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You can raise up to $1.5m for your business using equity crowdfunding in Canada. Alex Morsink of Equivesto takes us through the rules, who is it for, and shares his knowledge on how to successfully raise for your startup using equity crowdfunding.

Raising capital for their startup is the number one concern of founders. In fact only 0.05% of Startups receive VC funding, what happens to the 99.95% who don’t? With equity crowdfunding the rules have changed allowing startups to take their funding into their own hands. Learn the details of being successful at equity crowdfunding for your startup at Equivesto.com

Equivesto connects innovative, driven, inspired Canadian businesses with the capital they need to succeed through their community-focused equity crowdfunding platform https://equivesto.com/companies

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Automated Transcript Startup Funding using Equity Crowdfunding in 2023

SUMMARY KEYWORDS

equity crowdfunding, investors, crowdfunding, company, raise, platform, business, rules, equity, community, canada, people, exemption, campaign, capital, investment, aqua, investing, participate, invest

SPEAKERS

Alex Morsink of Equivesto, The Startup Coach

Alex Morsink of Equivesto 

So, who I am before I dive in, but my name is Alexander morsing. I’m a co founder and managing director of Equivesto.

Alex Morsink of Equivesto 

I have a background in finance, private investing startups, angel investing and been operating in this space for a number of years. Equivesto. The company is one of the few Canadian equity crowdfunding platforms. We have been operating for about 26 months. So far, we launched in September 2020. So far, we have helped companies raise over 17 million in capital run over 37 raises for different companies. And we have over 4000 investors on our platform. So that’s who I am. And let’s dive into equity crowdfunding in 2023.

Alex Morsink of Equivesto 

So, let’s just start with some basics. What is crowdfunding not just equity crowdfunding, but all crowdfunding. Crowdfunding is really about the ability for a group of people to come together and provide funds for something where their funds are grouped and able to go and achieve some sort of goal. There are three different types of crowdfunding donation based crowdfunding, where the funds are given purely as a donation with no expectation of anything in return. GoFundMe is a great example of a donation based crowdfunding platform. The next is rewards based where individuals are providing the funding in expectation of some sort of item or service being provided. In exchange, Kickstarter is a great example of a rewards based crowdfunding platform. The last example, the one we’re here to talk about today is equity crowdfunding. So equity crowdfunding is all about taking your company and actually allowing a large group of people to give you money in exchange for small pieces of ownership in your business. And so how does that work? How does that actually play out, because you’re offering partial ownership of your company, you can’t do that directly with people you need to work through a platform. So the companies come onto the platform, go through some due diligence, structure, their round to raise some capital, either in equity, convertible notes, or some other type of race. And then the platform helps process that and makes that available to investors, which is a large group of smaller investors who are participating in small amounts from as little as $100. But can be very large as well. Typically, with equity crowdfunding, it’s not just people writing small checks, it really is a combination of angel investors writing big checks and your extended community writing those smaller checks. So when running an equity crowdfunding campaign, what are you giving to investors, what are investors actually getting? They are getting ownership, when you run a an equity crowdfunding campaign, and you offer shares for purchase, you are offering partial ownership into your business as a company, you can choose the type of share the type of ownership that you want to offer to the public, you can work with a platform to help structure and plan out your round, though rounds are typically run offering non voting common shares. That is done so that when the investors are coming in, you’re getting, you know, potentially hundreds of new investors, these individuals are not suddenly taking over and getting some control of your business. They don’t have a say in how your business operates. They’re here to support you as the founder, but not tried to get involved in the running of the company. Some companies choose to offer a different type of shares, which might be preferred shares, which might pay dividends to their investors, you can also offer a whole different range of shares, units sort of everything in between. So it’s worth having a conversation with the platform, and getting the platform’s help to go and structure your round to make sure you’re offering what suits your business best. So where does equity crowdfunding really fit in the capital raising lifecycle of a company. So on the left hand side, we have, you know, the company getting started right at the beginning, family and friends, all the way through to eventually having an IPO and going public at the end. Equity crowdfunding really covers a range of stages from pre seed all the way through through to series A so equity crowdfunding can help companies raise when they’re sort of after they’ve gotten started. You can’t raise on a platform if you’re purely at the ideation stage. But once you’ve developed your business, you have a minimum viable product, you can be pre revenue, then you’re eligible to participate in it.

