On April 5th of this year, President Obama signed into law the JOBS Act (the “Jumpstart our Business Startups” Act). Part of the JOBS Act includes the ''Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012'' or the ''CROWDFUND Act." Aside from having to find words to meet an acronym (the US might consider going back to the name of the sponsor on the bill “Dodd-Frank”, “Sarbanes-Oxley” etc.), the CROWDFUND portion of the JOBS Act is a much balleyhoo’d financing methodology that is, at the moment, more noise than reality. The crowdfunding provisions of the JOBS Act are not yet in effect, and await the SEC’s rulemaking. To avoid any doubt, the SEC reminded issuers in late April that "any offers or sale of securities purporting to rely on the crowdfunding exemption would be unlawful under federal securities laws".
There are some sensational early stories about ‘crowdfunding’ sources such as Kickstarter, where a company or entrepreneur with a good idea for a product can instantly raise pre-orders sufficient to get the project off the ground. Great for gizmos that turn iPod Nano’sTM into watches, but not particularly helpful for anyone who has prototypes and industrial sized projects. So what will crowdfunding do for the clean tech industry? Probably nothing.
To avoid securities registration requirements, current crowdfunding models are either pre-sales of products, donation sites or, although close to the line in terms of whether it is a security, ‘micro-loans’ that do not have interest components attached. The CROWDFUND Act is meant to allow a company to actually issue a security to investors advancing small amounts. The maximum amount a company can raise under the proposed crowdfunding rules is $1,000,000 (less any other amounts raised pursuant to other exemptions) from investors who can advance (i) the greater of $2,000 or 5 percent of the annual income or net worth of an investor, if either the investor's net worth or annual income is less than $100,000; and (ii) 10 percent, not to exceed $100,000, of annual income or net worth of an investor, if either the investor's annual income or net worth is equal to or greater than $100,000. In other words, concepts of accredited investor (which exist on both side of the Canada – US border) are removed for these very specific capital raise opportunities.
A company wishing to take advantage of the crowdfunding option must sell its securities through a funding portal or broker, either of which is registered with the SEC. There is significant SEC rule making required to put this into effect, and as can be readily anticipated, there is already contrary commentary on the ‘return to fraud’ that this form of financing presents. No matter what rules are enacted, it is likely that this need to balance against the risk of a rise in charlatans will at the very least require an issuer to require legal assistance.
The discussion in the US has precipitated calls in Canada for expanded capital-raising opportunities for early-stage companies. Declining venture capital opportunities, and increased costs in accessing traditional capital mean that early-stage companies advancing in their development end up exiting to stronger, often foreign, buyers. The concern is that such companies end up exiting too early, leaving value on the table, and effectively transferring to non-Canadian corporations significant federal and provincial tax incentives. While there is much skepticism about the ultimate rule-making in the US around these early-stage company capital-raising initiatives, at the very least it elevates a much-needed dialogue in Canada, and particularly in western Canada, on how best to support and encourage our early-stage clean tech companies.