OSC EXEMPT MARKET REVIEW OSC NOTICE 45-712 …...osc exempt market review osc notice 45-712 appendix...

OSC EXEMPT MARKET REVIEWOSC NOTICE 45-712APPENDIX B – INVESTOR SURVEY REPORT

Th

e Bron

desbury Group Exem

pt M

arket Investor S

urvey – Ontario Securities Com

miss

ion

PREP

ARED

FOR TH

E ONTA

RIO SEC

URITIES COMMISSION

WRITTEN

BY: E

DWIN L.

WEINSTEIN, P

HD

MAY

28, 201

3

EXEM

PT M

ARKE

T ST

UDY ON CRO

WDFU

NDING

Th

e Bron

desbury Group Exem

pt M

arket Investor S


miss

ion

TABLE OF CO

NTENTS

0.0

EXEC

UTIVE

SUMMAR

Y

1 1.0

INTR

ODUCT

ION

5

1.1

METHOD

6

1.2

WHO W

AS IN

TERV

IEWED

7

1.3

ORG

ANIZAT

ION O

F TH

IS REP

ORT

13

2.0

PROPE

NSITY

FOR BU

SINESS IN

VESTING

14

2.1

RISK PRO

FILES

15

2.2

DECISION IN

FLUEN

CES

16

2.3

WILLINGNESS TO

INVE

ST VIA CRO

WDF

UNDING

18

2.4

SME INVE

STING AND CR

OWDF

UNDING

20

3.0

INVE

STING VIA CRO

WDFU

NDING

21

3.1

ASSESSMEN

T OF RISKS

22

3.2

DECISION IN

FLUEN

CES

23

3.3

INFO

RMED

PRO

PENSITY FOR INVE

STING

27

4.0

NOT IN

TERE

STED

IN SME IN

VESTING

29

4.1

WHO ARE

THE NON-‐IN

VESTORS

30

4.2

REAS

ONS FO

R NOT INVE

STING

31

4.3

UNRE

GULATED M

UTU

AL FUNDS

32

5.0

SUMMAR

Y & CONCLUSIONS

34

AP

PENDIX A

-‐ ONLINE SU

RVEY

S

39

APPE

NDIX B -‐ LI

TERA

TURE

REV

IEW

54

The Bron

desbury Group Exempt M

arket Investor S


miss

ion

1

0.0

EXEC

UTIVE

SUMMAR

Y Th

e Ontario Securities Com

miss

ion (OSC) is c

onsid

ering several ide

as

for n

ew cap

ital raising

prospectus e

xemptions th

at m

ay provide

bu

sine

ss enterprises, p

articularly start-‐up

s and

Small-‐M

edium

Enterprises (SME), w

ith greater access to capital. New

exemptions m

ay

also provide

individu

al investors w

ith m

ore investmen

t opp

ortunitie

s,

subject to ap

prop

riate investor protections and

limita

tions.

“Crowdfun

ding

” is on

e of th

e prop

osed

ideas for new

cap

ital raisin

g prospe

ctus exemptions.

This survey will help to assess w

hat m

atters to

poten

tial SME an

d crow

dfun

ding

investors. This include

s discussion of circ

umstan

ces tha

t bo

th encou

rage and

discourage investmen

t, as well as the

kinds of

peop

le likely to

invest und

er differen

t circ

umstan

ces.

The survey was executed on

the Internet and

took 15-‐20

minutes to

complete, dep

ending

on interest in crowdfun

ding

. A total of 1

501

adult C

anad

ians to

ok part in the survey. A

ll on

line interviews w

ere

cond

ucted be

tween March 13-‐Ap

ril 4, 201

3. O

nline interviews w

ere

cond

ucted in both En

glish an

d Fren

ch, according

to th

e respon

dent’s

choice.

The sample is a broa

d cross-‐section of Can

adians, w

hich is nationa

lly

represen

tativ

e by age and

region

. Med

ian saving

s and

investmen

ts

(includ

ing RR

SP but excluding

hom

e) in our sa

mple are ab

out $

45,000

. Almost 6

out of 1

0 respon

dents h

ave less th

an $50

,000

in sa

ving

s and

investmen

ts. In every age grou

p, m

ore than

half o

f respo

nden

ts have

less th

an $50

k in sa

ving

s and

investmen

t. This rises to

three-‐qu

arters

in th

e youn

gest age group

.

The survey itself is divide

d into th

ree broa

d sections.

• All R

espo

nden

ts. This include

d: D

emog

raph

ic inform

ation;

Investmen

t beh

aviour; P

rope

nsity

for b

usiness investin

g; and

De

cision

influ

ences.

• Po

tential C

rowdfun

ding

Investors. Tho

se sh

owing interest in

investing via crow

dfun

ding

were asked to: Ide

ntify risks;

Motivations; D

esire

for p

rofessiona

l advice; In

form

ation ne

eds; and

Factors a

ffecting the am

ount of m

oney th

ey wou

ld invest.

• Crow

dfun

ding

Non

-‐Investors. Tho

se sh

owing virtua

lly no interest

in investing in SMEs via crowdfun

ding

were asked: Poten

tial

interest in investing in unregulated

mutua

l fun

ds; R

easons fo

r not

investing in SMEs and

in unregulated

mutua

l fun

ds (if a

pplicab

le).

There are several cho

ices to

make in designing

surveys, and

becau

se

we were very con

cerned

abo

ut gettin

g en

ough

respon

se on a very new

topic like crow

dfun

ding

, we elected to use crowdfun

ding

as a

basis for

stream

ing pa

rticipan

ts into one

of the

two mutua

lly exclusiv

e stream

s.

We also used low cut-‐off scores to

iden

tify those po

tentially interested

in crowdfun

ding

, in an

effo

rt to

ensure sufficien

t respo

nse to th

e crow

dfun

ding

que

stions.

It is im

portan

t to un

derstand

the cut-‐off scores. W

illingn

ess to invest

was ra

ted on

a 1 (D

efinite

ly NOT interested

) to 10

(Definite

ly

Interested

) scale in all three qu

estio

ns whe

re it is asked

. Only those

giving

ratin

gs of 1

-‐3 were de

emed

‘Not interested

’ in investing,

whe

ther in SME gene

rally or c

rowdfun

ding

specifically. Th

us all those

giving

ratin

gs of 4

-‐10 were de

emed

‘interested in investing’. Ba

sed on

the typical psycholog

ical distan

ces o

n a 1-‐10

scale, how

ever, it is u

seful

to th

ink of th

e interested

investors in tw

o grou

ps. Th

ere is a “core

investor” that is likely to

invest and

gave 7-‐10

ratin

gs; as w

ell as a

set o

f “poten

tial investors” who

are less likely to

invest and

gave 4-‐6 ratin

gs.

The Bron


arket Investor S


miss

ion

2

As you

read

the survey re

sults, it is impo

rtan

t not to

over-‐interpret

small differen

ces. W

hile th

e survey has overall statistical accuracy of

+2.5%, tha

t reflects the

likelihoo

d of gettin

g the same nu

mbe

rs by

asking

the same qu

estio

ns. It do

es not re

flect th

e likelihoo

d that

peop

le will do wha

t the

y say. M

uch of th

e survey asks p

eople to

speculate on

wha

t the

y wou

ld do in re

spon

se to

a com

plex se

t of

alternatives. Th

e simple an

swer is we can’t b

e sure wha

t the

y will do

until th

ey are in th

e situation. N

onethe

less, w

e can be

reason

ably

certain that whe

n a much larger group

expresses interest in one

alternative over ano

ther, the

preferred

alte

rnative will re

main so in

practice. The

immed

iate practical im

pact of this w

arning

is th

at you

shou

ld be reluctan

t to interpret d

ifferen

ces in respon

se unless the

y are

quite

substantial. W

e ha

ve aim

ed to

do this whe

n we select

inform

ation to present and

discuss in th

is re

port.

PROPE

NSITY

FOR BU

SINESS INVE

STING

• Interest in SME investing an

d interest in crowdfun

ding

are highly

related. O

verall, th

e tw

o grou

ps overla

p by abo

ut 80%

(42.0%

+

37.3%). Som

e three-‐qu

arters of SME investors a

re interested

in

crow

dfun

ding

, and

con

versely, 86%

of tho

se interested

in

crow

dfun

ding

are interested

in SME investing. The

simple grap

hic

below sh

ows h

ow th

e total pop

ulation divide

s up in te

rms o

f interest in SME investing an

d crow

dfun

ding

. •

As we will se

e later, whe

n pe

ople are interested

in one

type

of

investing (SME or crowdfun

ding

) and

not th

e othe

r, the main

diffe

rence is th

eir fam

iliarity

and

com

fort with

the Internet. Th

at

explains m

ost d

ifferen

ces, and

other th

an dem

ograph

ics related

to

Internet usage, o

ther dem

ograph

ic differen

ces a

re largely

immaterial. As a

result, it sh

ould be un

derstood

that a con

clusion

applied to one

of the

two grou

ps of investors wou

ld alm

ost

certainly ap

ply to th

e othe

r group

.

Re

latio

nship Be

tween Interest in SME Investing &

Crow

dfun

ding

(% Total)

Crow

dfun

ding

New

/You

ng

Investmen

t Yes

No

Yes

42.0

13.8

55.8

No

6.9

37.3

44.2

48.9

51.1

•

Risk to

lerance, age and

gen

der a

re th

e three pe

rson

al

characteristics tha

t are m

ost ind

icative of prope

nsity

for b

usiness

investing, whe

ther we are talking ab

out investin

g in SME or

crow

dfun

ding

.

• Five th

ings have a strong

positive im

pact on willingn

ess to invest in

SME, while lack of information an

d lack of liquidity deter

investmen

t. Th

e po

sitiv

e influ

ences in de

scen

ding

order of n

et

impa

ct are:

o

The bu

siness is in an

indu

stry you

kno

w well.

o

It is a well-‐e

stab

lishe

d bu

sine

ss with

a new

plan for g

rowth.

o

It is a local business tha

t you

might use.

o

It is a start-‐up

com

pany with

an idea th

at so

unds goo

d.

o

You can bu

y it throug

h your fina

ncial adviso

r and

get advice.

• Ro

ughly ha

lf of re

spon

dents a

re not willing to invest in SME or via

crow

dfun

ding

. Ab

out o

ne-‐sixth expressed

strong

interest in SME

investing an

d crow

dfun

ding

. Th

e remaining

one

-‐third were

deem

ed poten

tial investors.

The Bron


arket Investor S


miss

ion

3

• Re

gressio

n an

alysis iden

tifies fou

r dem

ograph

ic variables th

at have

a major im

pact on willingn

ess to invest in SME, whe

ther th

roug

h crow

dfun

ding

or n

ot: age (you

nger), gend

er (m

ale), risk ap

petite

(high) and

owne

rship of com

plex investmen

ts. Ag

e ha

s the

greatest influ

ence.

• Be

sides th

e de

mog

raph

ic variables, regression an

alysis iden

tifies

two eq

ually im

portan

t prim

ary influ

ences o

n the crow

dfun

ding

de

cision

: It is easy to buy into th

e compa

ny on the Internet; and

It

has a

n idea th

at so

unds goo

d to you

. “It could take a fe

w years to

fin

d ou

t if the

business is p

rofitab

le” is a negative influ

ence as

powerful as e

ither positive influ

ence.

Investing Via Crow

dfun

ding

•

Almost h

alf o

f respo

nden

ts expressed

an interest in “Investing via

Crow

dfun

ding

”. H

alf a

lso expressed an

interest in SME investing.

While th

e tw

o grou

ps are not iden

tical, it w

as only the grou

p that

expressed an

interest in crowdfun

ding

that answered

the

questio

ns in th

is se

ction. W

ith th

e exception of issues re

lated to

the Internet, the

differen

ce in re

spon

se betwee

n SM

E investors

and crow

dfun

ding

investors is largely im

material.

• Re

spon

dents w

ere show

n a list o

f nine po

tential risks of investin

g in an un

regu

lated market a

nd asked

which one

s con

cerned

them

. Ro

ughly tw

o-‐third

s of tho

se willing to invest were concerne

d ab

out

Potential for frau

d an

d the Risk of losing their m

oney. R

ough

ly half

of re

spon

dents c

ited ad

ditio

nal reasons re

flecting a concern with

the lack of u

nbiased inform

ation an

d the lack of liquidity.

• More than

one

-‐third of tho

se interested

in investing via

crow

dfun

ding

wou

ld be willing to invest $10

00 or m

ore whe

n provided

with

goo

d inform

ation ab

out the

com

pany and

its p

lans.

Cond

ition

s tha

t increase willingn

ess to invest are: goo

d track

record; h

igh grow

th indu

stry; kno

w th

e ow

ners; an inde

pend

ent

annu

al fina

ncial rep

ort; an

d a high

ly detailed bu

sine

ss plan.

• Whe

n asked ab

out the

impo

rtan

ce of h

aving some seven diffe

rent

type

s of information, th

ree type

s of information were im

portan

t to

three-‐qu

arters: Finan

cial inform

ation ab

out the

com

pany; Yearly

inform

ation ab

out h

ow th

e compa

ny is doing

; and

How

the

compa

ny will use th

e mon

ey it gets from investors.

• Whe

n given a choice abo

ut how

they wou

ld prefer to invest,

respon

ses m

ade it clear tha

t gettin

g ad

vice from

a fina

ncial advisor

is im

portan

t. M

etho

ds involving an

advisor app

ealed to ro

ughly

three tim

es as m

any investors c

ompa

red to m

etho

ds th

at by-‐

passed

an ad

visor. If using an

advisor is not possible, providing

an

Offe

ring Mem

oran

dum slightly increases w

illingn

ess to invest usin

g the Internet.

• Am

ong the grou

p with

an interest in investing via crow

dfun

ding

, some 4 ou

t of 1

0 wou

ld invest und

er $10

00, 2 out of 1

0 wou

ld

invest $10

00-‐199

9, 2 out of 1

0 wou

ld invest $20

00-‐499

9, and

the

remaining

2 out of 1

0 (17%

) wou

ld invest $50

00 or m

ore.

• Focusin

g on

the grou

p willing to invest $50

00 or m

ore, we no

te a

few cha

racteristics tha

t make this group

distin

ct. C

ompa

red to

those willing to invest sm

aller a

mou

nts, th

ey are: H

ighe

r incom

e;

Have more mon

ey sa

ved/invested

; Male; Own more fin

ancial

prod

ucts; H

ave high

er risk to

lerance; and

Are m

ore likely to re

ad

and un

derstand

fina

ncial statemen

ts.

The Bron


arket Investor S


miss

ion

4

NOT INTERE

STED

IN SME INVE

STING

• Th

ose no

t interested in SME investing are olde

r and

less edu

cated.

They are also

more likely to be wom

en. Th

ey own fewer

investmen

t produ

cts o

verall, and

are less likely to

own each

investmen

t produ

ct we surveyed

. The

y also have less m

oney sa

ved

or invested

than

average and

they are lower income. Tho

se not

interested

in SME investing are less com

fortab

le using

the Internet,

and in fa

ct, 4 out of 1

0 did no

t use th

e Internet fo

r any buying

activ

ity in th

e pa

st m

onth. This is typical fo

r the

age, incom

e, and

ed

ucation distrib

ution that cha

racterizes th

ose no

t interested in

SME investing. Tho

se not interested

in SME investing also have

less to

lerance for risk.

• Th

e sin

gle do

minan

t reason for n

ot investing in new

or y

oung

bu

sine

sses was Risk of losing

their m

oney, w

hich re

flects the

relativ

ely low risk to

lerance we ob

served

in th

eir d

emog

raph

ics.

The Po

tential for frau

d, which is effe

ctively an

othe

r way of losing

mon

ey, w

as th

e second

most com

mon

reason

for u

nwillingn

ess to

invest in SME.