Alex Morsink of Equivesto 

equity crowdfunding, and through equity crowdfunding, you can raise all the way up to 1.5 million from the general public, or even more from accredited investors as well. So equity crowdfunding and angel investing rounds sort of go hand in hand and often operate at the same time. Typically, you would do equity crowdfunding before you then go out and raise capital from VCs. But it is possible to have, you know, a seed series or a precede series VC actually come in and be the lead investor in your equity crowdfunding round. So there is certainly some precedent of VCs leading equity crowdfunding rounds, but more typically, we’ll have the VC rounds come after an equity crowdfunding round. So before we start talking about equity crowdfunding in Canada, let’s just give a quick refresh of what equity crowdfunding looks like. Internationally, it’s important to mention that equity crowdfunding rules are segmented based on country and based on where investors reside. So for example, some of the platforms listed here are licensed and operating in the US or the UK, it would not be possible for a Canadian company to go and raise capital as a Canadian company on these platforms.

Alex Morsink of Equivesto 

Basically, it’s US company, US platform US investors, or Canadian company, Canadian platform Canadian investors, it’s important to keep in mind, the reason why we want to look at abroad us in the UK is because the financial regulations are a little bit more advanced in those countries. So we can almost look to the US and the UK to sort of see the future of what will be possible for equity crowdfunding in Canada, where equity crowdfunding was permitted several years earlier in the US and in the UK than it was in Canada, we’ve really seen massive growth in the equity crowdfunding market in both places, we’ve started to see platforms acquiring each other, as we’ve sort of entered a little bit of a recessionary period. But certainly billions of dollars being deployed for startups through equity crowdfunding in both the US and the UK. So we’ve seen that equity crowdfunding has really grown to take a large position in the capital raising lifecycle internationally. And it’s projected to do the same in Canada.

Alex Morsink of Equivesto 

So now let’s talk a little bit more about equity crowdfunding in Canada specifically. So a bit of background on securities law in Canada, it’s not super fun, but it’s important to keep in mind. In Canada securities are regulated by each province who have their own securities regulator. So in the United States, there’s a single regulator, the Securities and Exchange Commission. In Canada, there’s 1301 for each province and territory.

Alex Morsink of Equivesto 

And for a company, whether it’s a public company or a private company, anytime you’re looking to raise capital, you do need to follow those securities laws outlined by the regulators, private companies are not,

Alex Morsink of Equivesto 

you know, they’re still bound by those rules. It’s not like they don’t apply to you because you’re private, and then suddenly, you’re public. And now the rules apply. All companies are bound by the rules set by the Ontario Securities Commission. However, there are some easier rules or simpler rules available to private companies to make capital raising a bit easier for them. These are called prospectus exemptions, and you can think of them as legal doorways with which private companies can raise capital. Any company that has already raised capital from friends and family or angel investors has used these rules without even knowing it. And the most popular rule is called the private issuer exemption. This rule is one that you’ve probably all used and this allows private companies to raise capital without doing any reporting to the government, as long as they’re raising from friends and family or high net worth investors, and as long as they have less than 50 shareholders. So you’ve all been following the rules, but you didn’t even know it.

Alex Morsink of Equivesto 

Equity crowdfunding became a new doorway a new prospectus exemption in 2016. In Canada, however, each province made their own set of rules. None of them agreed on the rules, and it was all a little bit of a hodgepodge. But finally, with some feedback and participation from Aqua Vesto ourselves in September 2021, all provinces authorized a national set of rules called prospectus exemption 45 110 startup crowdfunding, and this has been the sort of equity crowdfunding rule that people refer to when they talk about equity crowdfunding in Canada. So let’s dive into some of the pieces of that rule and how they apply to you. Before I do that, I just want to highlight a few quick trends about it.

Alex Morsink of Equivesto 

equity crowdfunding in its position, as we noted about the US and the yolk. In the UK, we’re really seeing

Alex Morsink of Equivesto 

equity crowdfunding growing larger and larger internationally. And in Canada, it’s starting to do the same. Initially, equity crowdfunding was seen as sort of a worst alternative to VC funding. But that has really changed. And now equity crowdfunding is seen as an equal and critical part of a traditional capital raise cycle, you’ve got your friends and family round, then you’d have your angel round, potentially, alongside an equity crowdfunding round, which in the US is actually referred to as a community round. And then you’d go and raise from VCs afterwards. And by structuring the deal properly, there’s no impact on your cap table or in the control of the business. And so that makes it very easy for VCs to still come and participate in your deal afterwards.

Alex Morsink of Equivesto 

So let’s talk a little bit more about that set of rules that I mentioned the 45 110 equity crowdfunding rules in Canada, the first piece of information to know as a company is when you go and run an equity crowdfunding round, as I mentioned, at the beginning of the presentation, you’re not able to do it on your own, you have to work with a platform. And in Canada, under that set of rules, there’s two different types of entities that can operate platforms. The first is an exempt funding portal. So this is essentially a online platform that can only use the equity crowdfunding exemption to raise capital. It’s not a licensed securities dealer, and it’s really a listing location. Platforms like this are limited to only allowing investors to invest 2500 per campaign at the maximum, so there isn’t much flexibility around the amount of people can raise or anything like that, or the amount people can invest when using just an exempt funding portal.

