Examples of alternative financing sources for fast
growing small and medium size businesses.
 Venture Banks - Mezzanine financing
 Crowdfunding
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Venture bank lending
Venture banks have developed special expertise for advising and financing new ventures (ex.
BDC, or specialized division of a larger retail banks such as Vancity, RBC, TD bank etc.).
These banks will provide debt facilities such as secured lending, hybrid financing such as
mezzanine financing.
Financing venture investment in NOWC using mezzanine financing
 No collateral requirement
 No or limited ownership dilution
 Flexible payment schedule
. Traditional subordinated secured debt implies regular payments (interest and principal
repayment)
. Fast growing venture often have liquidity issues due to important investment in NOWC (to
support high sales growth rate). Imposing a rigid payment schedule will drain cash and
increase insolvency risk.
BUT requires
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Solid track record (end of “rapid growth stage”)
Cash-flows predictability
Audited financial statements (if principal greater than $5million)
Extensive due diligence process: business analysis, strategy, markets, customer relationship,
suppliers, and key staff etc.
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Example 1. Mezzanine financing
. 5-year loan with no principal repayment during the 5-year
. Annual/semi-annual payments are a blended payment: interest + a fixed percentage of the firm
annual FCF
. This type of financing has debt and equity components. Lender’s and shareholders’ objectives are
aligned (maximizing value creation, FCF, firm’s value).
. No equity sweetener, no ownership dilution for the venture’s owners.
Example 2. Mezzanine financing
. 5-year loan with no principal repayment during the 5-year
. Annual/semi-annual payments correspond to interest payments only (fixed rate)
. Balloon (also called bullet) payment at maturity: corresponds to the principal repayment
or
. Warrants attached: if the lender decides to exercise these warrants at maturity, instead of receiving the
principal repayment, the lender receives a given number of common shares from the borrowing venture
(issued especially for that purpose). If the warrants are exercised, the lender becomes a common
shareholder. Ownership dilution occurs for the venture owners. Such warrants are often called
“sweeteners” or an “equity kickers”.
Warrants give their owner, the right (no obligation) to buy a certain quantity of an underlying asset
(common shares of the venture in our previous example), at a certain date (expiration date), at a given
price (fixed at the time when the warrants/options have been issued).
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Example 3. Financing a venture expansion
3 to 8-year loan and no principal repayment during the first year
http://www.bdc.ca/EN/financing/business-loans/working-capital-financing/Pages/hybrid-working-capitalloan.aspx
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Crowdfunding
Crowdfunding allows businesses to raise financial resources needed to support their business
growth during earlier stages of their development. The crowdfunding requires the use of an
online platform (funding portal) that connects entrepreneurs and a large number of small
investors or “backers”. Crowdfunding can also be used by individuals to finance a project
(ex. making a movie). Normally, crowdfunding is used by new ventures, fast growing businesses,
innovating within an existing category of product or service.
Disruptive technologies are more likely to be financed by venture capitalists (VCs). VC provide guarantees in
term of confidentiality, as well as, better understanding of new technologies, business management and
business valuation techniques.
Market size
1990s first crowdfunding campaigns
USD 84 billion in 2018 (EY)
2008 creation of Indiegogo
42% China
2009 creation of Kickstarter
42% USA
2010 – US, Canada, Europe design and implement regulation for
11% UK
crowdfunding campaigns involving securities issues
5% Canada
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Crowdfunding can be
Reward Based – Pre-sale
Funding providers, the “backers”, will receive product(s) in exchange for funding, if the
project is successful and the product produced
. Positive impact on your reputation and brand name (if the campaign is a success)
. Receive feedback from clients
. Confirmation of the existence of a demand for your product
EX. Kickstarter/ Helix
Profit/revenue sharing
Future profits or revenues are shared with the “backers” in exchange for funding
Credit Based - Also called Debt crowdfunding or peer to peer lending
. Positive impact on your reputation (if campaign is a success)
. Could convince other lenders
. High default risk
. Example: interests are paid, loan is repaid when the project starts generating revenues
or profits.
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Crowdfunding can also be
Securities issue based crowdfunding
Debt and/or equity securities are issued and sold to the public in exchange for funding. The
firm must comply with BC Securities Commission (BCSC) regulation.
Example crowdfunding portals
Kickstarter
https://www.kickstarter.com/
Indiegogo
https://www.indiegogo.com/explore/techinnovation?project_type=all&project_timing=all&sort=trending
Example of crowdfunding portal authorized to operate in BC by BC Securities Commission
(BCSC) – for securities-based campaigns:
FrontFundr
www.frontfundr.com Example: https://www.frontfundr.com/nonavegan
Source: https://www.bcsc.bc.ca/industry/issuer-regulation/raising-capital/crowdfunding
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Crowdfunding – securities-based campaigns
Example of crowdfunding portal authorized to operate in BC by BC Securities Commission
(BCSC) – for securities-based campaigns:
FrontFundr
www.frontfundr.com Example: Nona Food; Little Canada
For complete list go to: https://www.bcsc.bc.ca/industry/issuer-regulation/raisingcapital/crowdfunding
Securities Based Crowdfunding campaigns (source BC Securities Commission, 2020)
Equity Based crowdfunding is available since 2016 in most Canadian provinces (BC, AB, SK,
MB, ON, QC, NS, NB) and subject to strict regulation.
