Crowdsourcing

Much has been written lately about "crowdsourcing", the latest trend in funding start up businesses and other projects. The JOBS (Jumpstart Our Business Startups) Act, which allows crowdsourcing in limited circumstances, recently passed the US House of Representatives. No such legislation exists yet in Canada, so crowdsourcing for business start ups still violates Canadian securities laws.


What is crowdsourcing? According to Wikipedia, crowdsourcing describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organizations. Websites such as Kickstarter allow people to raise funds for their projects. For example, a musician can launch a tour by raising money from their fans.


Until recently, crowdsource funding for businesses was caught by US securities regulations. With the introduction of the JOBS Act, businesses can raise up to $1,000,000 from up to 1,000 investors with no one investor owning more that 10% through crowdsourcing and would be exempt from the typical securities legislation.


From a start up business' perspective, this is a great new source of capital with substantially lower transaction costs. Businesses will be able to post their offering on Kickstarter or other crowdsourcing websites (I'm sure that new ones will be popping up). Investors will be able to invest up to $10,000.


However, investors must be wary. Without the protection of securities legislation, you can expect scammers to jump in to raise money from an unsuspecting public. Buyer beware!


I have mixed feelings about crowdsourcing for financing start ups. On one hand, entrepreneurs will be able to harness the power of the internet and social media to raise capital for their business ideas. On the other hand, fraudsters will surely take advantage of the lax regulatory regime for crowdsourcing. Investors will have to be very careful and carry out their due diligence.


As Canada decides whether to jump on the crowdsourcing bandwagon, we should carefully monitor the US situation and determine what additional investor protections should be included in a Canadian crowdsourcing environment.