Alex Morsink of Equivesto 

The other option is a registered funding portal operated by an exempt market dealer. An exempt market dealer is a fully licensed securities dealer that existed long before equity crowdfunding was a thing and works in the private market to help private companies raise capital from investors. Exempt market dealers use those doorways that I mentioned, prospectus exemptions to find the right set of door essentially for companies and for investors. With a platform operated by an exempt market dealer, the exempt market dealer can use all of the prospectus exemptions available to help the company raise capital, not just the equity crowdfunding exemption.

Alex Morsink of Equivesto 

Part of being a licensed securities dealer requires the platform to complete a full due diligence process called know your product on any company before it lists on the platform and is required to do a full KYC or Know Your Customer process and suitability assessment on the investors as well before they can sign up to actually make a transaction. The Securities dealer the exempt market dealer is required to review every investor their personal financial situation and help determine if the size of the investment and the type of the investment that they want to make make sense for them. Because of these responsibilities on an exempt market dealer, they have more flexibility when it comes to who can participate in a round and the amount that they can participate in around. So whereas an exempt funding portal can only let people in up to 2500. An EMD run platform can allow the general public to invest up to $10,000 per investment campaign with advice and can also allow accredited investors or angel investors to invest alongside in much much larger amounts. The platform operated by an exempt market dealer also has extensive reporting and registration requirements, including annual audited financial statements, and all sorts of other information that they have to provide to the regulators. Their role is really to help make the entire transacting process safer, secure and compliant for everybody involved. Equivesto is a fully licensed exempt market dealer.

Alex Morsink of Equivesto 

So let’s talk about the types of investors who can participate through equity crowdfunding. On one hand, we have the retail investors which is essentially the general public I talked about them on the previous slide. And the amounts they’re able to invest on Aqua Vesto. retail investors can invest up to 5000 per company, and they can invest up to 10,000. If they have a higher net worth, and they’re sort of proven suitable. We also can bring accredited investors so accredited investors are high net worth individuals who have over 200,000 in annual income or 300,000 with a spouse or over

Alex Morsink of Equivesto 

Over $1 million in net financial assets excluding real estate, accredited investors can also participate in equity crowdfunding, and they don’t have individual investment limits. Typically, if you’re looking to run an equity crowdfunding round raising north of 300 or so $1,000, you’re going to need to get probably about 50% of your raise from accredited investors, they might not be writing, you know, $100,000 checks. But having a credit investors participating, even writing smaller checks is important to really get the higher raises. If you’re looking to raise as I mentioned, over the 300,000,

Alex Morsink of Equivesto 

there’s something else that I want to talk about, that’s quite relevant for this presentation. It’s not technically part of the equity crowdfunding set of rules. It’s a different new set of rules as well. But it fits into the discussion around how companies can let a broader group of people beyond just angel investors participate and invest in their business. So in a few provinces across Canada, specifically Ontario, Alberta, and Saskatchewan, there is a new rule called the self certified investor prospectus exemption. Essentially, what this rule does is it says, Okay, if there are individuals with adequate investment or finance knowledge, even though they don’t have the income or the assets to become an accredited investor, because they have the adequate investment knowledge, they are allowed to invest up to $30,000 per year in accredited investor deals, or sort of equity crowdfunding deals. So whereas individuals were limited to a maximum of $10,000, before, if they’re not accredited, they can now do up to $30,000 per company, if they have the proven investment or finance knowledge, there’s a whole list of what knowledge is needed and how you prove that you can look that list up actually on the Aqua Vista website in our Learning Center under types of investors. But essentially, you need degrees or certifications in business or finance, think CFA CPA, MBA, an undergrad and finance, have your Canadian Securities course be a lawyer in the finance space, something like that. Or you can have relevant work experience in the same industry as the company you are investing in. The way you sort of prove yourself as a self certified investor, is you actually have the documentation proving your qualification. So your degree your certificate, something like that. The way signing up as a self certified investor works on the Aqua Vesto platform is you sign up like a retail investor or we have another category called eligible investor, you sign up as those categories like normal, and then you’d provide your proof to get set up as a self certified investor as well. In Ontario, this set of rules is actually just a pilot. So whereas in Alberta and Saskatchewan, it’s it’s a full set of rules, Ontario is testing it out for the next 18 months. So this is a very exciting opportunity for investors who want to be able to participate, but haven’t had the financial setup to be an accredited investor to start being able to participate in those types of deals over the next 18 months. And if you know the pilot is successful, and lots of people participate, they will roll the rules out officially, hopefully in 18 months.