• After a

n explan

ation of th

e im

plications of a

n un

regu

lated mutua

l fund

(hed

ge fu

nd or p

ooled fund

), those no

t interested in SME

investing were asked ab

out w

illingn

ess to invest in an un

regu

lated

mutua

l fun

d. A

bout 9% sh

owed

some interest (4

-‐10 ratin

g), b

ut

only 1% sh

owed

a strong

interest as g

auged by a 7-‐10 ratin

g on

a 1-‐

10 sc

ale. Risk

of losing mon

ey was th

e most com

mon

reason

for

lack of interest, followed

closely by Do

n’t k

now eno

ugh ab

out

unregu

lated fund

s to invest com

fortab

ly, and

Poten

tial for frau

d.

The Bron


arket Investor S


miss

ion

5

1.0

INTR

ODUCT

ION

The Ontario Securities Com

miss

ion (OSC) is c

onsid

ering several ide

as

for n

ew cap

ital raising

prospectus e

xemptions th

at m

ay provide

bu

sine

ss enterprises, p

articularly start-‐up

s and

Small-‐M

edium

Enterprises (SME), w

ith greater access to capital. New

exemptions m

ay

also provide

individu

al investors w

ith m

ore investmen

t opp

ortunitie

s,

subject to ap

prop

riate investor protections and

limita

tions.

“Crowdfun

ding

” is on

e of th

e prop

osed

ideas for new

cap

ital raisin

g prospe

ctus exemptions.

Inform

ation ab

out the

investmen

t kno

wledg

e an

d be

haviou

r of

individu

al investors is d

ifficult to ob

tain. In orde

r to en

sure th

at any

new prospectus e

xemptions con

side

red by th

e Co

mmission

includ

e ap

prop

riate investor protections, the

Com

mission

wou

ld like to

gain

insigh

t into individu

al investors’ views a

bout investing in start-‐up

s and

SM

Es. This s

urvey is de

signe

d to get inform

ation that will help the

Commission

better u

nderstan

d:

• Th

e na

ture of investors’ d

esire

to invest in start-‐up

s and

SMEs,

includ

ing risk ap

petite an

d size of investm

ent;

• Investors’ perceptions of the

risks a

ssociated with

investing in th

e exem

pt m

arket;

• Th

e specific inform

ation ne

eds o

f investors investing in start-‐up

s an

d SM

Es; and

•

The role of p

rofessiona

l adviso

rs in investors’ investmen

t decision

-‐making process.

“Crowdfun

ding

” is on

e of se

veral ide

as fo

r new

cap

ital raising

prospe

ctus exemptions investigated

in th

is stud

y. The

broad

er notion

of “crow

dsou

rcing” is fa

miliar to

man

y pe

ople. “Crow

dsou

rcing is th

e practice of obtaining

nee

ded services, ide

as, o

r con

tent by soliciting

contrib

utions from

a large grou

p of peo

ple, and

especially from

an

online commun

ity, rathe

r tha

n from

trad

ition

al employee

s or

supp

liers” (W

ikiped

ia, 12 Ap

ril 201

3). In its m

any form

s, crowdsou

rcing

is often

a m

ix of d

onation, m

oney fo

r goo

ds to

be prod

uced

, or sim

ply

the de

sire to be a pa

rt of a

socially m

eaning

ful exercise

.

The focus o

f crowdfun

ding

is narrower, especially with

in th

e context o

f this survey. Here we are explicitly referring to “the fund

ing of a

compa

ny by selling

small amou

nts o

f securities to

man

y investors”,

typically usin

g the Internet (a

dapted

from

Wikiped

ia, 12 Ap

ril 201

3).

This type

of fun

ding

has been activ

ely de

veloping

in th

e UK in re

cent

years, and

over the

past y

ear it w

as given

heigh

tene

d prom

inen

ce by

the prop

osed

crowdfun

ding

exemption in Title III of the

U.S. JOBS

Act.

But w

hile th

e focus o

f crowdfun

ding

is se

lling

securities, we cann

ot

assume that th

e prim

ary motivation of investors is s

olely mon

etary

return on investmen

t.

This survey will help to assess w

hat m

atters to

poten

tial SME an

d crow

dfun

ding

investors. This include

s discussion of circ

umstan

ces tha

t bo

th encou

rage and

discourage investmen

t, as well as the

kinds of

peop

le likely to

invest und

er differen

t circ

umstan

ces.

1.1

METHOD

Form

ulating qu

estio

ns to

improve the Co

mmiss

ion’s u

nderstan

ding

of

this market req

uired a great d

eal of d

iscussio

n. Crowdfun

ding

is largely

unknow

n territo

ry. Th

ere was little prio

r research to provide

any

guidan

ce. As a re

sult, th

e process o

f que

stion de

velopm

ent involved a

serie

s of steps.

• Th

e Bron

desbury Group

(“Bron

desbury”) m

et with

Com

miss

ion

staff to discuss issue

s, th

e kind

s of q

uestions th

at were feasible,

and the prioritization of issues to

fit survey tim

e lim

its.

• An

initial outline of su

rvey issues was develop

ed and

discussed

un

til agree

men

t was re

ache

d.

• Bron

desbury de

velope

d the first draft of survey qu

estio

ns.

The Bron


arket Investor S


miss

ion

6

• Bron

desbury an

d the Co

mmiss

ion staff reviewed

and

revised ite

ms

a nu

mbe

r of tim

es to

make the be

st possible use of su

rvey time.

• Th

e fin

al se

t of q

uestions was pilot tested with

the pu

blic and

am

ende

d accordingly be

fore going

“live”.

The survey was executed on

the Internet and

took 15-‐20

minutes to

complete, dep

ending

on interest in crowdfun

ding

. A total of 1

501

adult C

anad

ians to

ok part in the survey. A

ll on

line interviews w

ere

cond

ucted be

tween March 13-‐Ap

ril 4, 201

3. O

nline interviews w

ere

cond

ucted in both En

glish an

d Fren

ch, according

to th

e respon

dent’s

choice.

The sample is a broa

d cross-‐section of adu

lt Ca

nadian

s, which is

natio

nally re

presen

tativ

e by age and

region

. Med

ian saving

s and

investmen

ts (including

RRS

P bu

t excluding

hom

e) in our sa

mple are

abou

t $45

,000

. Almost 6

out of 1

0 respon

dents h

ave less th

an $50

,000

in sa

ving

s and

investmen

ts. In every age grou

p, m

ore than

half o

f respon

dents h

ave less th

an $50

k in sa

ving

s and

investmen

t. This rises

to th

ree-‐qu

arters in th

e youn

gest age group

. Only tw

o grou

ps were completely exclud

ed from

participation in th

e survey: A

dults und

er age 20; and

peo

ple who

ever h

eld an

y form

of

securities-‐related registratio

n with

a provincial securities com

mission

. Some 32

0 po

tential respo

nden

ts were elim

inated

from

participation

due to th

eir securities re

gistratio

n.

Amon

g those who

were eligible fo

r participation, we also put a limit of

400 respon

dents o

n the nu

mbe

r of p

eople who

did not own fin

ancial

prod

ucts fo

r saving or investmen

t. In

clud

ing this group

was based

on

the be

lief tha

t crowdfun

ding

might attract peo

ple who

don

’t invest

now. Limiting

the sample of peo

ple with

out investm

ents was based

on

the no

tion that th

ose alread

y investing were more likely to provide

inform

ed opinion

on a more complete rang

e of que

stions. This

limita

tion meant th

at 452

willing pa

rticipan

ts were no

t allowed

to

complete the survey. Th

e fin

al su

rvey data were weigh

ted in a way

that gave those with

out savings or investm

ent the

ir true

amou

nt of

impa

ct as a

propo

rtion of th

e gene

ral pop

ulation. Thu

s the

400

respon

dents w

e surveyed

were treated as if we ha

d actually su

rveyed

all 852

peo

ple with

out savings or investm

ent. Th

is is stan

dard practice

for e

nsuring the gene

ral pop

ulation is correctly

represen

ted.

The Bron

desbury Group

ana

lyzed the survey data moving from

consistency checks and

simple freq

uencies to more complex cross-‐

tabu

latio

ns. Bo

th chi-‐squ

are an

d an

alysis of chi-‐squ

are resid

uals were

used

in th

e an

alysis. In add

ition

, multip

le line

ar re

gression

was used to

iden

tify those most likely to invest via crowdfun

ding

and

predictors o

f the am

ount invested

. Re

gressio

n provided

a guide

to th

e most

meaning

ful variables fo

r discussion in th

e repo

rt.

The survey itself is divide

d into th

ree broa

d sections.

• All R

espo

nden

ts. This include

d: D

emog

raph

ic inform

ation;

Investmen

t beh

aviour; P

rope

nsity

for b

usiness investin

g; and

De

cision

influ

ences.

• Po

tential C

rowdfun

ding

Investors. Tho

se sh

owing interest in

investing via crow

dfun

ding

were asked to: Ide

ntify risks;

Motivations; D

esire

for p

rofessiona

l advice; In

form

ation ne

eds; and

Factors a

ffecting the am

ount of m

oney th

ey wou

ld invest.

• Crow

dfun

ding

Non

-‐Investors. Tho

se sh

owing virtua

lly no interest

in investing in SMEs via crowdfun

ding

were asked: Poten

tial

interest in investing in unregulated

mutua

l fun

ds; R

easons fo

r not

investing in SMEs and

in unregulated

mutua

l fun

ds (if a

pplicab

le).

There are several cho

ices to

make in designing

surveys, and

becau

se

we were very con

cerned

abo

ut gettin

g en

ough

respon

se on a very new

topic like crow

dfun

ding

, we elected to use crowdfun

ding

as a

basis for

stream

ing pa

rticipan

ts into one

of the

two mutua

lly exclusiv

e stream

s.

We also used low cut-‐off scores to

iden

tify those po

tentially interested

The Bron


arket Investor S


miss

ion

7

in crowdfun

ding

, in an

effo

rt to

ensure sufficien

t respo

nse to th

e crow

dfun

ding

que

stions.

It is im

portan

t to un

derstand

the cut-‐off scores. In all three

que

stions

whe

re willingn

ess to invest was asked

, it w

as ra

ted on

a 1-‐10 scale with

1 meaning

‘Definite

ly NOT interested

’ and

10 meaning

‘Definite

ly

Interested

’. Only those giving

ratin

gs of 1

-‐3 were de

emed

‘Not

interested

’ in investing, whe

ther in SME gene

rally or c

rowdfun

ding

specifically. Th

us all those giving

ratin

gs of 4

-‐10 were de

emed

‘in

terested

in investing’. Ba

sed on

the typical psycholog

ical distances

on a 1-‐10 scale, how

ever, it is u

seful to think of th

e interested

investors

in tw

o grou

ps. Th

ere is a “core investor” that is likely to

invest and

gave 7-‐10 ratin

gs; as w

ell as a

set o

f “po

tential investors” who

are less

likely to invest and

gave 4-‐6 ratin

gs.

1.2

WHO W

AS IN

TERV

IEWED

A total of 1

501 pe

ople participated

in th

e survey drawn from

across

Cana

da giving us a sa

mpling error o

f +2.5%

. A total of 3

20 peo

ple were

exclud

ed from

participation be

cause they were either currently or

form

erly re

gistered

with

a provincial securities com

mission

. In

additio

n, 452

peo

ple were exclud

ed from

participation be

cause we set

a qu

ota on

the nu

mbe

r of respo

nden

ts we wou

ld accep

t who

owne

d no

major fina

ncial produ

cts (i.e., GIC, m

utua

l fun

d, stocks, b

onds,

complex investmen

ts).

While sa

mpling was don

e to ensure prop

er re

presen

tatio

n of gen

der

and age grou

ps with

in re

gion

, weigh

ting was don

e to ensure the

balance correspo

nds to the 20

11 Cen

sus. In ad

ditio

n, we weigh

ted

those with

out investm

ents to

ensure that th

e fin

al sa

mple refle

cted

all

adult C

anad

ians ra

ther th

an just th

ose with

investmen

ts.

Exhibit 1

.1 sh

ows the

dem

ograph

ics o

f our sa

mple be

fore weigh

ting

(raw

) and

after weigh

ting (w

eigh

ted). Th

e diffe

rences are quite sm

all,

which indicates tha

t the

orig

inal sa

mple was a goo

d represen

tatio

n of

respon

dents a

cross C

anad

a.

• By

age, o

ne-‐qua

rter of respo

nden

ts were age 20

-‐34, one

-‐qua

rter

35-‐49, one

-‐third 50-‐64

and

one

-‐sixth were age 65

or o

lder. Half o

f the sample is female.

The Bron


arket Investor S


miss

ion

8

• By

region

, we ha

ve 38%

Ontario, 24%

Que

bec, 7% East a

nd 31%

from

the West.

• 3 ou

t of 1

0 respon

dents h

ave a un

iversity de

gree

and

the

remaining

7 out of 1

0 are split betwee

n pe

ople with

a college

diplom

a/certificate and

those with

a se

cond

ary scho

ol diploma or

less.

FINAN

CIAL

PRO

FILE OF TH

E CA

NAD

IAN POPU

LATION

Exhibit 1

.2 provide

s an overview

of h

ouseho

ld income an

d saving

s in

the gene

ral pop

ulation. In this an

d all sub

sequ

ent e

xhibits, w

e will

show

weigh

ted results to

give a prop

er se

nse of th

e po

pulatio

n as a

who

le.

• As th

e exhibit sho

ws, over 4

out of 1

0 (44%

) have ho

useh

old

income un

der $

50k. O

ne-‐qua

rter have ho

useh

old income in th

e $5

0-‐74

k rang

e an

d 3 ou

t of 1

0 ha

ve hou

seho

ld incomes in th

e $7

5-‐14

9k ra

nge. O

nly 3%

have ho

useh

old income of $15

0,00

0 or m

ore.

Med

ian ho

useh

old income is abo

ut $61

k.

The Bron


arket Investor S


miss

ion

9

• Med

ian saving

s an

d investmen

ts (including

RRS

P bu

t excluding

ho

me) are abo

ut $45

,000

. Almost 6

out of 1

0 respon

dents h

ave

less th

an $50

,000

in sa

ving

s and

investmen

ts, 2 out of 1

0 ha

ve $50

-‐99

k an

d an

othe

r 2 out of 1

0 ha

ve $10

0k or m

ore in sa

ving

s and

investmen

ts. Fewer th

an 1 out of 1

0 ha

ve as m

uch as $25

0k in

investmen

ts (7

%).

• In every age group

, more than

half o

f respo

nden

ts have less th

an

$50k saved

and

invested

(see Exhibit 1.3). A

t best, on

ly one

-‐qu

arter h

ave $1

00k or m

ore saved/invested

. In the youn

g ad

ult a

ge

grou

p, th

ree-‐qu

arters have less th

an $50

K saved an

d invested

.

• Exhibit 1

.4 sh

ows o

wne

rship of five categories o

f finan

cial

prod

ucts. Th

ey are listed

in descend

ing orde

r of current

owne

rship. Loo

king

at m

utua

l fun

ds, w

e see that 33%

of

respon

dents o

wn them

now

and

ano

ther 9% owne

d them

sometim

e du

ring the pa

st five years but not now

. We can also se

e that 11%

of respo

nden

ts are not su

re if th

ey owne

d them

in th

e pa

st five years or n

ot.

The Bron


arket Investor S


miss

ion

10

• Other th

an m

utua

l fun

ds, G

ICs/Te

rm Dep

osits/CSB

s are the on

ly

prod

uct tha

t is ow

ned by

at lea

st one

-‐qua

rter of p

eople. Stocks

(not in a m

utua

l fun

d) are not fa

r beh

ind. Few

er th

an 1 out of 1

0 ow

n corporate or governm

ent b

onds or c

omplex investmen

ts.