Firm seeking to raise capital by issuing new securities are required to file a prospectus with
BCSC unless they benefit from an exemption.
Startup crowdfunding exemption allows firms to borrow small amount of capital without
having to file a prospectus. The firm will prepare an Offering Document (also called offering
memorandum).
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Crowdfunding – securities-based campaigns
The Offering Document must describe:
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The business ‘organization, mission, main products/services, main executives (role,
compensation, background) and current owners, short-term and long-term objectives (3,
5, 10 years), important milestones, capital structure
The business current situation, expected future development (in 3, 5 10 years)
The new securities’ feature
The minimum capital to be raised before the end of the campaign (maximum 90 days
after the offering Document became available to investors)
The intended use of the issue’s proceeds
Investors’ rights
Fees and commission paid.
The risk associated to the business and to the new securities (especially the lack of
liquidity)
For a complete list of the Offering Document’s content see:
https://www.bcsc.bc.ca/-/media/PWS/New-Resources/Industry/Issuer-Regulation/RaisingCapital/Crowdfunding/
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Crowdfunding – securities-based campaigns
Most firm also add most recent financial statements (audited), even if this is not required.
Maximum amount that can be raised per crowdfunding campaign in BC: (since 2020) up to
$1.5 million over a period of 1 year (previous limit was $250,000).
Example of securities a firm can issue:
. Common shares, Preferred shares
. Debt securities, promissory notes
. warrants, instruments convertible into common or preferred shares
EX. Mindful Fud
https://www.frontfundr.com/mindfulfud
Nona Vegan
https://www.frontfundr.com/nonavegan
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Crowdfunding – securities-based campaigns
Investors
The amount that a non-accredited investor can contribute to a security based crowdfunding
campaign is limited. Limits vary from one province to another.
Maximum investment – individual investors – non-accredited investors
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$2,500 per individual investor if the web portal benefits from the “market dealer exemption”
$10,000 per individual investor, if all the following conditions are met:
o The funding portal is a registered dealer
o The issuer’s head offices are in BC, Alberta, Saskatchewan, Manitoba, Ontario or
Quebec
o The investor is a BC, Alberta, Saskatchewan, Manitoba, Ontario or Quebec resident
o The funding portal as determined that the investment is suitable for the investor.
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Crowdfunding – securities-based campaigns
Investors (continued)
No limit for accredited investors
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Institutional investors such as:
- Financial institutions, Pension Funds,
- Corporations, limited partnerships, with at least $ 5 million in net assets
- Registered advisers and dealers
Individuals complying with at least one of the following conditions:
- $1 million in financial assets before tax (cash and marketable securities)
- $200,000 annual income (or $300,000 combined with spouse income) for each of the
last over last 2 years, with reasonable expectation to exceed that income next year
- $5 million in net assets
Investors have 2 business days after they contributed to the crowdfunding campaign, to change
their mind and cancel their investment.
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Crowdfunding – securities-based campaigns
Money contributed by investors during the campaign is held by the funding portal (in a trust).
If the campaign is not successful (the issuer failed to raise the minimum target capital
amount), or if the issuer withdraws the offering, investors will get their money back.
Main advantages to investors
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Due diligence process (by funding portal)
Portfolio diversification: possibility to invest small amounts in high-risk investment
Invest in original, innovative products/services (mostly variation of existing
products/services)
Invest in new ventures seeking new type of relationship with their community
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Crowdfunding – securities-based campaigns
Money contributed by investors during the campaign is held by the funding portal (in a trust).
If the campaign is not successful (the issuer failed to raise the minimum target capital
amount), or if the issuer withdraws the offering, investors will get their money back.
Main risks for investors
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Valuation of the newly issued securities
Access to information: the issuer is not a reporting issuer => no obligation to report
financial statements after the crowdfunding campaign
Lack of liquidity: the new securities can be sold when/if the firm is acquired by another
entity, or becomes publicly listed (IPO), or subject to a Reverse take-over, or Vend-in
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Crowdfunding – securities-based campaigns
Funding portals must:
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Must inform investors: publish the issuer’s offering document, describe the type of
securities offered
Warn investors about the risk associated to the issue
Ask investors to confirm that they read and understood the offering documents and the
risks associated to the investment (ticking a box – pop-up acknowledgement)
Proceed to due diligence: ex. check background information, business information …
Main differences between funding portal operating under the start-up registration
exemption and funding portal operated by registered dealers and exempt market dealers
Funding portal operating under the start-up registration exemption
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Not allowed to provide investment advice
Do not receive a fee/commission from investors
Acknowledge that they are not a registered dealer....
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Crowdfunding – securities-based campaigns
Funding portal operated by registered dealers (ex. FrontFundr) and exempt market dealers
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Can give investment advise
Must disclose fee charged to investors
Acknowledge that they are a registered dealer....
Can equity-based crowdfunding become a threat for venture capitalists?
Today, VCs are in a better position to value new technologies, new ventures and mentor
entrepreneurs. How will investors (existing and potential) react when business failures
happen? Do investors really understand the risk they are taking? VCs do. Risk is part of their
DNA.
For more information – see
https://www.bcsc.bc.ca/industry/issuer-regulation/raising-capital/crowdfunding
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