Alex Morsink of Equivesto 

So let’s talk a bit about who can’t participate in an equity crowdfunding round. As I mentioned a little bit earlier, equity crowdfunding rounds are structured based on the rules, sort of country to country, they’re quite separate. So if you’re running an equity crowdfunding round in Canada, you are a Canadian headquartered company, and you’re raising on a Canadian platform from Canadian investors. Similarly, if you are a US company, you need to raise on a US platform from US investors, there currently isn’t really a lot of cross border investing. There are some ways to do sort of two campaigns at once. But you would need to then do a Canadian campaign for your Canadian investors, and then a US campaign on the US platform for US investors to make that work. If you’re interested in that certainly reach out and talk to us. It is a little bit complicated, but it is possible. Just takes a bit more work on that side.

Alex Morsink of Equivesto 

So let’s talk about the requirements for a company and how the process works from a company perspective to participate in equity crowdfunding. So first, to be able to list on a platform and raise capital you need to be operating in Canada, and you need to be either a corporation or a partnership. You can’t be a sole proprietorship, as a company you could

Alex Morsink of Equivesto 

Raise up to one thou 1,500,000 Every rolling 12 months through equity crowdfunding, you do not need financial statements. But you do need to have a minimum viable product or demo version of your product or service, and you can be pre revenue. So that’s what you need to sort of at least reach out and start the application process. In terms of how do things actually work from a company perspective, when you’re raising through equity crowdfunding campaigns can last up to 90 days, you as a company also need to set a minimum and a maximum raise target.

Alex Morsink of Equivesto 

If the minimum target isn’t reached, by the end of the 90 days, all of the funds are automatically refunded to the investors. At the end of the campaign. If the campaign was successful, you then need to file a one time report of exempt distribution to the regulators within 30 days of the closing of the campaign. And typically your securities lawyer would help with that. In terms of ongoing requirements, the only ongoing requirement for a company that’s raised through equity crowdfunding is the same ongoing requirements that every company has, which is to have an annual shareholders meeting. There’s no additional ongoing requirements for startups that raised through equity crowdfunding, companies that cannot participate using equity crowdfunding are passive investment companies and public companies. But all other types of companies legally can raise capital through equity crowdfunding, but what businesses really work best for equity crowdfunding startups work very well for equity crowdfunding, so startups typically have an exciting new idea that captures the imagination of potential investors, and they’re creating a strong impact either locally or globally.

Alex Morsink of Equivesto 

One example is a startup that’s helping make innovative cancer drugs faster, or a new technology that’s helping reduce pollution but it’s still you know, a profit driven business. Another type of business that can work well for equity crowdfunding are small businesses that have a strong community focus, and a strong positive impact locally, so restaurants, stores, community centers, breweries, wineries, these all work well as well for equity crowdfunding.

Alex Morsink of Equivesto 

Companies that don’t work as well for equity crowdfunding are ones where the value of the business is tied to a small number of employees where if they leave the company is immediately less valuable think consulting company or freelance business, something like that. Also, highly technical business to business companies can also be a challenge, depending on the industry simply because you need to be able to explain simply and create a captivating story for investors about what your business does. And that can be a bit harder depending on how technical your product is.

Alex Morsink of Equivesto 

So now that you understand some of the basics around equity, crowdfunding and how it works, what is the documentation you need to prepare as a company to be able to go and you know, apply on an equity crowdfunding platform and raise money. So you need everything listed here your certificate of incorporation, your capitalization table, organizational chart, a business plan, pitch deck, financial statements are helpful but not required. You also need a shareholders agreement, financial projections, and then you need to know the purpose and the amount of your raise. When working with the platform. In anticipation of setting up your campaign. You’ll also be preparing the 45 110 offering document, which is a requirement to have before you launch your campaign. The 45 110 offering document is a document required by the regulators for every company using the startup crowdfunding exemption. Essentially, it’s a 20 page summary of everything that a prospective investor might want to know about your business, and includes information on the background of the company details of the founder Terms of the deal, who the equity crowdfunding platform is the rights of the shares the risks related to the business and investing, how long the campaign is use of funds, minimum investment, campaign goals, all kinds of things. The document is also signed off by the company itself attesting to its truth. So it’s important that if there’s any changes the information presented, that the company lets the platform know immediately, and you can create a second copy and an updated copy of the document.

Alex Morsink of Equivesto 

This document must also be filed with the regulators as part of that report of exempt distribution within 30 days of the campaign closing.

Alex Morsink of Equivesto 

That is a quick rundown of everything you need to know about equity crowdfunding and 2023 in Canada. You can learn more at equifax.com/learn and you can also join our community a community dot Accra vesto.com where we have free training courses for companies and investors on a variety of topics.