• Wha

t this e

xhibit do

esn’t sho

w is th

at 43%

of tho

se surveyed (and

by

exten

sion

the gene

ral p

opulation) do no

t own an

y of th

ese fiv

e catego

ries of fina

ncial p

rodu

cts to th

eir k

nowledg

e. “To

their

know

ledg

e” is m

entio

ned as a qua

lifier for tw

o reason

s. First,

more than

1 out of 1

0 is not su

re abo

ut owne

rship for e

ach an

d every prod

uct. Secon

d, m

any pe

ople own these prod

ucts with

in a

compa

ny re

tirem

ent p

lan (defined

con

tribution plan

or g

roup

RR

SP). Past research ha

s sho

wn that th

ey often

do no

t rem

embe

r they own these prod

ucts since the de

cisio

n ab

out w

hat p

rodu

cts to

buy was m

ade long

ago

1 . •

There are some age diffe

rences in owne

rship of fina

ncial produ

cts,

but this is m

ost p

rono

unced for m

utua

l fun

ds. Owne

rship of

mutua

l fun

ds rises from 4 out of 1

0 for y

oung

adu

lts (2

0-‐34

) to 6

out o

f 10 am

ong those age 35

-‐64 an

d ba

ck dow

n to 5 out of 1

0 for

seniors. For other produ

cts, age differen

ces a

re m

inim

al.

• Pe

ople with

highe

r hou

seho

ld in

come are more likely to own

finan

cial produ

cts than

those with

lower in

come. The

y are also

more likely to accum

ulate sign

ificant sa

ving

s/investmen

t. For

househ

olds with

und

er $50

k income, tw

o-‐third

s don

’t ow

n an

y fin

ancial produ

cts a

nd 6 out of 1

0 ha

ve less th

an $25

k saved. By

contrast, h

ouseho

lds w

ith income of $10

0k or m

ore ha

ve m

edian

saving

s of $

130k and

own tw

o catego

ries o

f finan

cial produ

cts.

1 E. W

einstein, G

roup

RRS

Ps and

Small Pen

sion Plan

s: Employee Survey,

Bren

dan Woo

d Internationa

l, 19

97, 199

9, 200

1.

• Similarly

, the

num

ber o

f produ

cts ow

ned ris

es with

the am

ount

saved or in

vested

(see

Exh

ibit 1.5). Pe

ople’s kno

wledg

e of

finan

cial m

atters also grow

s alon

g with

the am

ount in

vested

2 .

Thus as a

broad

gen

eralization from

the OSC stud

y just cite

d an

d nu

merou

s proprietary stud

ies w

e ha

ve don

e over th

e years, we can

say that th

ose with

more mon

ey sa

ved an

d invested

are likely to

be

more know

ledg

eable ab

out finan

cial produ

cts.

Th

e relatio

nship be

tween age an

d the nu

mbe

r of d

ifferen

t types of

investmen

ts owne

d is not so

line

ar. It is lowest for You

ng Adu

lts and

pe

aks in the Middle Years. The

num

ber o

f differen

t types of

2 OSC, Perform

ance Rep

ortin

g & Cost D

isclosure, Sep

tembe

r 201

0.

http://w

ww.osc.gov.on.ca/docum

ents/en/Securities-‐

Catego

ry3/rpt_20

1106

22_3

1-‐10

3_pe

rfom

ance-‐rpt-‐cost-‐disclosure.pdf

The Bron


arket Investor S


miss

ion

11

investmen

ts declines after th

at, b

ut th

e total amou

nt of m

oney sa

ved

or invested

doe

s not. The

y simply focus o

n a sm

aller ran

ge of

investmen

ts.

ONLINE PR

OFILE

Crow

dfun

ding

is prim

arily an Internet-‐based

activity

, so know

ing ab

out

the Internet usage of respo

nden

ts is critical to

und

erstan

ding

the

results. Here we en

coun

ter a

problem

with

bias b

ecau

se th

e survey

was don

e on

the Internet. A pe

rson

who

doe

s not use th

e Internet or

who

has a low level of com

fort using

it can

not respo

nd to

this su

rvey.

A recent stud

y that m

easured Internet usage

3 , show

s tha

t for You

ng

Adults (a

ge 25-‐34

), this lim

itatio

n will have virtua

lly no im

pact becau

se

96% use th

e Internet. For M

iddle Years (35

-‐49), the

impa

ct will also

be

quite

small (6-‐7%

). W

ith 14%

of the

Mature (50-‐64

) not usin

g the

Internet, w

e will overestim

ate up

take m

ore for tha

t age group

. Th

e prob

lem will be most critical fo

r Sen

iors, w

here 29%

don

’t use the

Internet.

We ha

ve cho

sen no

t to correct the

data for this b

ias largely becau

se

crow

dfun

ding

is an Internet-‐based

activity

and

the po

tential users of

crow

dfun

ding

are In

ternet users.

As we will se

e later, he

avier u

sers of the

Internet are m

ore likely to

participate in crowdfun

ding

. With

that fa

ct in m

ind, it is im

portan

t to

unde

rstand

current usage. W

e profiled curren

t usage (see

Exhibit 1.6)

with

a ra

nge of online tran

saction activ

ities: b

anking

, sho

pping, travel

booking, gam

bling an

d bu

ying

investmen

ts. Th

e extent th

at so

meo

ne

engages in more Internet-‐based

tran

sactions is a m

easure of the

ir comfort and

trust o

f the

Internet. As th

e da

ta sh

ows, th

ose en

gaging

in m

ore type

s of Interne

t-‐ba

sed tran

sactions are m

ore likely to be

comfortab

le with

crowdfun

ding

.

3 Omnibu

s Survey, Research Ho

use, Ju

ne 201

2.

The Bron


arket Investor S


miss

ion

12

• Looking at five online tran

saction activ

ities, w

e fin

d that 9 out of 1

0 respon

dents h

ave used

at least one

of the

se activities in th

e pa

st

year. More than

7 out of 1

0 ha

ve bou

ght p

rodu

cts o

nline an

d pa

id

bills using

online ba

nking over th

e pa

st year. M

ore than

4 out of 1

0 ha

ve bou

ght a

nd paid for travel, while 3 out of 1

0 ha

ve bou

ght

lottery tickets or p

layed on

line games fo

r mon

ey. Fewer th

an 2 out

of 10 bo

ught m

utua

l fun

ds or o

ther investmen

ts online.

•

While not sh

own, we no

te th

at th

e nu

mbe

r of o

nline activ

ities in

the pa

st year rise

s with

both am

ount sa

ved/invested

(up to $25

0k)

and with

hou

seho

ld income. Tied to th

e same un

derly

ing

econ

omics, we fin

d that th

e he

aviest In

ternet users are also the

most likely to own each fina

ncial produ

ct category.

• For tho

se who

wou

ld like a m

ore de

tailed view

of o

nline activ

ity,

Exhibit 1

.7 profiles th

e freq

uency of each on

line activ

ity. As we can

clearly

see, online ba

nking do

minates In

ternet activity

in th

ese five

catego

ries.

The Bron


arket Investor S


miss

ion

13

• Internet activity

also varie

s with

age (see Exhibit 1.8). Th

ose age

20-‐49 used

3.0 of the

5 listed

activities in th

e pa

st year. This d

rops

to 2.2 fo

r Interne

t users age 50-‐64

and

1.9 fo

r Interne

t users age 65

and olde

r.

1.3

ORG

ANIZAT

ION OF TH

IS REP

ORT

The repo

rt con

tains five chap

ters plus a

n Executive Summary an

d an

Ap

pend

ix with

the stud

y qu

estio

nnaires.

In add

ition

to th

is In

trod

uctio

n, th

e remaining

four cha

pters a

re as

follows.

• Prop

ensity fo

r Business Investing (cha

pter 2) loo

ks at the

factors

that affe

ct willingn

ess to invest in you

ng or n

ew sm

all businesses.

• Investing via Crow

dfun

ding

(cha

pter 3) loo

ks at the

practices th

at

will encou

rage or d

iscourage eq

uity participation via crow

dfun

ding

. •

Not In

terested

in SME Investing (cha

pter 4) loo

ks at the

barrie

rs to

SM

E investmen

t, a well as p

oten

tial investm

ent in un

regu

lated

mutua

l fun

ds.

• Su

mmary & Con

clusions (cha

pter 5) ties tog

ethe

r the

find

ings of

the survey and

con

cisely answers s

ome of th

e qu

estio

ns ra

ised by

the OSC.

As you

read

the survey re

sults, it is im

portan

t not to

over-‐interpret

small d

ifferen

ces. W

hile th

e survey has overall statistical accuracy of

+2.5%, tha

t reflects the

likelihoo

d of gettin

g the same nu

mbe

rs by

asking

the same qu

estio

ns. It do

es not re

flect th

e likelihoo

d that

peop

le will do wha

t the

y say. M

uch of th

e survey asks p

eople to

speculate on

wha

t the

y wou

ld do in re

spon

se to

a com

plex se

t of

alternatives. Th

e simple an

swer is we can’t b

e sure wha

t the

y will do

until th

ey are in th

e situation. N

onethe

less, w

e can be

reason

ably

certain that whe

n a much larger group

expresses interest in one

alternative over ano

ther, the

preferred

alte

rnative will re

main so in

practice. The

immed

iate practical im

pact of this w

arning

is th

at you

shou

ld be reluctan

t to interpret d

ifferen

ces in respon

se unless the

y are

quite

substantial. W

e ha

ve aim

ed to

do this whe

n we select

inform

ation to present and

discuss in th

is re

port.

The Bron


arket Investor S


miss

ion

14

2.0

PROPE

NSITY

FOR BU

SINESS IN

VESTING

HIGHLIGHTS

• Interest in SME investing an


ding

are highly

related. O

verall, th

e tw

o grou

ps overla

p by abo

ut 80%

(42.0%

+

37.3%). Som

e three-‐qu


re interested

in

crow

dfun

ding

, and

con

versely, 86%

of tho

se interested

in

crow

dfun

ding

are interested

in SME investing. The

simple grap

hic

below sh

ows h

ow th

e total pop

ulation divide

s up in te

rms o

f interest in SME investing an

d crow

dfun

ding

. •

As we will se

e later, whe

n pe

ople are interested

in one

type

of

investing (SME or crowdfun

ding

) and

not th

e othe

r, the main

diffe

rence is th

eir fam

iliarity

and

com

fort with

the Internet. Th

at

explains m

ost d

ifferen

ces, and

other th

an dem

ograph

ics related

to

Internet usage, o

ther dem

ograph

ic differen

ces a

re largely

immaterial. As a

result, it sh

ould be un

derstood

that a con

clusion

applied to one

of the

two grou

ps of investors wou

ld alm

ost

certainly ap

ply to th

e othe

r group

.

Relatio

nship Be

tween Interest in SME Investing &

Crow

dfun

ding

(% Total)

Crow

dfun

ding

New

/You

ng

Investmen

t Yes

No

Yes

42.0

13.8

55.8

No

6.9

37.3

44.2

48.9

51.1

• Risk to

lerance, age and

gen

der a

re th

e three pe

rson

al

characteristics tha

t are m

ost ind

icative of prope

nsity

for b

usiness

investing, whe


out investin

g in SME or

crow

dfun

ding

.

• Five th

ings have a strong

positive im

pact on willingn

ess to invest in


d lack of liquidity deter

investmen

t. Th

e po

sitiv

e influ

ences in de

scen

ding

order of n

et

impa

ct are:

o

The bu

siness is in an

indu

stry you

kno

w well.

o

It is a well-‐e

stab

lishe

d bu

sine

ss with

a new

plan for g

rowth.

o

It is a local business tha

t you

might use.

o

It is a start-‐up

com

pany with

an idea th

at so

unds goo

d.

o

You can bu

y it throug

h your fina

ncial adviso

r and

get advice.

• Ro

ughly ha

lf of re

spon

dents a

re not willing to invest in SME or via

crow

dfun

ding

. Ab

out o

ne-‐sixth expressed

strong

interest in SME

investing an

d crow

dfun

ding

. Th

e remaining

one

-‐third were

deem

ed poten

tial investors.

• Re

gression

ana

lysis ide

ntifies fo

ur dem

ograph

ic variables th

at have

a major im

pact on willingn

ess to invest in SME, whe

ther th

roug

h crow

dfun

ding

or n

ot: age (you

nger), gend

er (m

ale), risk ap

petite

(high) and

owne

rship of com

plex investmen

ts. Ag

e ha

s the

greatest influ

ence.

• Be

sides th

e de

mog

raph


alysis iden

tifies

two eq

ually im

portan

t prim

ary influ

ences o

n the crow

dfun

ding

de

cision

: It is easy to buy into th

e compa

ny on the Internet; and

It

has a

n idea th

at so

unds goo

d to you

. “It could take a fe

w years to

fin

d ou

t if the

business is p

rofitab


ence as

powerful as e

ither positive influ

ence.

The Bron


arket Investor S


miss

ion

15

2.1

RISK

PRO

FILES

Before we discuss p

rope

nsity

for b

usiness investin

g, we shou

ld discuss

risk profiles. In

the survey, w

e asked pe

ople to

cho

ose on

e of th

ree

statem

ents th

at best d

escribes th

eir w

ay of thinking ab

out investin

g.

• 28

% sa

y “I am willing to earn a bit less if I can

be certain I w

on’t

lose any m

oney (low

risk);

• 39

% sa

y “I am willing to accep

t small ups-‐and

-‐dow

ns in m

y investmen

ts if I can earn a bit more (m

edium risk);

• 6%

say “I am willing to accep

t big sw

ings in th

e value of m

y investmen

ts includ

ing losing

my mon

ey, if it g

ives m

e the po

tential

to earn more (high risk); and

•

26% sa

y “I am not su

re”.

As we will se

e later, ris

k tolerance, age and

gen

der a

re th

e three

person

al cha

racteristic

s that are m

ost ind

icative of prope

nsity

for

busine

ss in

vesting, whe


out S

ME or

crow

dfun

ding

. With

this in m

ind, it is im

portan

t to get a

n un

derstand

ing of how

risk cha

nges by age an

d gend

er.

• Th

e high

-‐risk grou

p is abo

ut 8-‐10%

before age 50

and

abo

ut 3-‐4%

thereafter. Th

e prop

ortio

n of low-‐risk pe

aks a

t age 60-‐69

. Uncertainty abo

ut risk grows a

fter age 50, and

by age 70

, alm

ost

half of re

spon

dents a

re ‘n

ot su

re’ abo

ut th

eir risk profile.

• Th

ere are four times as m

any men

(10.3%

) tha

t ide

ntify th

emselves

as high risk compa

red to wom

en (2

.5%). W

omen

are also more

likely to ra

te th

emselves as ‘no

t sure’.

The Bron


arket Investor S


miss

ion

16

2.2

DECISION IN

FLUEN

CES

As an indicator o

f poten

tial for investing in you

ng com

panies, w

e asked

peop

le abo

ut th

eir p

rior investm

ent in sm

all business. Som

e 16

% have

invested

in th

eir o

wn sm

all business a

nd 5% have invested

in so

meo

ne

else’s. Th

ose who

have invested

in so

meo

ne else’s s

mall business a

re

more likely to be interested

in crowdfun

ding

(61%

versus 4

6%).

As a prelim

inary, we asked tw

o sepa

rate que

stions abo

ut willingn

ess to

invest in unlisted Ca

nadian

com

panies. One

que

stion asked ab

out a

“brand

new

start-‐up

com

pany” an

d the othe

r asked

abo

ut a “youn

g compa

ny”. R

espo

nses on a 1-‐10

scale were compa

rable with

45-‐47

%

not w

illing to invest (1

-‐3), 37

-‐38%

poten

tially interested

(4-‐6) a

nd 14-‐

18% sh

owing willingn

ess to invest (7

-‐10). Th

ere is no

point

distingu

ishing

the an

swers to the tw

o qu

estio

ns, b

ecau

se 90%

of

respon

dents w

ere either “no

t willing to invest” for b

oth qu

estio

ns or

potentially/w

illing to invest fo

r both qu

estio

ns.

We then

asked

abo

ut so

me 14

influ

ences tha

t might m

ake a pe

rson

more or less likely to

invest in SME. W

e ha

ve classified

the respon

ses

on a 1-‐5 sc

ale into less likely (1

-‐2), no

impa

ct (3

) and

more likely (4-‐5)

as you

can

see in Exhibit 2.3. The

14 influ

ences a

re listed

in descend

ing

orde

r starting with

the influ

ence th

at is m

ost likely to encou

rage

investing.

