectus implies high costs since it requires the company to have audited financial statements which could have hindered the mobilization of capital for start-ups.
The Regulation therefore imposes obligations on Equity Crowdfunding portals such as limits to investors in order to protect them considering the prospectus exemption and the potential high volatility of these investments. Indeed, the risk of these investments can be great especially as the issuer remains closed and therefore the investment illiquid; in other words, it is not possible for the investor to resell such shares in the current state of the Regulation.
According to this new Regulation, start-ups will need to respect specific conditions such as:
- Collecting a maximum 250 000$ per fundraising campaign;
- Collecting a maximum 1500$ per investor during one fundraising campaign;
- Hold a maximum of two campaigns per calendar year.
For now, only two platforms are allowed to operate participatory fundraising capital in Quebec by the Autorité des Marchés financiers: www.gotroo.com and www.frontfundr.com. On that last one, two campaigns managed to reach their funding goal. On Gotroo, the first campaign from Quebec is ongoing and has already achieved its objectives.
Many questions remain unanswered relatively to the fiscal treatment of the different types of Crowdfunding. In terms of Crowdfunding through donations, we believe that the tax authorities will be willing to consider these contributions as tax-exempt if the organization collecting them is a registered charity that can emit tax receipts to the contributor. In the opposite case, these contributions will be treated as taxed income. Furthermore, start-up businesses should charge the GST/QST on the products they give in exchange for the contributions (presales) during their crowdfunding campaigns.
The team of Propulsio 360 will keep you updated on any developments relating to Crowdfunding, in particular Equity Crowdfunding.
This article does not constitute an opinion or legal advice; you should contact a lawyer for advice specific to your situation. For any questions or comments, you can contact us at firstname.lastname@example.org