Alex Morsink of Equivesto 

I’m very looking forward to answering all of your questions now. And thank you very much for listening.

The Startup Coach 

Thank you, Alex. It was great. We the questions just started coming in. So put them in the chat room, either on YouTube or here on Zoom. And I’ll ask Alex, the first question is, does traction matter? Then? That’s a funny question. Because, you know, obviously, it’s Yeah, yeah. And we just have a minimum functioning product with not so many users right now.

Alex Morsink of Equivesto 

Perfect. So anytime you’re going out to to investors, traction is always useful, I rank, sort of that type of traction, some sort of best to worse as the best traction is revenue. The next best traction is user signups or agreements with customers. Next best is a waitlist or sort of coming soon, and then a newsletter, and then social media community with equity crowdfunding. And this is important to note, you’re not coming on the platform to simply access a pool of investors on the platform. The platform is a legal doorway that’s letting you invite your extended community and individuals that you want to attract through notification or marketing or networking to come and invest in your business. So in terms of building and having that community of potential people to invest in your deal, that is of critical importance. Equivesto spends a fair amount of time with companies, including setting up a free Coming Soon page so that companies can start building that community in advance of running their campaign. But having a network an extended community of potential investors is critical to a successful campaign.

The Startup Coach 

Right, you mentioned at the beginning, you need to raise in the country the company operates in and I’ve got a couple of questions around that. One is, can you clarify confounders that are here in Canada on the startup visa program raise using equity crowdfunding in Canada?

Alex Morsink of Equivesto 

Yeah, that’s a great question. So if your company is headquartered and operating in Canada, then you can use the equity crowdfunding set of rules to raise capital. So you do not need to be a Canadian citizen. You’re as long as your company is operating. And based in Canada, you can raise through equity crowdfunding. But again, as I mentioned, the success of your campaign is going to be driven by the investors and the community that you attract around your business equity, crowdfunding is that doorway to bring this network in. But if you don’t have that network, and you haven’t been building that network, there’s not going to be as many people interested in potentially investing in your opportunity. So even though you certainly could participate coming through the startup visa program, those individuals because they’re new to Canada may have less of a network. So that’s something to keep in mind.

The Startup Coach 

And I think you’ve answered this question, but I’m going to ask it anyway, because it’s very specific. Yeah, can a US based company run a Canadian campaign to target Canadian investors.

Alex Morsink of Equivesto 

 So there’s a bit of nuance in that. And I want to highlight the difference between what ECWA Vesto as a licensed exempt market dealer can do, and what’s possible under the specific equity crowdfunding rules. So under the specific Canadian equity crowdfunding rules, the company must be headquartered in Canada and operating in Canada to use the equity crowdfunding rules. Equivesto, as an exempt market dealer has access to a number of other prospectus exemptions, that don’t necessarily require the company to be Canadian, which we can leverage to help companies raise capital from investors in Canada. But again, just as a reminder, the investor community needs to be attracted by the company itself. So if it’s a US company, and they don’t know anybody in Canada, working with eco Vesto, and getting listed on our platform, is not necessarily going to bring you any investment, you would then need to be doing some outreach to Canadian investors, maybe pitching some Canadian angel groups, things like that, to then gather that community of Canadian investors to invite in to invest in your offering. But I wanted to highlight the sort of slight nuance there.

The Startup Coach 

The next question is about Equivesto. Can you clarify the track worker record of success on your platform?

Alex Morsink of Equivesto 

Certainly. So I see the question is asking about success on the application. So in terms of companies applying to the platform, Equivesto is about access and equal opportunity that’s very important to us. So rather than us trying to be a sort of a guardian or a gatekeeper saying, you know, we don’t think you’re good enough kind of go away. You don’t get to race on the platform. We’re very much from the other direction where we would say, these are the things that you need to have or these are the things that can make your offering stronger. Let’s help you get those

