Frequently Asked Questions
What is Equity crowdfunding?
Crowdfunding is the raising of small amounts of capital from a large number of individuals to finance a venture or project. Crowdfunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new venture or project and attract investors.
Equity crowdfunding is a type of crowdfunding where the investor receives ownership (i.e. “equity”) in the company in exchange for the investment. Equity crowdfunding is different from donation-based crowdfunding sites, like Kickstarter or Indiegogo, where backers only receive a product or service gift from the company, not company ownership.
The model permits anyone to acquire a share in privately held companies (i.e., those that are not sold on public stock exchanges) by allowing a company to offer a certain percentage of its equity for a set amount of capital that it is aiming to raise. Through the GoTroo.com funding portal, investors can buy small parts of the company’s equity stake, interact with the company’s management team and become advocates for the company within the investors' own social networks.
The founders of the business set the pre-money valuation of the business and terms of investment. Crowdfunding investors only choices are to walk away from an investment if it is over-valued or over pay for the investment. Crowdfunding investors tend to be passive shareholders.
Who can invest in a Junior crowdfunding raise?
Anyone can invest via the GoTroo portal so long as they are at least 18 years or older and resident in a province listed on the Offering Page that has approved junior equity crowdfunding.
How much can be invested in a Junior crowdfunding raise?
Each investor is limited to a maximum of $1,500 per investment and each capital raise is limited to $250,000 (twice annually).
In what will crowdfunding investors invest?
In most cases, the crowdfunding investors will invest in a flow-through legal vehicle (generally a limited partnership) that will invest the aggregated investments of all crowdfunding investors in the company in exchange for the issuance of shares as specified in the offering document.
What is a limited partnership?
Limited partnerships are formed by two or more people, with at least one person acting as the general partner who has management authority and personal liability, and at least one person in the role of limited partner who is a passive investor with no management authority. All partners – both general and limited – must enter into a limited partnership agreement.
Limited partnerships are managed and controlled by one or more general partners (generally a lead investor). The general partners are liable for partnership obligations to the same extent as partners of general partnerships. Limited partners normally do not participate in managing the business and are generally not liable for partnership obligations; their only risk is their agreed capital contribution. However, if limited partners participate in the management of the partnership business, they may lose their protected limited partner status and become liable for all risks. A limited partner generally has no obligation to contribute additional capital to the partnership to cover liabilities, and therefore the risk of loss is limited to the original capital contribution.
From the company perspective, limited partnerships are highly preferable because it is as it had one new shareholder and a single point of contact, the lead investor. This is particularly important in cases where future financings will be required because Angel investors, VC’s and institutional investors will refuse to deal with companies having a large number of shareholders.
It is also favorable from the investor perspective because the lead investor will act as a go between to facilitate the communications with the company and insure that there is someone following the activities of the company. In the event of a liquidity event, the shares of the company or the proceeds from the sale thereof will be distributed to the crowdfunding investors.
Who is a ‘Lead investor’?
A Lead investor is an Accredited Investor with experience in business and preferably in Start-ups. Lead Investors are typically called to: i) negotiate the terms of the investment with the Start-up, ii) carry out the due diligence review before the closing of the investment, iii) act as or manage the general partner of the Vehicle (generally a limited partnership) created to act as an intermediary between the Crowdfunding Investors and the Start-up, and iv) actively follow the Start-up after the investment until a liquidity event.
What are the requirements to be accredited investor?
The requirements for an individual to be considered as an Accredited Investor are defined in Regulation or National Instrument 45-106 (Prospectus and Registration Exemptions):
- either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000;
- beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5 000 000;
- whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year;
- either alone or with a spouse, has net assets of at least $5,000,000.
What is a business supporter?
A business supporter is simply any entity that assists entrepreneurs, they include: business incubators, small business development centers, universities, government support agencies, business consultants, non-profits, service providers, and more.
Why should I invest in a start-up?