Exhibit 2

.4 sh

ows the

same inform

ation tran

sformed

into a net im

pact

score. N

et im

pact is “% m

ore likely minus % less likely”. Thu

s if w

e look at the

most p

owerful influen

ce, “Th

e bu

sine

ss is an indu

stry you

kn

ow well”, the

net im

pact score is 73%

(77%

-‐4%) m

eaning

that

overall 73%

of p

eople are more likely to invest in an indu

stry th

ey

know

well. It is worth noting that th

is influ

ence has bee

n foun

d in

othe

r studies as w

ell4 .

4 M.J. Rob

inson & T. C

ottrell, “Investm

ent P

attern of Informed

Investors in the Albe

rta Private

Equity M

arket”, J. Small Business M

anagem

ent, 20

07, 45(1), 47-‐67.

The Bron


arket Investor S


miss

ion

17

Five th

ings have a strong

positive im

pact on willingn

ess to invest in


d lack of liquidity deter investmen

t. Th

e po

sitive influ

ences in de

scen

ding

order of n

et im

pact are:

• Th

e bu

siness is in an

indu

stry you

kno

w well.

• It is a well-‐e

stab

lishe

d bu

sine

ss with

a new

plan for g

rowth.

• It is a local business tha

t you

might use.

• It is a start-‐up

com

pany with

an idea th

at so

unds goo

d to you

. •

You can bu

y it throug

h your fina

ncial adviso

r and

get th

eir a

dvice.

As with

kno

wing the indu

stry, the

Alberta re

search cite

d earlier also

show

s a bias in favour of local business. Other stud

ies p

oint to

the bias

towards local investin

g5 th

at we see he

re. While we are no

t yet ta

lking

abou

t crowdfun

ding

as a

metho

d of SME investing, it is worth noting

that th

e crow

dfun

ding

research m

entio

ns tw

o ad

ditio

nal m

otivations

for investin

g, nam

ely “the

excite

men

t of a

start-‐up

” an

d the pe

rson

al

recogn

ition

that investors s

ometim

es get

6 . Five th

ings m

ake investing far less likely. Starting with

the most

negativ

e influ

ence th

e things th

at deter investing are as fo

llows.

• Yo

u know

nothing

abo

ut th

e ow

ners of the

business.

• Th

ere is no

way to

predict how

much mon

ey you

will m

ake an

d you

might lose all your m

oney.

• Th

e on

ly th

ing you know

abo

ut th

e compa

ny is wha

t you

can

read

on

the Internet.

• Th

ere won

’t be

a lot o

f information ab

out the

com

pany since it is

youn

g.

• Once you pu

t you

r mon

ey in, you

can

’t get it o

ut fo

r several years.

In sh

ort, lack of information an

d lack of liquidity hinde

r inv

estm

ent

while kno

wledg

e an

d ad

vice encou

rage it.

5 Dr. Allan Riding (E

quinox M

anagem

ent C

onsulta

nts), “Practices and

Patterns o

f Informal

Investors, Indu

stry Can

ada, M

ay 200

1.

6 A. Schwienb

ache

& B. Larralde, “Crow

dfun

ding of Small Entrepren

euria

l Ven

tures”, H

andb

ook of

Entrep

rene

urial Finan

ce, O

xford University

Press, 201

0.

The Bron


arket Investor S


miss

ion

18

2.3

WILLINGNESS TO

INVE

ST VIA CRO

WDFU

NDING

Review

ing the po

tential decision

influ

ences w

as an im

portan

t prelude

to our critical que

stion ab

out w

illingn

ess to invest via crowdfun

ding

. Be

fore looking at pub

lic willingn

ess, it is im

portan

t to un

derstand

that

these qu

estio

ns will have provoked

more thinking

abo

ut investmen

ts

as usual. It is also im

portan

t to un

derstand

the exact con

text th

at

respon

dents w

ere given be

fore being

asked

to re

spon

d. Our aim

was to

make this ‘con

text’ relatively ne

utral w

ith a balan

ce of p

ositives an

d ne

gativ

es.

“One of the new

investing trends emerging

on the Internet is called

“crowdfun

ding

”. There are so

me exam

ples in th

e U.K. and

it is gettin

g started in th

e US. The basic idea of crowdfun

ding

is th

at a bun

ch of

small investors invest re

lativ

ely sm

all amou

nts o

f mon

ey in new

or

youn

g bu

sine

sses th

at app

eal to them

. Th

is isn

’t a regu

lated market

like a stock market, bu

t it is m

ore like e-‐Ba

y where you

read

a “prod

uct”

descrip

tion on

-‐line and

decide whether you

are going

to buy. Th

e big

diffe

rence here is th

at you

are buying an

investment rather tha

n something

you

can

hold in you

r han

ds. Th

ere is no

gua

rantee th

at you

will m

ake mon

ey on the mon

ey you

invest, and

a very real risk th

at you

will lose all your m

oney. It is up

to you

to decide whether th

e idea is

one you wan

t to supp

ort a

nd one th

at you

think might su

cceed.

Assuming that you

are com

fortab

le with

the am

ount of m

oney involved

and the bu

siness idea ap

peals to you, how

likely wou

ld you

be to invest

in a new

or y

oung

business throu

gh a crowdfun

ding

site on the

Internet? Please rate you

r likelihoo

d of investing on

a 1-‐10 scale where

1 means ‘D

efinite

ly wou

ld NOT invest’ and

10 means ‘D

efinite

ly W

OULD

invest’.”

• More than

half o

f all respon

dents (53%

) are not willing to in

vest

via crow

dfun

ding

(1-‐3 ra

tings) w

ith 30%

of a

ll respon

dents g

iving

the lowest p

ossib

le ra

ting on

the scale. A

bout 14%

expressed

strong

interest and

most o

f tho

se were ratin

gs of 7

on the 7-‐10

pa

rt of the

scale. This 1

4% is th

e real core of crowdfun

ding

investors. The

remaining

33%

show

ed weaker interest a

nd were

deem

ed “po

tential investors” with

ratin

gs of 4

-‐6 on the 1-‐10

scale.

• Re

gression

ana

lysis iden

tifies four dem

ograph

ic variables th

at

have a m

ajor im

pact on willingn

ess to in

vest (4

-‐10 ratin

g) via

crow

dfun

ding

. The

same fin

ding

s app

ly to

SME investing more

gene

rally. A

ge has th

e greatest influ

ence on de

cisio

n-‐making.

Willingn

ess to invest varies a

s follows.

• age: 67%

for a

ges 2

0-‐34

, 53%

for 3

5-‐49

, 38%

for 5

0-‐64

, 23%

for

ages 65 an

d olde

r;

• gend

er: 5

6% of m

en and

39%

of w

omen

; •

risk ap

petite: 43%

at low

risk, 55%

at m

edium, 72%

at h

igh risk;

• ow

n complex investmen

ts: 7

0% versus 4

6% fo

r non

-‐owne

rs.

The Bron


arket Investor S


miss

ion

19

Relativ

e willingn


ding

is sh

own for several

selected

group

s in Exhibit 2

.6. Yo

u will note that th

e likelihoo

d of

crow

dfun

ding

goe

s dow

n as th

e am

ount sa

ved/ invested

increases.

This is be

cause the am

ount of m

oney sa

ved/invested

increases w

ith

age, while willingn

ess to crow

dfun

d de

clines with

age. Th

e driver here

is age ra

ther th

an m

oney. We includ

ed th

is to

make a po

int tho

ugh,

namely crow

dfun

ding

investors will ty

pically have less m

oney

saved/invested

than

non

-‐investors.

To fo

restall any unw

arranted

assum

ptions, w

e think it is also useful to

iden

tify some de

mog

raph

ic variables th

at have no

relatio

nship to

willingn

ess to crow

dfun

d. The

se includ

e: Lan

guage, Hou

seho

ld

income, owne

rship of m

utua

l fun

ds, and

owne

rship of equ

ities.

Besid

es th

e de

mog

raph


alysis iden

tifies two

equa

lly im

portan

t positive influ

ences o

n the crow

dfun

ding

decision:

“It is e

asy to buy into th

e compa

ny on the Internet”; and

“It ha

s an idea

that so

unds goo

d to you

”. “It could take a fe

w years to

find

out if th

e bu

sine

ss is profitab


ence as p

owerful as e

ither

positiv

e influ

ence.

Sign

ificant se

cond

ary influ

ences a

re fa

miliar from

our earlier a

nalysis

. Th

e first influ

ence is negative. The

other tw

o are po

sitive.

• Th

ere won

’t be

a lot o

f information ab

out the

com

pany since it is

youn

g.

• Th

e bu

siness is in an

indu

stry you

kno

w well.

• It is a well-‐e

stab

lishe

d bu

sine

ss with

a new

plan for g

rowth.

The archetype of a crowdfun

ding

investor will be a well-‐e

ducated male

unde

r the

age of 4

0 with

a high risk tolerance an

d a lot o

f com

fort with

the Internet. While th

e pe

rson

won

’t ha

ve m

uch mon

ey invested

yet,

they will still have bo

ught m

ore complex produ

cts. O

f cou

rse, only a

small portio

n of actua

l buyers w

ould look like th

is in re

ality

, but m

ost

will have some of th

ese elem

ents in th

eir b

ackgroun

d.

As a m

atter w

orth noting in Exhibit 2.6, so

me 12

% of p

eople who

iden

tify them

selves as “

low risk” are strong

ly interested

in

crow

dfun

ding

(7-‐10 ratin

gs). It is unclear why th

is grou

p is strong

ly

interested

in crowdfun

ding

given

the iden

tified risks, b

ut an attractio

n to activities th

at are In

ternet-‐based

is likely at the

heart of it.

The Bron


arket Investor S


miss

ion

20

2.4

SME INVE

STING AND CRO

WDFU

NDING

Interest in SME investing an


ding

are highly

related. O

verall, th

e tw

o grou

ps overla

p by abo

ut 80%

(42.0%

+

37.3%).

Some three-‐qu


re interested

in crowdfun

ding

(i.e., 42.0/55

.8=7

5%), an

d conversely, 86%

of tho

se interested

in

crow

dfun

ding

are interested

in SME investing (i.e., 42.0/48

.9=8

6%).

The sim

ple grap

hic be

low sh

ows h

ow th

e total pop

ulation divide

s up in

term

s of interest in SM

E investing an

d crow

dfun

ding.

2.7 Re

latio

nship Be

tween Interest in SME

Investing & Crowdfun

ding

(% Total)

Crow

dfun

ding

New

/You

ng

Investmen

t Yes

No

Yes

42.0

13.8

55.8

No

6.9

37.3

44.2

48.9

51.1

Wha

t the

graph

ic sh

ows is tha

t 42%

of the

gen

eral pop

ulation show

some interest (4

-‐10 ratin

g) in both SM

E investing an

d crow

dfun

ding

. Co

nversely, 37%

show

no interest in eith

er (1

-‐3 ra

ting) ty

pe of

investing. The

roug

hly 20

% re

maining

show

an interest only in

investing in one

of the

two ways.

Whe

n pe

ople are interested

in one

type

of investin

g (SME or

crow

dfun

ding

) and

not th

e othe

r, the main diffe

rence is th

eir

familiarity

and

com

fort with

the Internet. Th

at explains m

ost

diffe

rences, and

other th

an dem

ograph

ics related

to In

ternet usage,

othe

r dem

ograph

ic differen

ces a

re largely im

material. As a

result, it

shou

ld be un

derstood

that with

the exception of th

ings dire

ctly re

lated

to In

ternet usage, a con

clusion ap

plied to one

of the

two grou

ps of

investors (SME or Crowdfun

ding

) wou

ld alm

ost certainly app

ly to

the

othe

r group

. After e

xamining a rang

e of alte

rnative explan

ations usin

g statistical

analysis (i.e., An

alysis of C

hi-‐Squ

are Re

sidu

als), w

e conclude

d that th

e major differen

ce between the tw

o grou

ps is th

eir c

omfort with

the

Internet and

the trust the

y pu

t in bu

ying

on the Internet. For interested

SM

E investors (4-‐10

ratin

g), ease of buying on

line ha

d a ne

t impa

ct of

+18%

. Th

is is very sm

all com

pared to th

e ne

t impa

ct of +

45% fo

r interested

crowdfun

ding

investors. The

eno

rmou

s differen

ce is due

to

the fact th

at th

ose no

t com

fortab

le with

the Internet are not part o

f those interested

in crowdfun

ding. As fu

rthe

r evide

nce, we no

te th

at

those who

are not interested

in investing via crow

dfun

ding

use half a

s man

y internet activities re

gularly

and

are only on

e-‐third

as likely to

have invested

online (11%

versus 3

0%).

Both lo

gically and

statistic

ally, w

e conclude

that com

fort with

doing

bu

sine

ss on the Internet is th

e main differen

tiator b

etwee

n all SME

investors an

d those interested

in crowdfun

ding

. In fa

ct, as Exhibit 2

.7

show

s, th

ere is a small group

of p

eople (6.9%) w

ho will only invest in

sm

all b

usiness if they can

do so via crowdfun

ding

.

SM

E Investors

Crow

dfun

ding

Investors

Investors

80%

The Bron


arket Investor S


miss

ion

21

3.0

INVE

STING VIA CRO

WDFU

NDING

HIGHLIGHTS

• Almost h

alf o

f respo

nden

ts expressed

an interest in “Investing via

Crow

dfun

ding

”. H

alf a

lso expressed an

interest in SME investing.

While th

e tw

o grou

ps are not iden

tical, it w

as only the grou

p that

expressed an

interest in crowdfun

ding

that answered

the

questio

ns in th

is se

ction. W

ith th

e exception of issues re

lated to

the Internet, the

differen

ce in re

spon

se betwee

n SM

E investors

and crow

dfun

ding

investors is largely im

material.

• Re

spon

dents w

ere show

n a list o

f nine po

tential risks of investin

g in an un

regu

lated market a

nd asked

which one

s con

cerned

them

. Ro

ughly tw

o-‐third

s of tho


d ab

out

Potential for frau

d an


oney. R

ough

ly half

of re

spon

dents c

ited ad

ditio

nal reasons re

flecting a concern with

the lack of u

nbiased inform

ation an


• More than

one

-‐third of tho

se interested

in investing via

crow

dfun

ding

wou


00 or m

ore whe

n provided

with

goo

d inform

ation ab

out the

com

pany and

its p

lans.

Cond

ition

s tha

t increase willingn

ess to invest are: goo

d track

record; h

igh grow

th indu

stry; kno

w th

e ow

ners; an inde

pend

ent

annu

al fina

ncial rep

ort; an

d a high

ly detailed bu

sine

ss plan.

• Whe

n asked ab

out the

impo

rtan

ce of h


rent

type

s of information, th

ree type


portan

t to

three-‐qu

arters: Finan

cial inform

ation ab

out the

com

pany; Yearly

inform

ation ab

out h

ow th

e compa

ny is doing

; and

How

the

compa

ny will use th

e mon


• Whe


ut how

they wou

ld prefer to invest,

respon

ses m

ade it clear tha

t gettin

g ad

vice from

a fina

ncial advisor

is im

portan

t. M

etho

ds involving an

advisor app

ealed to ro

ughly

three tim

es as m

any investors c

ompa

red to m

etho

ds th

at by-‐

passed

an ad

visor. If using an

advisor is not possible, providing

an

Offe

ring Mem

oran

dum slightly increases w

illingn

ess to invest usin

g the Internet.

• Am

ong the grou

p with

an interest in investing via crow

dfun

ding

, some 4 ou

t of 1

0 wou

ld invest und

er $10

00, 2 out of 1

0 wou

ld

invest $10

00-‐199

9, 2 out of 1

0 wou

ld invest $20

00-‐499

9, and

the

remaining

2 out of 1

0 (17%

) wou

ld invest $50

00 or m

ore.

• Focusin

g on

the grou


00 or m

ore, we no

te a

few cha

racteristics tha

t make this group

distin

ct. C

ompa

red to


aller a

mou

nts, th

ey are: H

ighe

r incom

e;

Have more mon

ey sa

ved/invested


ancial

prod

ucts; H

ave high

er risk to

lerance; and

Are m

ore likely to re

ad

and un

derstand

fina

ncial statemen

ts.

