Equity Crowdfunding Portal Update and Slide Deck “Securities -Making Equity Crowdfunding Legal”

alfred-palmer-crowdfundingNew equity crowdfunding portals are starting to emerge across Canada. Five new portals became active since my last presentation on this topic in February this year, and one portal closed due to the unexpected death of its founder.

Three of the new crowdfunding portals in Canada focus on real estate investments in Ontario: Brix RCR, Open Avenue and R2Crowd.  NexusCrowd, which launched in the fall of 2015, is the only other real estate crowdfunding portal in Canada at this time. NexusCrowd, Brix RCR and R2Crowd each plan to focus on investment opportunities in the Ontario commercial real estate market. Open Avenue plans to focus on the housing market. All four of these real estate crowdfunding platforms are registered as exempt market dealers either directly or through a third party (R2Crowd relies on the registration of Waverly Corporate Financial Services Ltd.).  Each platform plans to rely primarily on the accredited investor exemption.  Brix RCR, R2Crowd and OpenAvenue also expect to a lesser extent utilize the integrated crowdfunding exemption. NexusCrowd is the only one in this group that has an investment listing on its website at this time.

The other two new crowdfunding portals, Bay Street Cannabis (Ascenta Finance Corp.) and Klondike Strike (Red Cloud Klondike Strike Inc.), are also registered as exempt market dealers. Bay Street Cannabis, as its name suggests,  plans to act as an equity crowdfunding portal for cannabis companies. Klondike Strike plans to act as an equity crowdfunding portal for mining companies.  Each platform plans to rely on all available prospectus exemptions that may be applicable in the jurisdictions where they are qualified as registered dealers.  Bay Street Cannabis does not have any investment listings on its website at this time.  Klondike Strike currently has two investment listings.  The head office of both these portals is in Ontario.

The portals relying on the Start-Up Crowdfunding provisions for their license to operate are starting to list investment opportunities on their respective portals.  Vested has posted a junior mining exploration investment. GoTroo is about to close its first investment campaign for a smart home tech company.  SmallStarter is collecting expressions of interest for an investment in a local brewery business it plans to launch shortly. StellaNova and InvestLocalBC are currently looking at potential investment listings and are expected to launch their first campaigns in the second quarter of 2016.

FrontFundr (Silver Maple Ventures Inc.), as an exempt market dealer, offers investment opportunities on its portal relying on the start-up crowdfunding exemption, the integrated crowdfunding exemption, accredited investor exemption and offering memorandum exemption.  FrontFundr currently has five active campaigns and twenty-eight (28) companies in their prospect lounge. The investment opportunities listed are primarily focused in the tech and industrial space.

SeedUps, as an exempt market dealer through Waverley, offers investment opportunities on its portal relying on the accredited investor exemption and offering memorandum exemption. SeedUps currently has six active campaigns, four of which are in the food and beverage industry.

InvestX, as an exempt market dealer through Waverley, is currently offering two later stage U.S. based tech investment opportunities. One is a fund and the other a direct investment. Campaigns listed on InvestX are made available through the accredited investor exemption.

Optimize Capital Markets (P2P Financial Inc.), as an exempt market dealer, has sixty-three (63) companies currently listed on its OCMX institutional marketplace. OMX is also registered in the United States as a broker-dealer.  OCMX relies on the accredited investor exemption in Canada and the United States.  It is the oldest crowdfunding portal in Canada.

CrowdMatrix is currently completing its registration process as an exempt market dealer.  This process has not been completed despite references to being an exempt market dealer on their portal website.  Once they have been registered as a dealer they plan on utlizing the accredited investor exemption to bring tech company investment opportunities to the public.

Canadian business owners also can avail themselves to debt financing through one of the new marketplace lenders operating in Canada. FundThrough, Lendified, Lending Loop, Thinking Capital and OnDeck all offer a streamlined online alternative to bank debt financing. ATB Financial and InvestNextDoor are expected to offer further choice to small businesses in Canada in the second quarter of 2016.