The reasons for investing are unique to each individual crowdfunding investor and equity funding campaign. There are several reasons you may want to invest in a small business’ equity crowdfunding campaign:
- to help a friend or acquaintance launch their business;
- to support young Canadian businesses, which generate the majority of new jobs in Canada;
- to support a business you want in your community;
- to support a new creative business idea by providing financial support, general support, feedback and guidance;
- to make a return on your investment;
- to diversify your investment portfolio;
- to potentially be involved in the next home run;
- to pay forward if you yourself were successful;
- to benefit from tax credits if an investment has associated tax credits such as flow-through shares if in the mining industry or an eligible small business tax credits under the British Columbia Small Venture Capital Act; and
- for the fun of it.
What are the risks involved in investing in an equity crowdfunding round?
Equity crowdfunding investments are high-risk investments especially if no one does any due diligence and/or follow the company after the closing of the investment. There is no guarantee you will ever make any money or even see the return of the money you invest. You must be read and accept the GoTroo portal Form 2 - Start-up Crowdfunding Risk Acknowledgement prior to making an investment.
Offerings available on the GoTroo.com portal are only suitable for Investors who are familiar with and willing to accept the high risk associated with private investments. Securities sold through private placements are not publicly traded and, therefore are considered illiquid. Additionally, Investors may and will probably receive restricted stock that may be subject to holding period requirements. Investing in private placements requires high risk tolerance, low liquidity concerns and long-term commitments. Investors must be able to afford to lose their entire investment.
You need to make up your own mind and decide what risks you want to take. In particular, we reiterate that no part of the GoTroo.com portal is intended to constitute investment advice. You should seek your own independent advice.
When will I be able to cash-in my investment?
Investing in start-ups is a high risk, long-term investment which you should expect will take an average of eight or more years, if successful, to generate a significant return/exit for an early stage seed capital investor holding an equity stake.
How can I make money in an equity crowdfunding investment?
Crowdfunding investors can make money in four ways:
- Capital gains on the sale of the business to another business – most likely if the business is successful, investors may receive cash or shares or both from an acquiring company;
- Initial public offering – rare, as a buy-out offer likely to be received prior to the business being attractive enough to take public;
- Dividends or interest payments – rare, as all cash generated is usually pushed back into the business;
- Selling securities to another investor in a private sale transaction – rare, such a transaction must rely on available securities exemptions for the sale. This type of transaction occurs most often when an existing investor wants to strengthen his/her position in the company.
How does it work?
- Register on the GoTroo portal (free and quick) by accepting the GoTroo general terms and conditions. Initially only your name and email are required.
- There is a 90 day listing period on GoTroo. Once you have signed the Investment access agreement, you can access the offering document of the companies seeking funding and research their business, management and shareholders. Investors have access to company updates and participate in any webinars, allowing you to learn more about the companies you are interested in. Investors can chat with management and share information with other investors.
- You can commit to invest in the company(ies) that interest you by:
- completing your profile:
- upload a proof of identity (driver’s licence, passport or other acceptable photo ID),
- upload a photo,
- complete a simple bio,
- set your investment preferences to tailor the types of investments you will see,
- signing Form 2 – Risk acknowledgement,
- signing the subscription agreement,
- signing the shareholders agreement,
- paying the amount you committed into GoTroo’s trust account (this amount will be returned to you if the investment does not close).
- completing your profile:
- When the company hits its minimum raise, it can end the process, legal paperwork is completed, you receive your units in the special purpose limited partnership or shares in the company and the company receives its capital less GoTroo’s agreed to fees.
- The company will keep you informed periodically about its progress (at least quarterly and annual financial statements).
For companies raising money
What type of business may create an equity crowdfunding campaign?
Equity crowdfunding is open to all types of businesses but works best for businesses that have a compelling story to tell. You need to stand out from the crowd. Ideally, you have already started the process of building a community of supporters, for instance on social networks, to help ensure campaign momentum upon launch.
Why raise funds?
You should always have a specific purpose for the funds you are raising. Whether you need more funds to continue research and development, build a prototype, expand production, or market your product better, your funding goals should be directly tied a specific business objective. Bringing investors into your company is a big responsibility, but it also builds a pool of people who are personally and financially invested in your company who will take every chance to tell others about your start-up.
What factors you should take into consideration in establishing your funding target and strategy?