Alex Morsink of Equivesto 

Let’s connect you with an accelerator incubator that can help you improve that. And then as long as you sort of have the requirements that are needed, you would be able to list on the platform, we do a lot of work with companies to help improve investor readiness. So we’re working with companies on valuation, projections, pitch decks, all kinds of stuff on, you know, go to market investor preparation stuff that can help make companies more successful. And then the second piece is, you know, how successful are companies raising on the platform. And I take that back to the sort of core community piece, even though Equivesto has over 4000 investors on our platform signed up and looking at deals, there’s no guarantee that they would invest in any one of the companies that raise. So for companies, we always highlight the critical importance of you should plan to raise 100% of the funds through your own community and network. And we do a lot to try to help companies be more successful at that. So we will help set up a totally free co branded coming soon landing page for companies that are looking to introduce their community to the idea of investing in them and see if there’s any interest before they’ve paid any money. And that gives the company the opportunity to actually start seeing, would our community invest in us? What would this look like? How many people would sign up on their on this list? Maybe how much would they consider investing. And that really lets you sort of count and begin to tally up potential traction on your round before you’ve gone through and actually started doing the work to structure it, because really, your community engagement is what is going to drive your success. That being said, we have a success rate of campaigns on Equivesto well over 70%. And that is because we spend so much time focusing on the companies themselves to make sure that you are not launching a campaign until you really are ready for success. If we remove one instance where we basically on boarded an entire accelerator cohort, then we have a success rate of over 95% With campaigns.

The Startup Coach 

Thanks for answering both those questions. Because yeah, it could have been either way. Right.

The Startup Coach 

The next question, the 12 month funding ceiling, if a Canadian startup ran the Canadian campaign and the US campaign? Yes. As you kind of mentioned, yeah. Do the funding ceiling apply to both or each? Is this a way to double the investment and still meet the regulation?

Alex Morsink of Equivesto 

Great, great question. Very good, very insightful question. So that 12 million, that 12 month rolling limit on the 1.5 that is specifically on money raised through the equity, crowdfunding exemption, legal doorway. So not only would that not include any money raised in the US, but that would also not include any money raised from accredited investors in Canada who invested via the accredited investor exemption at the same time. So when you run an equity crowdfunding round on Vesto, you’re using the equity crowdfunding rules at the same time as the accredited investor exemption rules on top of each other through the same campaign page. So if you’re running an equity crowdfunding round, and you raise $1.5 million, but 500,000 of that comes from accredited investors. Legally speaking, you actually only used 1 million of your 1.5 Rolling 12 month limit. So if you were to raise using other rules in the United States from US investors, that has nothing to do with that 1.5 million equity crowdfunding limit in Canada? Great question on that.

The Startup Coach 

The next one here is are all the investors through the platform on the cap table? Or can the special purpose vehicle be used? So investors own that entity and just one line is added to the cap table? Right? Is that progress allowed?

Alex Morsink of Equivesto 

Great, great question. So Equivesto as an exempt market dealer has and works with sometimes angel groups to set up special purpose vehicles for them to go and invest as a single line item on a cap table. So that’s something we’re certainly capable of doing. The equity crowdfunding rules themselves specifically prohibit that. If I scroll back to who can’t participate. If the investors are investing into a special purpose vehicle, a special purpose vehicle is just another word for a company, you’re creating a limited partnership or a corporation specifically to hold that investment. And that special purpose vehicle is what is taking the individuals money, and then in that situation, that immediately becomes a passive investment fund, which is not eligible for equity crowdfunding. However, we help with the whole sort of cap table management piece in a number of ways. So yes, the people are going directly on the cap table. However, through equity crowdfunding companies typically create an entirely new Share class, which is a non voting common share class that only equity crowdfunding passive investors are buying.

Alex Morsink of Equivesto 

Secondly, we also have these passive investors sign a voting trust. So not only do they not have voting shares, but in, you know, some specific legal situations where they might have a say, they’re then in a voting trust, which is controlled by the CEO or the founder. So then they really don’t have a say, because you’ve structured the situation that way, on your main page of the cap table, you can represent the investment from the equity crowdfunding round as a single line item, because everybody’s in one share class. So you can say, class ECF, non voting shares, you know, 12% as one line item, and then you can have another tab with all of the other investors located there. We have circled this setup and structure with a variety of different angel groups, VCs, and everyone has been very happy with how it’s been structured. And it’s worked out well. So a number of companies that have run equity crowdfunding rounds with us have gone on to raise VC capital, go on Dragon’s Den, even go public and all sorts of other things. So it hasn’t limited anything like that from sort of cap table management perspective. But again, a great question.

The Startup Coach 

Keep the questions coming here is one from YouTube. And you know, you can answer it any way you want. Yeah, what is the best exit strategy for equity crowdfunding, given the company’s building to sell or legacy?

Alex Morsink of Equivesto 

Tell me more about the legacy piece I in type in the chat what you mean by legacy, typically with equity crowdfunding, because you’re you have more flexibility with who your investors can be, there’s more flexibility with how you can run your business. Typically, if you’re raising from angels or VCs, in sort of the typical capital lifecycle, they’re expecting aggressive growth for five to 10 years, and then a very distinct exit period, with the company either being acquired or IPO that’s basically required to raise from VC with equity crowdfunding, you can certainly do that. And that’s, you know, you’ll deal with a lot of investors who were expecting deals to be structured that way. Because of that flexibility, though, you could also structure your deal differently. So you could say, Look, you know, we’re raising to grow rapidly, but we’re not planning to have a big exit, we’re planning to start paying strong dividends later on, or we’re actually going to start paying dividends in year three, and different things like that you have more flexibility, but have conversations with some of the investors in your community, some of the people who have said that they’re interested in you want to bring in, that’s where we can, you know, we can engage with you. And they can be involved in the conversations as well to talk about what sort of terms investors want to see.