Last week on March 16, 2016, I was a speaker at the 2016 Community Crowdfunding Summit in Prince George, British Columbia.  My slide deck, although similar to past presentations I have made, is updated to reflect recent changes.  This includes updating the active equity and debt portal slides.

The audience was terrific. I was the last speaker of the day. Not one person nodded off or left despite having been at the event since 8 am that morning.  The desire and willingness to learn was definitely present in that room to the very end.

Thank-you Community Futures BC for organizing the event and inviting me to Prince George.


Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.

Recent Regulatory Developments in Equity Crowdfunding in Canada

Equity-Crowdfunding-CanadaCanada now has two crowdfunding specific exemptions: the Start-Up Crowdfunding Exemption (May 14, 2015 – BC, SK, MB, QU, NB, and NS), and the Integrated Crowdfunding Exemption (Jan. 25, 2016 -MB, ON, QU, NB, and NS, with SK pending).

As of today’s date, there are six portals operating in Canada which list Start-up Crowdfunding Exemption deals.

There are no portals which are authorized to list deals under the Integrated Crowdfunding Exemption, but this is not a surprise as the rule only came into force on Jan. 25, 2016.

Entrepreneurs can also use the accredited investor exemption and the offering memorandum exemption to raise capital on online funding platforms (available in every jurisdiction across Canada). There are eight online funding platforms offering deals relying on these two exemptions and more on the way.

The offering memorandum exemption is new to Ontario (Jan. 13, 2016) and their version has some significant changes to the two versions in force elsewhere in Canada.

Come April 30, 2015, Alberta, New Brunswick, Nova Scotia, Quebec, and Saskatchewan will amend their versions of the offering memorandum exemption to conform with the Ontario version.

Alberta also has introduced for comment a proposed Prospectus Exemption for Start-up Businesses. This exemption has a number of things in common with the Start-up Crowdfunding Exemption adopted in other provinces, but there are some major differences as well.

On February 2, 2016, I taped my phone to the wall and spoke to a group of lawyers in Saskatchewan via Skype about these recent regulatory developments in equity crowdfunding.  Skype and my web camera on my computer apparently are not compatible with the latest Windows 10 upgrade. Something that was discovered five minutes to the presentation time.  The last minute solution was to see if the organizer could hear me at an acceptable volume level using the Skype app on my cell phone. I was given the thumbs up, and the attendees followed along from paper print-outs they were given of the slides. From my end of the Skype connection, I was talking to a very long empty table top.  These are the slides from that presentation.

Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.

Part III: Is Culture Killing Equity Crowdfunding in Canada: Real Estate Spotlight

[As published on October 7, 2015 on CrowdfundInsider.com]

By Bret Conkin and Alixe Cormick

Canada-Dock-Chairs-Color
Real estate investment is a consistently hot news topic.  Open any newspaper or news website in Canada and coverage of the real estate market is easy to find, particularly in Vancouver and Toronto.  Fortunes are made investing in residential and commercial properties. Speculation, offshore investors, bubbles and REITs are cocktail party fodder.   Enter real estate crowdfunding – offering the promise of exciting new ways for Canadians to become mini land barons.

Real estate crowdfunding is projected to climb to $2.57 billion globally in 2015 up from $1.01 billion last year and $396.4 million in 2013, according to industry researcher Massolutions.  This makes real estate one of the hottest sectors in the global crowdfunding industry sized at $16.2 billion overall in 2014 and projected to exceed $32 billion in 2015.

Real Estate Listing Canada

On September 9, 2015, Canadian platform NexusCrowd launched Galleria, a Mississauga shopping mall project.  In less than a month, $8 million of the $8.2 million campaign target has been committed for the project.  Real estate crowdfunding in Canada is still in its infancy and lags behind the other sectors identified in Part I of this series.  In Part III below we break down the real estate crowdfunding story so far and offer a sneak peak of what’s just around the corner.