The Bron


arket Investor S


miss

ion

22

3.1

ASSESSMEN

T OF RISK

S All o

f the

find

ings in

this cha

pter com

e from

the 70

7 respon

dents who

we classifie

d as poten

tial (4-‐6) or w

illing (7-‐10) in

vestors via

crow

dfun

ding

.

Respon

dents interested in crowdfun

ding

were show

n a list o

f nine

potential risks of investin

g in an un

regu

lated market (see Exhibit 3

.1)

and asked which one

s con

cerned

them

. On average, peo

ple chose 4-‐5

risks. Th

ey were then

asked

to iden

tify the tw

o risks th

at are th

eir

biggest con

cerns.

• Ro

ughly tw

o-‐third

s of tho


d ab

out

Potential for frau

d an


oney.

• As you

can

see in Exhibit 3.1, fo

ur add

ition

al risks w

ere cited by

roug

hly ha

lf of re

spon

dents reflecting a concern with

the lack of

unbiased

inform

ation an


• Even

the three remaining

risks w

ere concerns fo

r 3 out of 1

0 •

Only 7%

had

no real con

cerns.

Whe

n asked to se

lect th

e top tw

o risks th

at con

cerned

them

from

am

ong the 4-‐5 typically se

lected

, the

top tw

o choices reflected

the

same concerns as the

y show

ed whe

n all risk

s cou

ld be iden

tified.

• Th

e tw

o do

minan

t risks were the po

tential for frau

d (51%

) and

the ris

k of lo

sing

my mon

ey (4

2%).

• Th

e ne

xt m

ost ide

ntified

risks w

ere cited as a “top tw

o” risk fa

ctor

by fe

wer th

an 20%

: My mon

ey is locked

-‐in and

the Pe

ople

prom

oting the compa

ny m

ay not give me the full picture.

Youn

ger investors have fewer con

cerns tha

n olde

r investors, and

concom

itantly, tho

se with

less sa

ving

s/investmen

t and

less income

show

fewer con

cerns a

bout th

e risks of a

n un

regu

lated market. M

ore

activ

e Internet usage also redu

ces risk concerns.

The Bron


arket Investor S


miss

ion

23

If we look at the

num

ber o

f finan

cial produ

cts o

wne

d no

w as a

n indicator o

f investm

ent e

xperience, we see a few patterns.

• More expe

rienced

investors s

how m

ore concern ab

out the

inab

ility

to se

ll the investmen

t. •

Those with

out investm

ents now

show

greater con

cern abo

ut

mon

ey being

locked

in and

the un

pred

ictability of re

turns.

If we look at the

age differen

ces in concerns, w

e fin

d several risk

concerns increase m

arkedly with

age. For the

most p

art, concerns

increase at a

ge 50 an

d be

come more accentua

ted.

• Th

e biggest increase is for “No on

going inform

ation ab

out h

ow th

e investmen

t is d

oing

”, which is 38%

for y

oung

adu

lts and

61%

for

seniors.

• “The

peo

ple prom

oting the compa

ny m

ay not give me the full

picture” increases from 46%

for y

oung

adu

lts to

64%

for sen

iors.

• “Poten

tial for frau

d” increases from 63%

to 78%

; and

•

“I can

’t sell this investmen

t to someo

ne else

” increases from 28%

am

ong youn

g ad

ults to

43%

for sen

iors.

3.2

DECISION IN

FLUEN

CES

WHAT

AFFEC

TS AMOUNT INVE

STED

Peop

le were then

asked

wha

t was th

e most the

y wou

ld invest und

er

some nine

differen

t con

ditio

ns. Th

e am

ounts the

y could state were

open

-‐end

ed, elim

inating an

y po

tential con

cern abo

ut lead

ing pe

ople to

a specific an

swer. Exhibit 3

.2 (n

ext p

age) sh

ows the

con

ditio

ns startin

g with

the cond

ition

that wou

ld ra

ise the most m

oney on average an

d then

in descend

ing orde

r of the

mon

ey th

ey wou

ld ra

ise on average.

More than

one

-‐third of tho

se interested


dfun

ding

wou


00 or m

ore un

der the

first five

cond

ition

s. As w

ell, these cond

ition

s sho

w average investmen

ts in th

e $9

50-‐$13

00 ra

nge. G

ood inform

ation is th

e key to greater in

vestmen

t as you

can

see

. Con

ditio

ns th

at increase willingn

ess to invest m

ore

mon

ey are:

• Th

e compa

ny alre

ady ha

s a goo

d track record;

• Th

e compa

ny is in a high grow

th indu

stry;

• Yo

u know

the bu

siness o

wne

rs;

• Each year y

ou get a fina

ncial rep

ort v

erified

by an

inde

pend

ent

accoun

ting firm; and

•

The bu

siness p

lan is high

ly detailed.

The cond

ition

s least likely to

encou

rage investing yield average

investmen

ts of $

400 or less.

• Th

e compa

ny won

’t start u

p un

til fu

nded

; and

•

Your m

oney is invested

perman

ently

– you

can

’t get it o

ut.

Regression

ana

lysis

show

s three

sign

ificant influ

ences h

ere. Of the

three, “Th

e compa

ny alre

ady ha

s a goo

d track record” ha

s the

most

influ

ence Also

sign

ificant are “Th

e bu

siness p

lan is high

ly detailed” and

“The

com

pany won

’t start u

p un

til th

ey get eno

ugh investmen

t mon

ey”.

The Bron


arket Investor S


miss

ion

24

THE RO

LE OF AD

VICE

& IN

FORM

ATION

Peop

le were asked whe

ther th

ey wou

ld se

ek professiona

l advice

before deciding to invest (see Exhibit 3.3).

• One

-‐qua

rter (2

4%) sim

ply weren

’t sure.

• Th

ree-‐qu

arters of tho

se with

an op

inion said th

ey wou

ld see

k profession

al adv

ice (58%

of a

ll respon

dents).

• Th

e ad

visor m

ost likely to be consulted was an ad

visor licen

sed to

sell stocks (3

9%), followed

by a fin

ancial plann

er (3

0%), accoun

tant

(18%

) and

lawyer (11

%).

Whe

n asked ab

out the

impo

rtan

ce of h


rent

type

s of information using a 1-‐5 scale, all type

s of in

form

ation were

rated im

portan

t (4-‐5 ratin

g) by at least 6

out of 1

0 (see Exhibit 3.4).

Some 3 type


portan

t to three-‐qu

arters:

• Fina

ncial information ab

out the

com

pany;

• Yearly inform

ation ab

out h

ow th

e compa

ny is doing

; and

•

How

the compa

ny will use th

e mon


The Bron


arket Investor S


miss

ion

25

In add

ition

, regression an

alysis sho

ws that whe

n investors are

prov

ided

with

better information ab

out “

How

the compa

ny will use

the mon

ey it gets from

investors” th

ey are likely to

invest m

ore

mon

ey.

Looking at Exhibit 3.4, we no

te th

at th

ree-‐qu

arters of investors wan

t fin

ancial inform

ation ab

out the

com

pany, as w

ell as y

early

inform

ation

abou

t how

the compa

ny is doing

.

Amon

g those wan

ting a fin

ancial statemen

t, on

ly one

-‐qua

rter

unde

rstand

s fin

ancial statemen

ts well eno

ugh to ju

dge ho

w

belie

vable they are (see Exhibit 3.5). Most just u

nderstan

d the ba

sics.

In sh

ort, while th

ey m

ay wan

t a fina

ncial statemen

t, most a

re incapa

ble

of re

ally using it.

We also asked

abo

ut th

e type

of information they con

side

r to be

“reliable fin

ancial inform

ation” (see Exhibit 3.6). It is c

lear from

the

respon

ses tha

t peo

ple un

derstand

the principle of ‘ind

epen

dent

inform

ation’, even if they can

’t read

a fina

ncial statemen

t as w

ell as

might be expe

cted

. Finan

cial statem

ents verified

by an

inde

pend

ent

accoun

ting firm were de

emed

most reliable followed

by compa

ny ta

x returns.

The Bron


arket Investor S


miss

ion

26

So

me 7 ou

t of 1

0 investors also who

wan

t information ab

out the

ow

ners and

promoters of th

e compa

ny (7

1%). Amon

g those who

wan

t information, th

ey ty

pically (8

out of 1

0) wan

t to know

: •

Busin

ess b

ackgroun

d an

d expe

rience;

• A character c

heck includ

ing crim

inal re

cord and

securities law

violations; and

•

Inform

ation ab

out p

rior b

ankrup

tcies a

nd insolven

cies.

METHODS OF INVE

STING

Whe


ut how

they wou

ld prefer to invest, respo

nses

mad

e it clear tha

t gettin

g ad

vice from

a fina

ncial advisor is im

portan

t (see Exhibit 3.7). Metho

ds in

volving an

adv

isor were roug

hly three

times m

ore attractiv

e than

metho

ds th

at by-‐pa

ssed

an ad

visor.

With

out b

enefit of an Offe

ring Mem

oran

dum (O

M)7, few

er th

an 2 out

of 10 chose a metho

d that by-‐pa

ssed

the ad

visor a

nd bou

ght d

irectly

7 A legal docum

ent statin

g the ob

jectives, risk

s and

term

s of investm

ent

involved

with

a priv

ate placem

ent. Th

is includ

es item

s such as th

e fin

ancial

over th

e Internet. Even

for c

rowdfun

ding

, the

adviso

r’s advice takes

preced

ence over the

app

eal of the

Internet.

Re

spon

dents w

ere first asked

which m

etho

ds th

ey wou

ld use to

buy

and those respon

ses w

ere show

n in dark blue

in Exhibit 3.7. W

e then

explaine

d the be

nefit of a

n OM and

asked

abo

ut th

eir w

illingn

ess to

buy by previou

sly un

acceptab

le m

etho

ds if an OM was available. The

ad

ditio

n of th

e OM add

ed 8-‐13%

(light blue) to

the ba

se re

spon

se.

statem

ents, m

anagem

ent b

iograp

hies, d

etailed de

scrip

tion of th

e bu

siness,

etc. An offerin

g mem

oran

dum se

rves to

provide

buyers w

ith inform

ation on

the offerin

g an

d to protect th

e sellers from

the liability associated

with

selling

unregistered

securities. Sou

rce: In

vestop

edia

(http://www.in

vestop

edia.com

/terms/o/offerin

gmem

oran

dum.asp )

The Bron


arket Investor S


miss

ion

27

3.3

INFO

RMED

PRO

PENSITY

FOR INVE

STING

The logic of th

e survey design led respon

dents to think ab

out the

risks

of SME investing an

d wha

t wou

ld m

itigate th

ose risks. Th

en, for th

ose

who

thou

ght crowdfun

ding

was attractive, we led them

to th

ink ab

out

the risks of crowdfun

ding

and

the kind

s of a

dvice an

d inform

ation that

wou

ld m

itigate th

ose risks. At th

is point in th

e survey, after being

prod

ded to th

ink ab

out the

se issues, w

e wan

ted to get a fina

l sum

mary

judg

men

t of the

ir view

of SME investing. In do

ing so, w

e recogn

ized

that only SM

E investors interested in crowdfun

ding

cou

ld provide

this

inform

ation. A

s we men

tione

d earlier, the

differen

ces b

etween SM

E an

d crow

dfun

ding

investors a

re largely im

material, so we ha

d little

concern ab

out sub

stan

tive diffe

rences in re

spon

se.

Whe

n we asked crow

dfun

ding

investors a

bout th

e riskine

ss of

investing in new

or y

oung

business (see Exhibit 3

.8), some 52

% dee

m it

high

risk (4

-‐5 on a 5-‐po

int scale), 43

% dee

m it m

edium risk, and

only

4% th

ink it is low risk. Th

e risk profile is th

e same for tho

se who

are

potential (4-‐6)an

d core (7

-‐10) crowdfun

ding

investors.

To get a su

mmary judg

men

t on the am

ount peo

ple wou

ld invest after

being inform

ed abo

ut th

e risks, w

e asked the following qu

estio

n an

d gave seven

cho

ices fo

r the

amou

nt th

ey cou

ld cho

ose to invest (see

Exhibit 3

.9).

“And

fina

lly, if you

cou

ld get th

e inform

ation you ha

ve identified as

impo

rtan

t to you ab

out the timing an

d the risks of investin

g in a new

or

youn

g bu

siness, how

much mon

ey wou

ld you

be prepared to

invest at

most? “

Some 4 ou

t of 1

0 wou

ld in

vest und

er $10

00, w

hile fe

wer th

an 2 out of

10 (1

7%) w

ould in

vest $50

00 or m

ore. The

remaining

4 out of 1

0 wou

ld in

vest amou

nts in th

e $1

000-‐49

99 ra

nge.

The Bron


arket Investor S


miss

ion

28

Usin

g three broa

d grou

ps to

illustrate sm

all (<$

1000

), med

ium ($

1000

-‐49

99) a

nd large am

ounts ($5

000+

) tha

t peo

ple wou

ld be willing to

invest, w

e show

the am

ounts p

eople will invest by the nu

mbe

r of types

of investmen

t produ

cts the

y ow

n no

w and

by age (see Exhibit 3.10

). Statistical ana

lysis

show

s tha

t age is not sign

ificantly re

lated to th

e am

ount investors a

re willing to invest. Prop

ensity to

buy a wider ra

nge

of fina

ncial produ

cts is s

ignifican

t, bu

t especially in te

rms o

f willingn

ess

to invest large am

ounts.

Focusing

on the grou

p willing to in

vest $50

00 or m

ore, in

clud

ing some

demog

raph

ic group

s no

t sho

wn in th

e exhibit, we no

te a fe

w

characteris

tics that distin

guish those willing to in

vest m

ore.

Compa

red to th

ose willing to invest sm

aller a

mou

nts, th

ey are:

• Highe

r incom

e (30%

@$1

00k+ versus 8

% @

<$5

0k);

• Highe

r dollar a

mou

nt sa

ved/invested

(43%

@ $25

0k+ versus 10%

@ less

than

$50

k);

• Male (22%

versus 1

1% fe

male);

• Own more fin

ancial produ

cts (

43% @

4-‐5 produ

cts v

ersus 1

0% with

0);

• Have high

er risk to

lerance (32%

@ high risk versus 12%

@ low risk); an

d

• Are more likely to re

ad and

und

erstan

d fin

ancial statem

ents (2

7% @

can judge be

lievability versus 11%

@ don

’t un

derstand

).

As a fina

l observatio

n, we no

te th

at it is th

e youn

ger investors with

less

income an

d fin

ancial assets tha

t are th

e most e

nthu

siastic abo

ut

crow

dfun

ding

. Bu

t whe

n it comes to

investing sums like $5

000 or

more the em

phasis sh

ifts to fin

ancial cap

ability. It is only those with

more mon

ey from

income or fina

ncial assets tha

t can

affo

rd to

invest

$500

0. A

s our ana

lysis

show

ed, amon

g crow

dfun

ding

investors, age

has n

othing

to do with

willingn

ess to invest large sums.

41%

55%

41%

26%

21% 45%

35%

42%

47%

42% 35%

44%

51%

44%

40%

47%

37%

41%

17%

10%

15%

24%

35% 15%

18%

21%

11%

0% 20% 40% 60% 80% 100%

Overall

No. Produ

cts O

wne

d

Non

e

One

Two

3 or m

ore

Age

Youn

g Ad

ult (20-‐34)

Middle Years (35-‐49)

Mature (50-‐64)

Seniors (65+)

3.10 Amou

nt W

illing to In

vest

by No. Produ

cts O

wne

d & Age

<$1000

$1000-‐4999

$5000+

The Bron


arket Investor S


miss

ion

29

4.0

NOT IN

TERE

STED

IN SME IN

VESTING

HIGHLIGHTS

• Th

ose no


r and

less edu

cated.

