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Ask a Lawyer: Is Equity Crowdfunding in Ontario Around the Corner?

The revolution is coming – from Saskatchewan, of all places. On December 6, 2013, this rounding error in securities markets became the first Canadian province to allow equity crowdfunding: perhaps not all that surprising, given its populist traditions, independent attitudes and slim(mer) bureaucracy. The US is on the same track – the JOBS ACT (“Jumpstart Our Business Startups Act” – I love how US legislation is named for the acronym, it’s all about marketing) gave the Securities Exchange Commission a mandate to develop a crowdfunding framework. Last fall, the SEC published draft rules. The period for public comment closed in early February and the Commission is now studying the responses. Equity crowdfunding could be legal in the US this year.

Of greater significance to local game developers, Ontario is not far behind. In the next 6 weeks the Ontario Securities Commission will be publishing its proposal for an equity crowdfunding structure – also followed by 90 days of public comment. Add a few months to finalize the rules and we could be equity crowdfunding in Ontario by the end of the year. Check out the OSC’s August 2013 progress report at http://www.osc.gov.on.ca/documents/en/Securities-Category4/sn_20130828_45-712_progress-report.pdf and, to get a sense of the likely draft rules, see page 25.

So what? Kickstarter was founded in 2009. Since then, almost $1,000,000,000 has been pledged to almost 135,000 projects, of which 44% were successful in meeting their funding goal. Successfully funded projects have taken out just under $850,000,000. Games are the number one category – over 20% of the total dollars pledged, with a success rate of about 87%. That’s $186,000,000 for the game industry through crowdfunding in just over 5 years. One of the craziest stats is that of the 56 projects that raised over $1M on Kickstarter over 50% of those (29) were games. (https://www.kickstarter.com/help/stats)

What does “equity crowdfunding” bring to an already plentiful crowdfunding table? The quick answer is a completely different incentive premise, more cash, lower initial cost but the potential for a much higher end cost. Let’s start with the incentive: crowdfunding is currently a donation or the pre-buy of a “reward” (a copy of the project or product itself, stuff related to the project or product, an experience, etc.). The incentive in equity crowdfunding is a piece of the business – big difference. You can see how this might mean more cash. Equity crowdfunding gives access to fans/investors rather than fans/consumers. The upside for the investor is much greater but also much more speculative. There’s only so much anyone is willing to pay for a custom t-shirt, even a fan, but how much will people pay for a shot at owning a share, however small, of the next casual game megahit?

That also means that your cost of “fulfillment” is lower – you don’t have to print and mail those 5000 t-shirts, or “give away” your game, or spend time delivering on your promised “experience”. You just have to focus on building your business – except that it’s no longer your business. That’s the rub – it’s a business you share with your investors and, assuming your business is incredibly successful (why not, could happen), you will share that success with them. There’s lots more to consider, of course, but it is going to be a revolution. For the first time in the history of capitalism, technology has made it feasible for small private companies to access “public” funds to finance the growth of their businesses and the regulators are about to make it legal.

Edwards PC, Creative Law is a boutique law firm provides legal services to Music, Film, Animation, TV, Digital Media, Game, Software and Publishing industry clients. For more information and blogs, please visit www.edwardslaw.ca

© 2018 Edwards PC

* This blog is for general informational purposes only and is not to be construed as legal advice. Please contact Edwards PC, Creative Law or another lawyer, if you wish to apply these concepts to your specific circumstances.