In this three-part series, we examine whether “conservative” Canadian business culture is having a negative effect on equity crowdfunding taking hold in Canada.

Part I in the series investigated the market metrics and traction so far in Canada: Read it here. Part II investigated causes for market underdevelopment in Canada and lessons from other markets: Read it here.  

What is fueling the growth of real estate crowdfunding platforms globally?

The number of real estate funding platforms has doubled in the last year. In the United States (US) alone, there are over 175 real estate funding platforms up from 75 such platforms in 2014.  Globally, there are over 250 such platforms up from 100 such platforms in 2014. As mentioned above, these platforms are well on their way to raising over $2.57 billion globally in 2015. In the US, seventy to eighty percent (75%-80%) of the funds raised under Rule 506(c), the accredited investor rule that allows advertising, has been in the real estate sector. A number of factors are fueling this growth:
Proof of Concept and Attractive Returns;

  • Flexibility and Speed;
  • Unique Investor Benefits; and
  • Unique Benefits for Developers and Real Estate Companies.

We discuss each of these factors in more detail below.

Proof of Concept and Attractive Returns

CN Tower Toronto CanadaReal estate is an investment category the average investor believes they understand and know without assistance of an investment professional.  Real estate is also a “hard asset” investment. Investors take comfort in the fact they can physically visit and see their investment in a real estate project. Real estate investments also provide a 10% average return with a 2-3% volatility. Although potential returns are lower in real estate than many other sectors, so is the risk volatility.  Investors like steady returns with low risk.

Real estate projects have also had a long history of syndication worldwide.  Real Estate Investment Trusts (REITs) and Real Estate Limited Partnerships (RELPs) are common syndication vehicles institutional and high-net-worth investors are familiar with in North America.

Crowdfunding is a new way to syndicate real estate investments; a sector investors are already comfortable investing in.  Crowdfunding provides more transparency and openness than existing syndication models, which makes it attractive to investors and those seeking capital.  Platforms like Patch of Land (USA) now claim an average blended rate of return of 12%.  Traction is also evident for international platforms likeProdigy Network (USA, South America), Companisto (Europe), CoAssets (Asia) and others.

Flexibility & Speed

Canada Wooden BoatJPGReal estate funding platforms are more than a listing service of properties and projects available to potential investors.  Successful platforms focus on specific geographic markets and asset classes. They offer opportunities to invest in a local contractor’s latest housing flip through to multi-million dollar resort and commercial developments.  Investments may take the form of a direct or indirect investment in debt or equity participation in a real estate project.  Funding platforms provide tools to enable investors to find and compare these different opportunities quickly and efficiently. Algorithms and big data analytics make the platforms smarter and enable faster workflows and approvals.  They streamline the investment process by utilizing online deal rooms and subscription agreements, electronic signatures, and payment systems. They strive to make the investment process as frictionless as possible enabling quicker closings, and in theory, faster access to investment returns.

Unique Investor Benefits

Key Investor Questions Real EstateInvesting in real estate securities through an online funding platform provides investors with a number of other benefits beyond attractive returns, flexibility and speed.  Investors are able to diversify their risk profile in this sector by choosing to make a number of smaller investments in different geographic markets and asset classes. They can chose to invest in specific individual real estate projects of their choosing or a pool of projects as part of a RELP or private REIT.

Real estate investors, who are familiar with underwriting individual properties, assessing value and modeling cash flows, can step into the next layer of real estate investment by leveraging the knowledge of a larger pool of investors or portfolio management group. The elimination or reduction of the need for road shows, registered sales representatives and legal costs reduce the cost of investment and increases returns.  Investment volatility in these types of private real estate investments is limited to changes in net asset value and interest rate unlike public REITs, which are also subject to stock market volatility, which moves independently of the other two factors.