They are also

more likely to be wom

en. Th

ey own fewer

investmen

t produ

cts o

verall, and

are less likely to

own each

investmen

t produ

ct we surveyed

. The

y also have less m

oney sa

ved

or invested

than

average and

they are lower income. Tho

se not

interested

in SME investing are less com

fortab

le using

the Internet,

and in fa

ct, 4 out of 1

0 did no

t use th

e Internet fo

r any buying

activ

ity in th

e pa

st m


r the

age, incom

e, and

ed

ucation distrib

ution that cha

racterizes th

ose no

t interested in

SME investing. Tho

se not interested

in SME investing also have

less to

lerance for risk

. •

The sin

gle do

minan

t reason for n

ot investing in new

or y

oung

bu

sine

sses was Risk of losing

their m

oney, w

hich re

flects the

relativ

ely low risk to

lerance we ob

served

in th

eir d

emog

raph

ics.

The Po

tential for frau

d, which is effe

ctively an

othe

r way of losing

mon

ey, w

as th

e second

most com

mon

reason

for u

nwillingn

ess to

invest in SME.

• After a

n explan

ation of th

e im

plications of a

n un

regu

lated mutua

l fund

(hed

ge fu

nd or p

ooled fund

), those no

t interested in SME

investing were asked ab

out w

illingn


regu

lated

mutua

l fun

d. A

bout 9% sh

owed

some interest (4

-‐10 ratin

g), b

ut

only 1% sh

owed

a strong

interest as g

auged by a 7-‐10 ratin

g on

a 1-‐

10 sc

ale. Risk

of losing mon

ey was th

e most com

mon

reason

for

lack of interest, followed

closely by Do

n’t k

now eno

ugh ab

out

unregu

lated fund

s to invest com

fortab

ly, and

Poten

tial for frau

d.

The Bron


arket Investor S


miss

ion

30

4.1

WHO IS

NOT INTERE

STED

IN SME INVE

STING

A total of 7

94 peo

ple rated their w

illingn


ding

as 1-‐3 on a 1-‐10

point sc

ale. A

fter weigh

ting the da

ta, w

e fin

d that th

is is 53%

of the

gen

eral pop

ulation. O

ut of this g

roup

, we furthe

r selected

those who

said th

ey were no

t willing to invest in new

or y

oung

bu

sine

ss (1

-‐3 ra

ting on

a 1-‐10 scale). Th

is grou

p of 589

respon

dents

(37%

after weigh

ting) is th

e ba

se we used

for this c

hapter.

The fin

ding

s in this chap

ter a

re so

lely based

on the 58

9 pe

ople who

show

ed no interest (1

-‐3 ra

ting) in both SM

E investing an

d crow

dfun

ding

. For sim

plicity

, we will re

fer to this group

as ‘Non

-‐Investors’. Our sa

mpling error for Non

-‐Investors is +

4.0%

some 19

out

of 20 tim

es.

Those no


r and

slightly less

educated

. The

y are also m

ore likely to be wom

en. Th

ey own fewer

investmen

t produ

cts o

verall, and

are less likely to

own each investmen

t prod

uct w

e surveyed

. The

y also have less m

oney sa

ved or invested

than

average and

they are lower income.

Those no

t interested in SME investing are less com

fortab

le using

the

Internet, and

in fa

ct, 4 out of 1

0 did no

t use th

e Internet fo

r any buying

activ

ity in th

e pa

st m


r the

age, incom

e, and

ed

ucation distrib

ution that cha

racterizes th

ose no

t interested in SME

investing. Tho

se not interested

in SME investing also have less

tolerance for risk

. A more de

tailed an

alysis high

lights s

ome of th

e key diffe

rences.

Taking

the extrem

es to

highlight differen

ces, we compa

red Non

-‐Investors (1-‐3 ra

ting) with

Core Investors (7-‐10 ratin

g) based

on

willingn

ess to invest in SME. W

hat w

e know

abo

ut Non

-‐investors

compa

red to Core Investors is the

following.

• Th

ey are older – 49%

on Non

-‐Investors a

re age 50 or older versus

35% fo

r Core investors.

• Th

ey have less edu

catio

n. Som

e 40

% of N

on-‐In

vestors h

ave a

second

ary scho

ol diploma or less versus 3

4% fo

r Core investors.

• Some 60

% of N

on-‐in

vestors a

re wom

en com

pared to 32%

wom

en

amon

g Co

re In

vestors.

• Th

ey own fewer ty

pes of in

vestmen

t produ

cts. 21%

of N

on-‐

investors o

wn 2 or m

ore prod

ucts com

pared to 39%

of C

ore

Investors. Som

e 58

% of n

on-‐in

vestors o

wn no

investmen

t produ

cts

versus 38%

for C

ore investors.

• 42

% of N

on-‐in

vestors h

ave less th

an $25

k saved/invested

compa

red to 28%

of C

ore investors.

• 49

% of N

on-‐in

vestors h

ave un

der $

50k in pre-‐tax hou

seho

ld

income versus 34%

of C

ore investors.

• Non

-‐investors a

re less com

fortab

le on the Internet. The

y regu

larly

use ha

lf as m

any of th

e five key Internet activities com

pared to

Core In

vestors. D

uring the pa

st year, tw

o-‐third

s of N

on-‐in

vestors

used

0-‐2 of the

five ty

pes o

f transactio

ns we surveyed

com

pared to

32% fo

r Core investors.

• Non

-‐investors are less likely to

invest over the

Internet. Only 25

%

of Non

-‐Investors ha

ve in

vested

over the

Internet versus 55

% of

Core in

vestors.

• Non

-‐investors a

re less su

re abo

ut th

eir risk tolerance with

36%

saying

“Not su

re” versus 14%

of C

ore Investors. W

hen the “N

ot

sure” grou

p is exclud

ed from

percentages, 48%

of N

on-‐in

vestors

show

low to

lerance for risk

versus 3

3% of C

ore Investors.

The Bron


arket Investor S


miss

ion

31

4.2

REAS

ONS FO

R NOT INVE

STING

As a first stage in und

erstan

ding

those no

t interested in SME investing,

we asked an

ope

n-‐en

ded qu

estio

n ab

out w

hy th

ey were no

t interested

in investing in new

or y

oung

businesses. N

early

40 diffe

rent re

ason

s were given, which we ha

ve com

bine

d into th

e six them

es sh

own in

Exhibit 4

.1. Tw

o reason

s do

minate the respon

ses an

d the third

reason

(don

’t wan

t to lose m

oney) cou

ld easily be seen

as the

same as “too

risky”.

• No mon

ey to

invest/une

mploy

ed (4

1%); an

d •

Too ris

ky /Prefer con

servative investmen

t (40

%).

Respon

dents w

ere then

show

n a list o

f nine po

tential reasons fo

r not

investing in new

or y

oung

businesses a

nd asked

which re

ason

s app

lied

to th

em. On average, peo

ple chose 4-‐5 reason

s. The

y were then

asked

to iden

tify their o

ne m

ain reason

for n

ot investing.

The do

minan

t rea

sons were:

• Th

e ris

k of lo

sing

their m

oney (5

3%); an

d

• Th

e po

tential for frau

d (17%

).

The Bron


arket Investor S


miss

ion

32

4.3

UNRE

GULA

TED M

UTU

AL FUNDS

After b

eing

given

some explan

ation ab

out the

implications of a

n un

regu

lated mutua

l fun

d (hed

ge fu

nds/po

oled

fund

s), N

on-‐In

vestors

were asked ab

out w

illingn


regu

lated mutua

l fun

d.

The explan

ation they were given is as fo

llows.

“By an

unregulated fu

nd, w

e mean an

y fund

that m

akes riskier

investments. Th

is means you

are m

ore likely to lose you

r mon

ey, but

you ha

ve th

e po

tential to earn m

ore. A

s well, it is sometim

es difficult to

get y

our m

oney out. The re

gulator d

oes n

ot look at these fu

nds.”

Over 9

out of 1

0 (91%

) gave ratin

gs of 1

-‐3, w

hich re

flects ‘no interest

in in

vesting’ in

unregulated

mutua

l fun

ds (see Exhibit 4.3). Th

e remaining

1 out of 1

0 show

ed so

me interest, b

ut th

e Co

re investor (7

-‐10

ratin

g) fo

r unregulated

mutua

l fun

ds is only 1%

. It is re

ason

able to

expe

ct th

at interest in investing in unregulated

mutua

l fun

ds wou

ld be

high

er amon

g those interested

in SME investing, but since they were

not a

sked

this que

stion, we ha

ve no way to

kno

w th

eir interest w

ith

any certainty.

The Bron


arket Investor S


miss

ion

33

As you

can

see in Exhibit 4.4, th

ose no

t interested in investing in

unregu

lated mutua

l fun

ds m

entio

n the Risk of losing their m

oney as

the main reason

not to

invest (6

7%). Lack of kno

wledg

e ab

out

unregu

lated mutua

l fun

ds is also an

impo

rtan

t deterrent fo

r more than

ha

lf of th

ose who

respon

ded (55%

). Poten

tial for Fraud

is a con

cern fo

r 4 ou

t of 1

0 as well.

We did ask those with

a Core interest in unregulated

mutua

l fun

ds (7

-‐10

ratin

g) how

they wou

ld invest th

eir m

oney. With

only 8 respon

ses,

no graph

ic is warranted

. With

7 out of 8

preferring to use a m

etho

d that involves th

eir a

dviso

r, the preferen

ce fo

r gettin

g ad

vice is clear.

The Bron


arket Investor S


miss

ion

34

5.0

SUMMAR

Y & CONCLUSIONS

After c

onsid

erab

le con

sulta

tion an

d consideration of th

e tim

e available

to ask peo

ple qu

estio

ns, the

OSC iden

tified five high

prio

rity research

questio

ns th

at th

is stud

y was designe

d to add

ress. In th

is cha

pter, o

ur

aim is to

provide

con

cise answers to these qu

estio

ns.

1. Wha

t is the

nature of investors’ desire


s and

SM

Es, including

risk app

etite

and

size of investm

ent?

2. Wha

t are investors’ perceptions of the

risks a

ssociated with

investing in th

e exem

pt m

arket?

3. Wha

t are th

e specific inform

ation ne

eds o

f investors investing in

start-‐up

s and

SMEs?

4. Wha

t is the

role of p

rofessiona

l advisors in investors’ investmen

t de

cision

-‐making process?

In th

is cha

pter we wou

ld like to

com

men

t on each of the

se issues. We

will re

late th

e key fin

ding

s on the issue an

d provide ou

r views a

bout

the meaning

of tho

se find

ings. A

s distinct from

the preced

ing chap

ters,

we will provide

more synthe

sis o

f finding

s here an

d more op

inion

abou

t the

ir meaning

and

implications.

1. Wha

t is the na

ture of inv

estors’ d

esire

to in

vest in

start-‐ups and

SM

Es, including

risk app

etite

and

size of in

vestmen

t?

• Just over h

alf o

f the

gen

eral pop

ulation (56%

) is p

oten

tially willing


s and

you

ng SMEs (4

-‐10 ratin

g). Just u

nder half

are willing to invest by crow

dfun

ding

(49%

). The

real core of

peop

le (7

-‐10 ratin

g) who

wou

ld be likely to invest with

out

considerab

le persuasion is only ab

out 1

4% fo

r both SM

E an

d crow

dfun

ding

. •

Whe

n pe

ople are interested

in one

type

of investin

g (SME or

crow

dfun

ding

) and

not th

e othe

r, the main diffe

rence is th

eir

familiarity

and

com

fort with

the Internet. With

the exception of

matters re

lated to In

ternet usage, com

men

ts m

ade ab

out e

ither

SME or crowdfun

ding

investors typically app

ly to

the othe

r group

as well.

• If we de

fine a ‘trad

ition

al investor’ as s

omeo

ne who

invests in

stocks, b

onds, m

utua

l fun

ds and

com

plex investmen

ts. Am

ong

trad

ition

al investors, so

me 53

% are poten

tially willingn

ess to invest

in SME with

a core of 16%

that are very likely to invest. For tho

se

who

are not trad

ition

al investors, so

me 42

% are poten

tially willing

to invest with

a core of 12%

that are very likely to invest. This h

as

two major im

plications. First, trad

ition

al investors a

re m

ore likely

to invest via crowdfun

ding

by virtue

of the

ir stated

attitu

de and

be

cause they alre

ady ha

ve experience with

investing. W

hile th

e po

tential for uptake may be as high as 42%

amon

g those who

have

not invested be

fore, the

fact th

at th

ey have no

t invested

constitutes a beh

avioral barrie

r tha

t the

y will need to overcom

e.

• Risk profile plays a

key ro

le in deciding to invest via crowdfun

ding

. Th

ere is no

differen

ce between trad

ition

al investors a

nd others in

these fin

ding

s.

o

Amon

g those with

low risk to

lerance, 43%

are poten

tially

willing to invest includ

ing a core of 1

2% th

at are very likely to

invest;

o

For m

edium risk, 55%

are poten

tially willing with

a core of

16%;

o

For tho

se with

high risk tolerance, 72%

are poten

tially willing

to invest includ

ing a core of 2

7% th

at are very likely to invest.

•

While it is clear th

at investing via crow

dfun

ding

is m

ore likely as

risk tolerance increases, we are concerne

d with

the high

prop

ortio

n of low risk peo

ple who

might poten

tially invest via

crow

dfun

ding

. In our view, the

survey m

ade the risks quite visible

and explicit leaving us to

won

der h

ow th

ey con

clud

ed th

at

crow

dfun

ding

was app

ropriate fo

r the

m.

The Bron


arket Investor S


miss

ion

35

• Looking solely at the

group

of p

eople who

are poten

tially

interested


dfun

ding

, som

e 4 ou

t of 1

0 wou

ld

invest und

er $10

00, 2 out of 1

0 wou

ld invest $10

00-‐$19

99, 2 out of

10 wou

ld invest $20

00-‐499

9 an

d roug

hly 2 ou

t of 1

0 wou

ld invest

$500

0 or m

ore.

• Th

e grou

p po

tentially willing to invest $50

00 or m

ore is ab

out 9

%

of th

e gene

ral pop

ulation, but m

ore than

three-‐qu

arters of this

grou

p are trad

ition

al investors. Amon

g pe

ople who

have no

t bo

ught trad

ition

al investmen

ts, w

illingn

ess to invest th

at m

uch is

less th

an half a

s stron

g.

• Focusin

g on

the grou


00 or m

ore, we no

te a

few cha

racteristics tha

t make this group

distin

ct. C

ompa

red to


aller a

mou

nts, th

ey are: H

ighe

r incom

e;

Have more mon

ey sa

ved/invested


ancial

prod

ucts; H

ave high

er risk to

lerance; and

Are m

ore likely to re

ad

and un

derstand

fina

ncial statemen

ts.

• While not add

ressed

here, one

of the

biggest fa

ctors in

participation in crowdfun

ding

is pub

licity

. Th

is will com

e from

both

mass m

edia and

social m

edia. With

out a

dou

bt Title III of the

UA

JOBS

Act and

local cultural fun

ding

effo

rts w

ill gen

erate bo

th

positiv

e an

d ne

gativ

e stories a

bout crowdfun

ding

and

crow

dsou

rcing. The

gen

eral pub

lic, regardless o

f legal distin

ctions,

will view th

e tw

o term

s as s

ynon

ymou

s. The

nature, sp

eed an

d am

ount of p

ublicity

will play a major ro

le in th

e up

take and

success

of crowdfun

ding

for n

ew and

you

ng businesses.

2. Wha

t are in

vestors’ perceptions of the

risks associated

with

investing in th

e exem

pt m

arket?

• In decision theo

ry, risk is gen

erally defined

as “

decision

-‐making

unde

r con

ditio

ns of u

ncertainty”. The

biggest uncertainty fo

r investing in new

or y

oung

business is the

lack of information for

making a reliable pred

ictio

n ab

out the

value

of the

investmen

t.

More directly, tying

together re

sults from

differen

t parts of the

survey, w

e conclude

that th

e biggest risk

s are deemed

to be:

insufficien

t information ab

out the

investmen

t, an

d its corollary, the

un

certainty of th

e ou

tcom

e of th

e investmen

t including

the risk of

losing

mon

ey. Lack of liqu

idity

is also no

ted.