The Startup Coach 

Another question here, we have participated in two incubators here, their validation programs, is it better to seek angel investors slash accelerators at this phase, or try crowdfunding.

Alex Morsink of Equivesto 

So as as noted, equity crowdfunding is really in combination, kind of with Angel investing and community investing. So what you’re doing when you run an equity crowdfunding round is sort of expanding the pool of people who can participate, and you’re actually making it easier for the angels to invest. So instead of saying, Okay, I’m only raising from angels, or I’m only doing equity crowdfunding, what you really want to think about is, okay, I’m only raising from angels, or I’m going to do both angels and equity crowdfunding, if your goal, for example, is to raise 500,000, or a million dollars, as I mentioned, you’re going to need angels involved to help drive some initial traction at the beginning of your round, and help incentivize and activate your community. So if you’re saying, Okay, I want to start preparing my round and going out in this direction, you want to be having those conversations with angels, while preparing and setting up an equity crowdfunding round with the idea being the angels are coming in at the beginning, and sort of acting as leads in the equity crowdfunding round showing that traction, and then your extended community sees that engagement and can sort of follow along, you’re not saying I’m only going to raise from my community and not from angels, you’re kind of doing both. Of course, if you want to do a sort of non standard style raise, you’re not interested in that sort of traditional Angel VC exit, and you really only want to raise from your community, then you can’t do that. It is harder, of course, to get half a million or a million dollars, from people only writing 1000 or $5,000 checks without having anybody coming in with, you know, the $20,000 check here, you know, $50,000 Check here or a $10,000 check there. So, really, a successful round is a sort of combination of both. And the benefit to the angels through an equity crowdfunding round is actually angels typically have to do their own due diligence, they have to do their own valuation deal structuring, it can be very time intensive. I’m also an angel investor. So I know from an experience it’s a lot of work by leveraging a platform it’s possible

Alex Morsink of Equivesto 

or the platform, the platform automatically does a lot of that due diligence and structuring work on behalf of the investors. So the angel can kind of show up and say, Wow, that’s already been kind of done. For me, that’s so great, I can focus on the things that I really care about with the round. One thing that I haven’t mentioned, but it’s actually quite exciting is, it’s possible to make an investment in your private company TFSA and RRSP. Eligible, there are certain additional costs for this, investors will have to open, you know, additional investment accounts, and there’ll be some fees for them. So it’s not free. But it’s possible to make investing in private companies through equity crowdfunding, TFSA, and RRSP. Eligible, which really changes the way people can approach investing in your businesses with the tax protection and benefits from TFSA and RRSP. And that can be really exciting for both the general public and for angel investors who want to participate.

The Startup Coach 

So this is a very specific next question. And I’m going to kind of elaborate what is the ratio of Equivesto, investors that invest as a community in art initiatives, and let me you know, kind of change that around and say, how successfully we’ve seen art initiatives in the investment slash equity crowdfunding community.

Alex Morsink of Equivesto 

So at the core of it, equity crowdfunding is about investing in for profit businesses that are going to generate potential returns for their investors. They’re not purely a sort of donation situation, if you’re looking for something like that, it’s way easier to just do donation based or reward based crowdfunding. However, if your business is a profit generating business, and it happens to be connected to the arts, that can still work very well. We’ve had a number of discussions with movie companies and different film and music organizations that are interested in raising capital for their for profit production of film, TV, music, all sorts of stuff. And that can work very well. Because if you’ve done it before, you immediately have a group of supporters who care about what you want to do. Certainly in the US, we’ve seen a number of movies actually go forward and be successful through crowdfunding as well. So that’s definitely possible.

The Startup Coach 

As a Quebec based early stage startup, can we do our crowdfunding and incorporation in Ontario,

Alex Morsink of Equivesto 

 certainly, if you’re incorporated in Ontario, you’re suddenly in Ontario company. So even if you live in Quebec, so if you’re a Quebec based company, but you’re not incorporated, yet, wherever you incorporate sort of where your company becomes, I would highlight that, when raising from Quebec investors, it doesn’t really matter where the company is located, as long as it’s Canadian, but when raising from Quebec investors, you will need to provide your investment documentation in French as well as in English. It’s a legal requirement from the Quebec government. So that cost to you may go up to take Quebec investors. But for everyone else in Canada, yeah, you can you can be a Quebec company and incorporate anywhere you like in Canada and raise equity crowdfunding from anywhere you like in Canada.