Unique Benefits for Developers and Real Estate Companies

money global internationalReal estate developers and companies are constantly raising capital.  Equity requirements on new projects in 2015 remain between 50% and 65% on average worldwide, with most lenders requiring some form of construction guarantee.  Secondary real estate cities outside of core gateway cities such as New York, London, Tokyo, Los Angeles, San Francisco, Paris, Hong Kong, Sydney, Seoul, and Shanghai continue to provide opportunities for yields in markets and asset types that fall farther along the risk curve than those available in gateway markets that are saturated.

Funding platforms allow developers and other real estate companies’ access to a new pool of accredited and retail investors at a much lower cost than traditional funding avenues.  It also allows them to obtain community support for projects that may have otherwise faced resistance or low market acceptance. Owners become customers and vice versa in a variety of real estate sectors.

An example of this last benefit is the online funding campaign of Kitridge Hotels & Resorts of its Hard Rock Hotel Palm Springs on Realty Mogul in July 2014.  A total of $1.5 million in equity was raised in the offering to refinance and renovate the property. A small amount in the real estate world.  What the offering did, however, in addition to providing capital, was secure significant media attention for the hotel as the first-ever equity crowdfunded hotel deal in the US. It also provided VIP benefits to the 85 investors who participated in the offering such as free use of hotel owner poolside cabanas, a 25% discount off best room rates, free room upgrades and more.

What is the story so far in Canada?

Only two platforms are currently active in real estate crowdfunding in Canada. Optimize Capital Markets has offered access to real estate investments for several years, the last couple via its platform The OCMX marketplace.  However, their current deals are for funds, development companies, or related technologies not specific properties.

NexusCrowd recently launched their platform and first project Galleria in September 2015. The platform focuses on accredited investors. Its first project is a $100 million development project for a two-story, 238,000-square-foot (23,000-square-metre) mall to be anchored by Korean grocery store Galleria Supermarket, which also has a 50 percent stake in the development. Closely held TerraCap Investments Inc. owns the remaining interest.Hitesh Rathod

“We will only get involved in deals with strong partners where at least 50% of the funding target has been reached.  The Galleria project was brought to us by Terra Cap with an anchor tenant in place, de-risked with 85% of tenancy sold and most approvals in place,” stated NexusCrowd CEO Hitesh Rathod.  “We are accessing capital from existing relationships but looking for more partners to do the due diligence on deals in the $2M to $20M range.   Individual (accredited) investors don’t get access to these kinds of deals unless they are networked in.  We provide affordable access to exclusive deals.”

NexusCrowd will aggregate investors into a single purpose Limited Partnership that invests directly into the real estate providing “beneficial ownership.”  The timeline for the project is to start development in January 2016 and complete by December 2017.  At that point, similar to the structure on other platforms, the limited partnership vehicle created for the financing will be liquidated and dissolved and the investor returns distributed.  The target internal rate of return (IRR) is 15-20%.

A third platform, Open Avenue, is also preparing to launch.   “Currently the real estate investment industry is a “members-only” club, commented CFO and Co-founder Rafael Nicolas Fermin Cota of Open Avenue. “Open Avenue seeks to bridge the gap for individual investors and real estate operators across a variety of properties,” Cota added, “As little as $5,000 is required to invest and Open Avenue makes the entire process seamless and straightforward.”

Fundrise also recently announced that it was opening US real estate deal flow access to Canadian investors but not for developments in Canada.

Why is real estate crowdfunding so underdeveloped in Canada?

Given the advantages outlined so far, why is Canadian real estate crowdfunding progressing at baby steps when there is a full out sprint elsewhere?