• Th

e role of information comes th

roug

h first in its impa

ct on

willingn

ess to invest. We fin

d that peo

ple are more pron

e to invest

in new

or y

oung

businesses if the

y know

the indu

stry or its

environm

ent (i.e., local business) and

if th

ey can

read

its p

lan for

grow

th and

find

the idea com

pelling

. At th

e same tim

e, lack of

inform

ation ab

out the

com

pany and

its o

wne

rs is clearly a

deterren

t to investing an

d this covers b

oth initial and

ong

oing

inform

ation.

• In a nearly

iden

tical way, the

amou

nt of information available or

absent affe

cts jud

gmen

ts of the

amou

nt of m

oney it is worth

investing. Regression an

alysis sh

ows tha

t information ab

out “How

the compa

ny will use th

e mon

ey it gets from investors” is th

e main

driver of the

amou

nt of m

oney likely to

be invested

. To

put it

anothe

r way, in an

hon

est e

ffort to

raise mon

ey, enlighten

ed se

lf-‐interest dictates tha

t a com

pany sh

ould provide

as m

uch

inform

ation as possible ab

out h

ow th

ey will use th

eir investors’

mon

ey.

The Bron


arket Investor S


miss

ion

36

• Th

e un

certainty of outcome an

d the risk of losin

g mon

ey are

iden

tified in se

veral differen

t ways. First, most p

eople recogn

ized

that uncertainty is part o

f investin

g in new

or y

oung

business.

With

that com

es less predictab

ility of return on

investmen

t, if an

y.

But in ad

ditio

n, th

ere is a recogn

ized

risk of fraud

and

mislead

ing

inform

ation from

the prom

oters tha

t raises the

risk of losing

mon

ey. Pa

rticularly (b

ut not exclusively) for Non

-‐investors, th

is

same concern is man

ifest by their d

istrust of d

oing

business o

ver

the Internet. Co

nversely, tho

se who

are th

e most a

ctive users o

f the Internet fo

r purchases, w

hose beh

aviour su

ggests m

ore trust o

f the Internet, are also

the most likely to do bu

siness v

ia

crow

dfun

ding

. The

y see on

e less sign

ificant risk.

• Bridging

the concerns just m

entio

ned, we no

ted that one

of the

three prim

ary drivers o

f the

decision

to (n

ot) invest v

ia

crow

dfun

ding

is th

at “It could take a fe

w years to

find

out if th

e bu

sine

ss is profitab

le”. This a

gain re

cogn

izes th

e un

certainty of th

e situa

tion.

• Lack of liquidity is ra

nked

fifth am

ong po

tential risks, b

ut

none

theless, half o

f investors iden

tify the risk of th

eir m

oney being

locked

-‐in and

possibly no

t gettin

g it ba

ck. A much sm

aller g

roup

, ab

out o

ne-‐third, recog

nize th

at th

e inab

ility to

sell the investmen

t to so

meo

ne else

is ano

ther aspect o

f lack of liqu

idity

. From

our

analysis of factors influ

encing

willingn

ess to invest, it is c

lear th

at a

real likelihoo

d of a steady income stream

from

an investmen

t can

offset its lack of liqu

idity

. Whe

n we looked

at d

ecision factors,

“Can

’t get m

oney back bu

t investm

ent w

ill give you a steady

stream

of incom

e if it succeeds” ha

d a po

sitive im

pact on

willingn

ess to invest. Th

is is a fa

miliar m

arketin

g ap

peal fo

r man

y lim

ited pa

rtne

rships and

royalty

trusts.

3. Wha

t are th

e specific inform

ation ne

eds of in

vestors investing in

start-‐up

s an

d SM

Es?

• Th

is qu

estio

n ha

s two type

s of a

nswers. The

first is w

hat spe

cific

inform

ation is con

side

red essential for investing. The

second

is

wha

t kinds of information will increase th

e likelihoo

d of investing

and the am

ount invested

. •

In th

e survey we asked ab

out seven

kinds of information that m

ight

be helpful whe

n de

ciding

to invest. Six of th

e seven type

s of

inform

ation were de

emed

‘Essen

tial’ (4-‐5 on a 1-‐5 scale) by 7 ou

t of 10 investors w

ith little discrim

ination am

ongst the

m. Th

e seventh ite

m was not fa

r beh

ind (64%

). Ideally, investors wan

t regu

lar finan

cial inform

ation ab

out the

com

pany and

wha

t it is

doing with

their m

oney. Th

ey also wan

t information ab

out the

risks of investin

g. Clearly, information ab

out the

probity and

track

record of the

owne

rs is also very desira

ble, and

to a lesser exten

t, so is th

eir c

ompe

nsation.

• While th

ree-‐qu

arters wan

t finan

cial inform

ation, only on

e-‐qu

arter

of th

is group

und

erstan

ds fina

ncial statemen

ts well eno

ugh to

assess th

eir c

redibility. The

vast m

ajority

just und

erstan

ds th

e ba

sics. Non

ethe

less, investors und

erstan

d the value of

inde

pend

ence and

fewer th

an 2 out of 1

0 de

em a fina

ncial

statem

ent p

repa

red by th

e compa

ny’s accou

ntan

t to be

reliable

inform

ation. A

fina

ncial statemen

t verified

by an

inde

pend

ent

accoun

ting firm is th

e ‘gold stan

dard’ for re

liability, but fa

iling

that,

the tax return filed with

CRA

will do.

• Our que

stions abo

ut Offe

ring Mem

oran

dum (O

M) a

lso be

ar on the

kind

of information pe

ople nee

d with

the qu

estio

n indicatin

g that

an OM wou

ld provide

both ba

sic compa

ny inform

ation an

d inform

ation on

investor righ

ts. Th

e ad

ditio

n of an OM ra

ised

the

prop

ortio

n of poten

tial investors by 8-‐13

% und

er fo

ur differen

t

The Bron


arket Investor S


miss

ion

37

scen

arios. B

ased

on ou

r und

erstan

ding

from

related research on

use of prospectuses a

nd given

the more soph

isticated

profile of

trad

ition

al Exempt m

arket investors

8 , it is our se

nse that fe

w

investors w

ill kno

w wha

t an OM is and

that it is available.

• Our answer to

que

stion 2 (“Wha

t are th

e risks associated with

investing in th

e exem

pt m

arket”) ind

icates th

e kind

s of information

that will encou

rage crowdfun

ding

investmen

t, bo

th in te

rms o

f the

nu

mbe

r of p

articipan

ts and

how

much they will invest. Th

e on

ly

point w

e wou

ld like to

emph

asize is th

at th

e most d

ecisive

inform

ation for fosterin

g investmen

t is a

detailed explan

ation of

how th

e compa

ny will use th

e mon


4. Wha

t is the role of p

rofessiona

l adv

isors in in

vestors’ in

vestmen

t de

cision

-‐making process?

• Startin

g with

willingn

ess to invest th

roug

h crow

dfun

ding, w

e fin

d there is a clear p

reference for g

ettin

g ad

vice from

a fina

ncial

advisor b

efore bu

ying

an investmen

t. M

etho

ds th

at use an ad

visor

are 3-‐4 tim

es m

ore acceptab

le th

an m

etho

ds th

at bypass a

n ad

visor.

• Th

e be

st indicatio

ns from

this su

rvey are th

at 60-‐75

% of

crow

dfun

ding

investors w

ould se

ek advice if it were available.

Most w

ould se

ek advice from

a re

gistered

dealer o

r adviser, b

ut

accoun

tants a

nd lawyers also played

a sm

all role.

8 Adviso

r Rep

ort, Investor Edu

catio

n Fund

, 200

3; Adviso

r Relationships and

Investor Decision

-‐Making, In

vestor Edu

catio

n Fund

, 201

2; Perform

ance

Repo

rting & Cost D

isclosure, O

SC, 201

0; Exempt M

arket Investors, O

SC, 201

2;

and Focus G

roup

with

Retail Investors on Investor Rights &

Protection, OSC

Investor Adviso

ry Pan

el, 201

1.

• Th

e fact re

mains th

at fina

ncial adviso

rs provide

investors w

ith

guidan

ce and

com

fort abo

ut th

eir d

ecisions. If fin

ancial advisors

are no

t allowed

to play a role, the

uptake of crowdfun

ding

as a

n investmen

t wou

ld likely be lower th

an with

their involvemen

t. The

caveat abo

ut th

is is th

at advisors m

ay be more motivated

to advise

investmen

t in regu

lated markets, and

by do

ing so, m

ay delay th

e grow

th of crowdfun

ding

. Th

e trad

e-‐off h

ere is not one

that we can

evalua

te from

the eviden

ce here, but it is certainly worth noting if

crow

dsou

rcing is to

be an

effe

ctive means of increasing the capital

available to new

or y

oung

businesses.

While we did no

t dire

ctly assess the

experiences of E

xempt M

arket

Investors, we do

have some ob

servations th

at are re

levant.

Wha

t is kn

own ab

out the

exp

eriences of tho

se in

vestors that do or

have con

side

red investing in securities th

roug

h the exem

pt m

arket

(EM)?

• As a prelude

to th

is stud

y, we estim

ated

the incide

nce of exempt

market investin

g in Can

ada ba

sed on

the Co

ttrell & Rob

inson stud

y cited earlier in th

is re

port, as w

ell as E

xempt M

arket (EM

) Studies

done

for the

OSC (see

footno

tes 4

& 8). Based

on the low

incide

nce of exempt m

arket investin

g (<½%) w

e estim

ated

, we

knew

we could no

t get su

fficien

t respo

nse from

EM investors, so

we did no

t include

any dire

ct que

stions abo

ut th

eir e

xperience.

Non

ethe

less, in this stud

y we asked ab

out o

wne

rship of “complex

investmen

ts”, which were de

scrib

ed as “

Complex investmen

ts like

optio

ns, forwards, h

edge fu

nds, exempt m

arket investm

ents or

limite

d pa

rtne

rship un

its”. W

hile im

perfect, we can use this group

as a proxy since it is a very sm

all and

select part o

f the

gen

eral

popu

latio

n an

d ou

r survey sample (6%).

The Bron


arket Investor S


miss

ion

38

• Be

fore doing

that, let us loo

k at th

e grou

p who

are now

considering investing in se

curities throu

gh th

e exem

pt m

arket b

y crow

dfun

ding

. Co

mpa

red to th

e gene

ral pop

ulation, th

ey are:

youn

ger (<5

0); m

ore likely male; better e

ducated; and

have a

high

er risk to

lerance. The

y are more likely to own (now

or p

ast 5

years) com

plex investmen

ts, b

onds and

GICs. The

y are also likely

to be very com

fortab

le with

buying things on the Internet,

includ

ing investmen

ts. By

virtue

of the

ir youn

ger a

ge, the

y ha

ve

less m

oney sa

ved or invested

than

the olde

r group

, but have go

od

breadth of produ

ct experience. It sho

uld be

und

erstoo

d that while

this is the profile th

at best d

escribes th

e grou

p, fe

w peo

ple will

embo

dy all of th

ese prop

ertie

s.

• Looking at th

e po

tential EM investors (as indicatin

g by

crow

dfun

ding

respon

ses) who

will invest $50

00 or m

ore shifts the

focus from enthu

siasm and

risk to

lerance to fina

ncial cap

ability.

Those that can

affo

rd to

invest th

is much are high

er income an

d ha

ve m

ore mon

ey sa

ved or invested

than

is ty

pical for th

eir c

ohort.

They also

own a wider variety of finan

cial produ

cts, and

as s

uch,

they are likely to

be more know

ledg

eable ab

out finan

cial produ

cts

than

average. Co

nfirm

ing this is the fact th

at th

ey are m

ore likely

to be ab

le to

read

and

und

erstan

d fin

ancial statem

ents, alth

ough

this capa

bility is still a m

inority

. Not su

rprisingly, th

is grou

p is the

most d

eman

ding

with

regard to

gettin

g de

tailed inform

ation ab

out

how th

e compa

ny plans to

use investors’ m

oney. Overall, th

e profile is one

that is su

itable for this type of investing, alth

ough

suita

bility at th

e individu

al level is in no

way certain.

• Th

ose curren

tly buying complex investmen

ts are our proxy fo

r curren

t EM investors, while th

ose interested

in buying exem

pt

market investm

ents via crowdfun

ding

are th

e po

tential m

arket.

Those who

buy com

plex investmen

ts differ from

the gene

ral

popu

latio

n in se

veral w

ays. In man

y ways the

y are like the profile

of poten

tial EM investors (i.e., crow

dfun

ding

investors) we just

describ

ed, b

ut even more so.

o

Owne

rs of com

plex investmen

t produ

cts o

wn more type

s of

investmen

t produ

cts.

o

They are m

ore likely to have a un

iversity edu

catio

n, especially

a grad

uate degree.

o

They do far m

ore activ

ities on the Internet, especially buying

investmen

ts. Some 60

% of tho

se with

com

plex investmen

ts

have bou

ght investm

ents over the

Internet versus 1

5% of

othe

rs.

o

Those with

com

plex investmen

ts have a much high

er risk

tolerance – 25

% high risk versus 5% fo

r others.

o

They are fa

r more likely to have alread

y invested

in eith

er

someo

ne else

’s sm

all business o

r the

ir ow

n.

o

They are m

ore likely to se

ek out advice from

a fina

ncial adviso

r be

fore buying.

Our overall assessmen

t is tha

t EM investors, both actual and

poten

tial,

have th

e kind

of p

rofile that is su

ited to m

ore risky investmen

t.

Non

ethe

less, n

ot everyon

e in th

e grou

p of buyers fits th

is profile. It is

unclear h

ow to

deter th

ose who

shou

ldn’t b

e investing in th

is market

from

taking

part. It is likely th

at a better strategy will be lim

iting

the

amou

nt th

ey can

invest to

limit the im

pact of a

poo

r decision.

The Bron


arket Investor S


miss

ion

39

APPE

NDIX

A.

ONLINE SU

RVEYS

ALL INVE

STORS

-‐-‐ EXE

MPT

MAR

KET IN

VESTMEN

T OPP

ORT

UNITIES (Part O

ne, 12-‐Mar-‐13)

This survey is being

don

e on

beh

alf o

f a governm

ent a

gency that is

respon

sible for som

e special types of con

sumer fina

ncial protection

and ed

ucation. The

survey will ta

ke abo

ut 15-‐20

minutes of you

r tim

e an

d your re

spon

ses w

ill be kept com

pletely confiden

tial. W

hat y

ou te

ll us can

make a major differen

ce to

the kind

s of investm

ent

oppo

rtun

ities th

at will be available to peo

ple like you in th

e future.

Before we be

gin the survey, the

re are a fe

w que

stions we ne

ed to

ask.

A.

SCRE

ENER

1.

Wha

t is y

our c

urrent age?

__

__ <En

ter a

ge, terminate if less th

an 20 years o

ld>.

2a.

Have you ever held an

y type

of securities-‐related

registratio

n?

That is, h

ave you be

en re

gistered

with

any provincial securities

commission

s, fo

r example as a dealer o

r a fina

ncial adviser?

1

Yes, I am

currently re

gistered

. [Terminate]

2

Yes, I was re

gistered

in th

e pa

st but am no long

er

registered

[Terminate]

3

No, I ha

ve never been registered

.

2b.

Please indicate which of the

following fin

ancial produ

cts y

ou

own no

w includ

ing prod

ucts inside

an RR

SP. If you do

n’t o

wn

the prod

uct n

ow, p

lease indicate if you

have ow

ned this

finan

cial produ

ct in th

e pa

st five years <rand

omize orde

r of

prod

ucts>?

Own

Owne

d Not

Not

Now

Past 5y

Owne

d Sure

1 2

3

9

Mutua

l fun

ds (o

r other

investmen

t fund

s)

1

2

3

9

Stocks (e

quities) n

ot in a m

utua

l

fund

1

2

3

9

Governm

ent o

r corpo

rate bon

ds

(excluding Can

ada Savings B

onds)

1

2

3

9

Term

dep

osits, G

ICs o

r Can

ada

Savings B

onds

1

2

3

9

Complex investmen

ts like options,

forw

ards, h

edge fu

nds, exempt

market investm

ents or lim

ited

pa

rtne

rship un

its

<Con

tinue

if any produ

ct is “ow

n no

w” or “ow

ned pa

st 5y”. If no

t, accept 400

who

don

’t qu

alify by ow

nership an

d then

term

inate all

othe

rs. Re

port on rate of termination. >

3.