The Startup Coach 

You mentioned the beginning having a conversation with the platform, I assume like we’d want to reach out to Equivesto. What does that mean? And what should a founder have ready to reach out and start the conversation?

Alex Morsink of Equivesto 

Certainly, we’re happy to have conversations at kind of every stage and give more direction to companies, regardless of the sort of stage that you’re at, in terms of where you want to be if you’re sort of like, okay, I want to get started on this, like, what should I be to actually be considering doing around, you should be at a position where you’ve got, you know, these legal documents that I mentioned, so you’re already incorporated, you know, you already have a business plan and a pitch deck, you have a minimum viable product that you’ve built out, it’s kind of ready to go, if you have traction or a community that’s going to help a really long way, move things forward. But if you’re looking for help on how to build one, we can also help give you advice around how to do that. But having that community having, you know, in your mind, like, Okay, we’ve got 5000 people on our waitlist, I think some of these people would be interested in investing in us, that’s a great place, but having that minimum viable product, having that pitch deck business plan, certificate of incorporation, that’s kind of the baseline to list on the platform, if you’re earlier stage than that, but you’re like, wait, while I’m building my company, why don’t I also build my community, because so I’ll do that for free. And then by the time my company is ready to go, I have this community of people. That’s exactly where you want to be thinking you’re spending all this time building your business, you can be building your network of people who could potentially become investors. So when you do want to run a campaign, they’re already right there and you don’t have to spend all this time and effort to go get them. So if you’re interested in advice on how to do that, we have at ton of information in our Learning Center in our community page that I mentioned here, we’re actually going to be rolling out some courses specifically around how to market and build community for your startup. So check those out. We’ve done some other presentations with Craig before. So I’m sure we’ll do some again, covering those topics. And yes, certainly reach out, message me on LinkedIn, send me an email, visit the Aqua Vista website, we have hundreds of hours of free education on everything you’d want to know.

The Startup Coach 

What level of effort does it take to raise successful using equity crowdfunding, I like to tell founders that you need to meet with at least 100 investors in a traditional round over like an eight week period, if you want to complete a raise? What level of effort is it to do equity crowdfunding?

Alex Morsink of Equivesto 

Yeah, so I would say raising capital for your business really becomes kind of a full time job, whether you’re raising from angels, or you’re doing an equity crowdfunding round with equity crowdfunding, it goes from kind of one on one relationships with with individual investors to some of that still, but now you’re almost creating this entire production around your company, there’s potentially a marketing team that you’re involving, there’s sort of all these pieces, you’re involving your social channels, and all this sort of stuff, there’s a big lead up to it. But the whole campaign can actually act as almost this big beacon to the community kind of announcing your presence, showing how serious you are. And even bringing your attention to bringing attention to you from other investors who wouldn’t have thought of you before, we’ve had a number of companies get awareness brought to them through their crowdfunding campaign that resulted in potentially successful rounds later on. Because suddenly, they’re visible and people are hearing about them. It’s like a huge PR marketing push as well. So all those activities together, if you’re trying to do it by yourself, you most likely can’t typically companies will work with a marketing firm, or there’s members of the team that specialize in marketing that will sort of get involved. It definitely is a serious production. It’s not a simple short undertaking. It’s not I sort of set it and forget it type thing. So if you want to do an equity crowdfunding round, it is serious. And you do want to have several months of preparation that you’re putting in before the launch itself. But this is the thing with equity crowdfunding, it’s not a or angel investing, it’s a and situation and they really can benefit and share from each other. So if you’re saying, you know, okay, I’m going to try to do a round this year, here’s all the angels I’m going to reach out to and everything. Doing it in combination with around on a platform makes it easier for those angels as well, but also allows you to get access to even more Canadian capital. So that can be a win win there. But yes, it’s a lot of work.

Alex Morsink of Equivesto 

It’s always good to go in eyes open.

Alex Morsink of Equivesto 

Yes. 100% 100%. So your contact information is here on the screen, but just in case people are listening and you know, at some point, I turned this into a podcast episode, Where do people go to find out more.

Alex Morsink of Equivesto 

Yeah, so to learn more about echo Vesto you can go to equivesto.com/learn EQU i v e s t o.com/learn. You can also reach out to me Alexander Morrison directly on LinkedIn. Or you can send me an email at Alexander dot m o r s i n k at equivesto.com

The Startup Coach 

Thank you for taking the time today to answer all these questions. And thank you everyone for showing up and giving us all these great questions. We really appreciate it

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