The Perspective of Canadian Developers and Real Estate Companies

Perhaps it is more of an issue of ready access to financing already in place more than a cultural problem.  Canadian developers and real estate companies are currently using Canada’s existing accredited investor and offering memorandum exemptions to sell their securities as an exempt market dealer (EMD) or through third party EMDs. Real estate issuers, mortgage investment corporations, and funds are the three primary users of the offering memorandum exemption in Canada, which is crowdfunding off-line. Issuers can raise capital from anyone resident in Canada, other than in Ontario, if they provide an offering memorandum in the required form.  Real estate issuers are raising significant capital under these two exemptions.

canada kayak Lake IslandIn 2014, private issuers raised $8 billion in British Columbia under the accredited investor and offering memorandum exemptions.  Private investment funds accounted for $5 billion of that amount.  Real estate issuers and mortgage investment corporations accounted for a large percentage of the $3 billion raised by all other issuers in British Columbia.  In Alberta, private issuers raised $4.2 billion in 2014 under the accredited investor and offering memorandum exemption.  Real estate issuers accounted for approximately $500 million of this amount, down from $1.2 billion raised in 2013 by real estate issuers. In Ontario, approximately $3.8 billion was raised under the accredited investor exemption by real estate issuers.

What this market sector wants is an Ontario offering memorandum exemption that looks like one of the two versions already in place in the rest of Canada.  Many issuers active in this sector believe all of their needs to access capital in the future will be met by this one regulatory change.  Right now, the need to access investors is being met by traditional brick and mortar EMDs. For equity crowdfunding to be attractive to developers and real estate companies it will need to prove it can deliver the same results or better as EMDs at a lower cost and faster time frame.  Alternatively, investor pressure will be needed to convince these issuers to move online.

The Investor Perspective

Canadians are very comfortable in investing in real estate as the numbers above show. EMDs currently have the trust and relationship with investors interested in this investment segment. Canadian and US RELPs and REITs are actively pursuing Canadian investors through traditional EMD channels. Canadian institutional and sophisticated accredited real estate investors are also scouring the globe looking for real estate investment opportunities in international gateway and secondary cities.

Canada Unitd StatesThe quick uptake of the Galleria investment opportunity by NexusCrowd should be a signal to anyone interested in this market that Canadian accredited investors are open to investing in quality real estate projects through a funding portal.  The lack of real estate funding portals and quality offerings may be the real issue in this market segment.

“We don’t think there is a reticence to participate, Canadian investors are conservative and may be hesitant to investing in early stage start-ups,” commented Rathod.  “We seek to access their desired deal flow, hit their comfort level and identify what kind of protections we can put in place.”

Cota added, “Investors are increasingly understanding the importance of diversification given recent market volatility… [It is] more and more apparent how valuable real estate is as an investment asset class.”

The Platform Perspective

Top Global Buyers 2015 Canada Real Estate“Regulations will continue to make it difficult for other platforms,” stated Rathod.   He points to regulatory restrictions as a key barrier to platform availability including the time it took to get an EMD license.  Another barrier is being knowledgeable in the real estate investment and development space, creating a barrier for pure technology start-ups.  Expect more existing players, EMDs and real estate companies, to partner or offer their own platforms going forward.

Cota echoes the challenge of regulatory burdens as they have worked with Ontario Securities Commission.  “Among the numerous benefits, crowd investing provides the public with a means to support developments that will improve their communities.”

Conclusion

There is no doubt based on our research that the crowd capital opportunity for all sectors including real estate is substantial.  Real estate is further behind in market development due to strong traditional financing alternatives, regulatory barriers and to a limited degree, our conservative business culture.  The ultimate market size will depend on many factors but the good news is that critical mass is growing in Canada for equity crowdfunding.

Is culture killing equity crowdfunding in Canada?   We believe the answer is a definitive no.  What do you think?  We welcome your comments and questions below.

Bret-ConkinBret Conkin
Brett is the Founder of CrowdfundSuite, a CrowdInvesting and Crowdfunding Consultancy. CrowdfundSuite provides platform development and other expert services to help organizations profit from the new Crowd Economy.  Bret is an Ambassador to the National Crowdfunding Association of Canada and a former executive with FundRazr.  He has founded and collaborated on multiple tech start-ups including Canada’s first Crowdfunding platform Fundfindr launched in 2008.

Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.