- Funding Requirements.
- Ability to raise funds via other methods.
- Have you considered alternative sources of capital for both short and long-term requirements?
- Does your investment appeal to prospective online investors?
- Are you able to presell your product through reward-based crowdfunding models to raise the necessary capital?
- Do you require the assistance of professional sponsors/mentors to help structure your business offering and how much will this cost?
- What will be your cost of capital? There are fees (cost of capital) often associated with an equity crowdfunding campaign, such as regulatory compliance (i.e., background checks), listing fees, portal transactional fees, payment facilitation/escrow fees, legal/accounting service fees, administrative overhead and other third party provider services.
What will be your cap table?
- Are you open to having a larger than average number of external investors in your private company?
- Are you willing to accept/use standardized subscription and shareholders agreement?
- Are you comfortable distributing a portion of your equity and thus losing a corresponding degree of control in your business? (Note, the average amount of equity offered to raise funding via an equity crowdfunding campaign is usually around 20-25%).
Who are the potential crowdfunding investors?
The Massolution study in the United States and data from operating equity crowdfunding portals in the United Kingdom and Australia have identified the following investors as being interested in equity crowdfunding:
- average age 24-44,
- 60/40 male/female ratio,
- have internet and computer hardware access and are active online
- are interested and able to take risks and bear the burden of an investment loss,
- the majority have not participated in start-up investments before (largely due to regulatory constraints).
How does it work?
- Companies raise capital in exchange for shares. In order to do that, preparation is required.
- You’ll start by completing Form 1 – Offering document which will require that you provide information about you, your business, your management, your existing shareholders, your previous capital raises, the amount you intent to raise, the securities to be issued, what you intend to do with the capital you are raising on the GoTroo portal and the risk factors. When you can provide what’s needed, you’ll be able to begin the application process.
- The GoTroo team will review your Offering document and related submissions and let you know what else we may need to proceed. If you comply with all of the requirements, you are ready to go live.
- Your Offering document and related submissions will be posted on the GoTroo portal and become accessible by the potential crowdfunding and lead investors.
- Investors can interact socially, add other investors to their groups, invite users from LinkedIn and other networks, discuss opportunities and tailor what opportunities they see.
- You need to inform everyone you know that you are on GoTroo. Encourage them to share the story with those they know. Contact local media to tell them what you are doing. And, don’t forget to tell your followers on Twitter, LinkedIn and Facebook about the opportunity.
- Keep your followers up to date with regular updates, allowing potential investors to get to know you and your team even more.
- When you hit your minimum raise, you can end the process, legal paperwork is completed, the units in the special purpose limited partnership or shares in the company are issued to the investors and the company receives its capital less GoTroo’s fees.
- You will keep your crowdfunding investors informed periodically about your company’s progress (at least quarterly and annual financial statements).
What happens if I have more than 50 shareholders?
You are no longer a ‘private’ issuer if you have more than 50 shareholders (excluding employees). The main difference between being a private issuer and a non-private issuer is that non-private issuers must report all sales of securities to all applicable the securities regulators upon closing the first sale of securities which causes you to exceed this limit and each subsequent sale.
What are the advantages of raising money on the GoTroo portal?
By listing on the GoTroo portal, you gain access to new groups of accredited and non-accredited investors who may be interested in helping you obtain the funding you need that is not available elsewhere. Besides funding, crowdfunding can provide you with a quick and efficient way to test the market for your product or business through feedback from prospective customers and backers. It can also create product evangelists out of early investors. Crowdfunding campaigns can also increase your business’s visibility to potential joint venture partners, purchasers, venture capital firms, and acquirers.
What about confidentiality?
Before providing information about your business to potential investors you should protect your intellectual property to the extent possible under Canadian and American copyright, trademark, industrial design and patent laws.
Indeed at least some information related to your business will become public in a crowdfunding campaign. This is true anytime you are seeking to raise capital as investors will want as much information as possible to evaluate your business and the risks involved. You should not expect that you will be able to get prospective equity crowdfunding investors to sign non-disclosure agreements. You need not disclose every minute detail about your product or service, just the basics that investors need to make an informed decision.