Are you…

? <set q

uotas for gen

der to 50

+/-‐2%>

1

Male

2

Female

4.

In wha

t region do

you

live? <Ba

lance region

al re

presen

tatio

n by 201

1 census>

1

Atlantic

2

Que

bec

3

Ontario

4

Prairie

s (M

B, SK)

5

Albe

rta (in

clud

ing NWT, NU)

6

British Colum

bia (in

clud

ing YT)

9

Outsid

e Ca

nada

<Term

inate survey>

The Bron


arket Investor S


miss

ion

40

B.

CLAS

SIFIER

S – De

mograph

ics+

1a.

Wha

t is the

highe

st level of e

ducatio

n that you

have

completed

?

1 Elem

entary and

/or som

e second

ary scho

ol

<Skip to B2>

2 A second

ary scho

ol (h

igh scho

ol) d

iploma

<Skip to B2>

3 A college diploma or certificate prog

ram

<Skip to B2>

4 An

und

ergrad

uate degree from

a university

5

A grad

uate degree from

a university

1b

. Which of the

following de

gree

s or p

rofessiona

l designa

tions do

you ho

ld? [Che

ck all that app

ly]

1

MBA

2 CFA

3

Accoun

ting (CA, CGA, CMA)

4

Law (LL.B, JD

)

5 Ch

artered Investmen

t Man

ager (C

IM)

6

Bachelor of C

ommerce (B

.Com

m.)

9

Non

e of th

e ab

ove

2.

Considering all savings and

investmen

ts (w

hether in an RR

SP or

not) but excluding

you

r hom

e, w

hat is the

total amou

nt you

ha

ve currently sa

ved an

d/or invested

?

1 Less th

an $25

,000

2 At least $

25,000

but less th

an $50

,000

3 At least $

50,000

but less th

an $10

0,00

0

4 At least $

100,00

0 bu

t less tha

n $2

50,000

5 $2

50,000

or m

ore

9

Don’t k

now/D

on’t wan

t to say

3.

Wha

t is y

our h

ouseho

ld income be

fore ta

xes? Is it…

1

Less th

an $25

,000

2 $2

5,00

0 -‐ $

49,999

3 $5

0,00

0 -‐ $

74,999

4 $7

5,00

0 -‐ $

99,999

5 $1

00,000

-‐ $1

49,999

6 $1

50,000

or m

ore

8

Don’t w

ant to say

4.

Over the

past y

ear, roug

hly ho

w often

did you

use th

e Internet

for e

ach of th

e following activ

ities? <ran

domize orde

r of

activ

ities>

<C

reate scale with

(1) Several times per m

onth, (2) 1-‐4 times

every three mon

ths (3) 1-‐4 times in th

e pa

st year, (4) U

sed bu

t no

t in the pa

st year, (5) N

ever>

a. Bo

oked

and

paid for travel

b. Bo

ught lottery tickets or p

layed on

line games fo

r mon

ey

c. Pa

id bills u

sing on

line ba

nking

d. Bo

ught produ

cts o

nline (e.g., Am

azon

, e-‐Bay, Kob

o,

compa

ny web

site, etc.)

e. Bo

ught m

utua

l fun

ds or o

ther investmen

ts

5.

Which of the

following statem

ents best d

escribes you

r way of

thinking

abo

ut investing.

1

I am willing to earn a bit less if I can

be certain I w

on’t

lose any m

oney

2

I am willing to accep

t small ups-‐and

-‐dow

ns in m

y

investmen

ts if I can earn m

ore

3

I am willing to accep

t big sw

ings in th

e value of m

y

investmen

ts includ

ing losing

m

oney, if it gives m

e the po

tential to earn m

ore

9 I am not su

re

The Bron


arket Investor S


miss

ion

41

C.

PROPE

NSITY

FOR BU

SINESS INVE

STING

1.

Have you ever invested

in a sm

all business?

1

Yes, m

y ow

n bu

siness

2

Yes, so

meo

ne else

’s business

3

No

9

Don’t k

now/N

ot su

re

2.

The go

vernmen

t is thinking ab

out m

aking it easie

r for peo

ple

to invest in Can

adian compa

nies. Assuming that you

are

comfortab

le with

the am

ount of m

oney involved

and

the risks,

how likely wou

ld you

be to invest in a brand

new

start-‐up

compa

ny th

at is not listed

on an

y stock market? Please rate

your likelihoo

d of investing on

a 1-‐10 scale whe

re 1 m

eans

‘Definite

ly wou

ld NOT invest’ and

10 means ‘D

efinite

ly W

OULD

invest’.

__

___

Ratin

g: W

illing to invest

3.

Usin

g the same 1-‐10

scale, how

likely wou

ld you

be to invest in

a yo

ung compa

ny th

at is n

ot listed

on an

y stock market?

__

___

Ratin

g: W

illing to invest <If ratin

g is 1-‐3, skip to B5>

4.

There are a nu

mbe

r of thing

s abo

ut a com

pany th

at m

ight

make you more or less likely to

invest in th

e compa

ny. For

each of the

descriptio

ns below

, please rate how

this wou

ld

affect you

r willingn

ess to invest using

a 1-‐5 sc

ale whe

re 1

means ‘M

uch LESS likely to

invest’, 5 means ‘M

uch MORE

likely

to invest’ and

3 m

eans ‘N

o im

pact on your willingn

ess to

invest’. <R

ando

mize orde

r – Add

a “Not Sure” colum

n>

a. It is a local business tha

t you

might use

b. Once you pu

t you

r mon

ey in, you

can

’t get it o

ut fo

r several years

c. It is a well-‐e

stab

lishe

d bu

sine

ss with

a new

plan for

grow

th

d. It is a start-‐up

com

pany with

an idea th

at so

unds goo

d to you

e.

Yo

u know

nothing

abo

ut th

e ow

ners of the

business

f. Th

e bu

siness is in an

indu

stry you

kno

w well

g. Yo

u can bu

y it throug

h your fina

ncial adviso

r and

get

their a

dvice

h. Yo

u can’t g

et you

r mon

ey back, but you

r investm

ent

will give you a steady stream

of incom

e if the bu

sine

ss

succeeds

i. Th

e bu

siness m

ight not m

ake much mon

ey, b

ut it is a

worthy cause

j. Th

ere won

’t be

a lot o

f information ab

out the

com

pany

since it is you

ng

k. It could take a fe

w years to

find

out if you

r investm

ent

is profitab

le.

l. It is easy to buy into th

e compa

ny on the internet

m. Th

ere is no

way to

predict how

much mon

ey you

will

make an

d you might lose all your m

oney

n. Th

e on

ly th

ing you know

abo

ut th

e compa

ny is wha

t you can read

on the internet.

One of the new

investing trends emerging

on the Internet is called

“crowdfun

ding

”. There are so

me exam

ples in th

e U.K. and

it is gettin

g started in th

e US. The basic idea of crowdfun

ding

is th

at a bun

ch of

small investors invest re

lativ

ely sm

all amou

nts o

f mon

ey in new

or

youn

g bu

sine

sses th

at app

eal to them

. Th

is isn

’t a regu

lated market

like a stock market, bu

t it is m

ore like e-‐Ba

y where you

read

a “prod

uct”

descrip

tion on

-‐line and

decide whether you

are going

to buy. Th

e big

diffe

rence here is th

at you

are buying an

investment rather tha

n something

you

can

hold in you

r han

ds. Th

ere is no

gua

rantee th

at you

will m

ake mon

ey on the mon

ey you

invest, and

a very real risk th

at you

will lose all your m

oney. It is up

to you

to decide whether th

e idea is

one you wan

t to supp

ort a

nd one th

at you

think might su

cceed.

The Bron


arket Investor S


miss

ion

42

5.

Assuming that you

are com

fortab

le with

the am

ount of m

oney

involved

and

the bu

sine

ss idea app

eals to

you

, how

likely

wou

ld you

be to invest in a new

or y

oung

business throu

gh a

crow

dfun

ding

site on the Internet? Please rate you

r likelihoo

d of investing on

a 1-‐10 scale whe

re 1 m

eans ‘D

efinite

ly wou

ld

NOT invest’ and

10 means ‘D

efinite

ly W

OULD

invest’.

__

___

Ratin

g: W

illing to invest

<If rating is 1-‐3, sk

ip to

section E (Part 3

), ELSE sk

ip to

section D

(Part 2

)>

BUSINESS INVE

STORS

– EXE

MPT

MAR

KET IN

VESTMEN

T OPP

ORT

UNITIES (Part 2

, 12-‐Mar-‐13)

D.

INVE

STING VIA CRO

WDF

UNDING

1a.

There are several poten

tial risk

s whe

n you invest in a com

pany

in an un

regu

lated market like this. Whe

n we talk abo

ut an

unregu

lated market, we mean a market w

ith riskier

investmen

ts. Th

is m

eans you

are m


r mon

ey, b

ut you

have the po

tential to earn m

ore. A

s well, it is

sometim

es difficult to get y

our m

oney out. The

regu

lator d

oes

not loo

k at unregulated

markets. U

sing

the list o

f risks below

, please iden

tify the risks th

at con

cern you

abo

ut investing in

unregu

lated markets th

roug

h crow

dfun

ding

. <rand

omize

orde

r>

1b.

Which TWO of the

se risks a

re th

e biggest con

cerns for you

?

1

1 My mon

ey is locked

-‐in – I may not be ab

le to

get it b

ack

2

2 I can


t to someo

ne else

3

3 Po

tential for frau

d

4

4 Th

e pe

ople promoting the compa

ny m

ay not

give m

e the full picture

5

5 Risk of losing my mon

ey

6

6 I kno

w very little

abo

ut th

e compa

ny

7

7 Th

ere is no

way to

predict how

much mon

ey I

will m

ake, if any

8

8 Th

ere is no

ong

oing

inform

ation ab

out h

ow th

e

investmen

t is d

oing

9 9

I don

’t trust d

oing

business o

ver the

internet

0

Non

e of th

e ab

ove

2.

Assuming you like the compa

ny's ideas for growth and

you

think it ha

s goo

d po

tential, wha

t is the

most y

ou wou

ld be

willing to invest using

crowdfun

ding

und

er each of th

e following circum

stan

ces. Please en

ter a

num

ber o

n each line

iden

tifying

the most y

ou wou

ld be willing to invest. Do

not use

commas, d

ecim

al points o

r dollar signs whe

n you en

ter the

nu

mbe

r."

a. Yo

u know

the bu

siness o

wne

rs

b. Friend

s have invested

and

recommen

d it

c. Th

e bu

siness p

lan is high

ly detailed

d. Yo

ur m

oney is invested

perman

ently

– You

can

’t get it

out

e. Th

e compa

ny is ta

ckling a cause you be

lieve in

f. Th

e compa

ny alre

ady ha

s a goo

d track record

g. Th

e compa

ny is in a high grow

th indu

stry

h. Each year y

ou get a fina

ncial rep

ort v

erified

by an

inde

pend

ent a

ccou

nting firm

i. Th

e compa

ny won

’t start-‐up

until they get eno

ugh

investmen

t mon

ey

3a.

Considering the sum of m

oney poten

tially involved

, wou

ld you

seek professiona

l advice be

fore deciding to invest?

1

Yes

The Bron


arket Investor S


miss

ion

43

2

No

<Skip to D4>

3 Not su

re

<Skip to D4>

3b

. Who

wou

ld you

be most likely to ask fo

r advice? Cho

ose on

e.

1

An adviso

r who

is licensed

to se

ll stocks

2 An

adviso

r/fin

ancial plann

er who

sells m

utua

l fun

ds

and GICs (bu

t not stocks)

3

Accoun

tant

4

Lawyer

5

Other (p

lease de

scrib

e)

4.

Please ra

te th

e im

portan

ce of e

ach of th

e following type

s of

inform

ation for h

elping

you

decide whe

ther to

invest in a

compa

ny. Please ra

te using

a 1-‐5 sc

ale whe

re 1 m

eans th

e inform

ation is ‘N

ot neede

d at all’, 3 m

eans it is ‘N

ice to have’

and 5 means it is ‘Essential’. <rand

omize orde

r>

a. Fina

ncial information ab

out the

com

pany

b. De

tailed bu

sine

ss plan includ

ing key prod

ucts/services

c. Inform

ation ab

out the

owne

rs and

promoters o

f the

compa

ny, including

crim

inal re

cord che

cks a

nd che

cks

on se

curities law

violatio

ns

d. Yearly inform

ation ab

out h

ow th

e compa

ny is doing

e. How

much ow

ners & executiv

es will be pa

id fo

r the

ir work

f. How

the compa

ny will use th

e mon

ey it gets from

investors

g. Risks related

to investing in th

e compa

ny

5a.

Wha

t best d

escribes you

r ability to und

erstan

d a compa

ny

fin

ancial statem

ent? [che

ck one

]

1 I d

on’t know

wha

t a fina

ncial statemen

t is

2.

I don

’t un

derstand

them

3 I u

nderstan

d the ba

sics

4 I u

nderstan

d them

well eno

ugh to judg

e ho

w

believable they are

5b.

<Ask ONLY if D4a is ra

ted 4 or 5> Which of the

following type

s of fina

ncial information do

you

con

side

r to be

“reliable

finan

cial inform

ation”? Please check all tha

t app

ly.

1

A fin

ancial statem

ent p

repa

red by th

e compa

ny’s

accoun

tant

2

A fin

ancial statem

ent v

erified

by an

inde

pend

ent

accoun

ting firm

3

A compa

ny ta

x return filed with

the Ca

nada

Reven

ue

Agen

cy (C

RA)

4

Non

e of th

e ab

ove

5c.

<Ask only if D4

c is rated 4 or 5> Which of the

following type

s of

inform

ation ab

out the

owne

rs and

/or p

romoters o

f the

compa

ny do you wan

t to see be

fore deciding to invest? Ch

eck

all tha

t app

ly.

1

Busin

ess b

ackgroun

d an

d expe

rience

2

Prior b

ankrup

tcies o

r insolvencies

3 Ch

aracter c

heck includ

ing crim

inal re

cord and

securities law

violatio

ns

4

Non

e of th

e ab

ove

6.

Which of the

following metho

ds wou

ld you

be willing to use to

invest in a new

or y

oung

business? <Yes, No, Not su

re –

Rand

omize orde

r of m

etho

ds>

a.

Over the

Internet with

out a

dvice using the web

site of

the compa

ny se

eking investmen

t

b.

Over the

internet with

out a

dvice using a web

site that

offers investmen

t in several

differen

t com

panies

c.

Over the

internet, b

ut with

advice from

a fina

ncial

advisor

d.

Throug

h my regu

lar finan

cial advisor with

out u

sing

the

internet

The Bron


arket Investor S


miss

ion

44

7.

<ONLY present m

etho

ds th

at were marked ‘No’ or ‘Not sure’

in D6>

An ‘Offe

ring Mem

oran

dum’ (OM) p

rovide

s basic

inform

ation ab

out a

com

pany. It a

lso gives y

ou a num

ber o

f rig

hts to take action if the compa

ny m

isrepresen

ts itself, but

you will proba

bly ne

ed to

hire

a lawyer to do

this. Assum

ing an

offerin

g mem

oran

dum was available, wou

ld you

then

be

willing to invest by each of the

following metho

ds.

a.

Over the

Internet with

out a

dvice using the web

site of

the compa

ny se

eking investmen

t

b.

Over the

internet with

out a

dvice using a web

site that

offers investmen

t in several

differen

t com

panies

c.

Over the

internet, b

ut with

advice from

a fina

ncial

ad

visor

d.

Throug

h my regu

lar finan

cial adviso

r with

out u

sing the

internet

8.

How

risky do

you

think it is to

invest in new

or y

oung

bu

sine

sses? Please rate using

a 1-‐5 sc

ale whe

re 1 m

eans ‘Low

risk’, 3 m

eans ‘M

edium risk’ and

5 m

eans ‘H

igh risk’?

__

__ R

isk Rating

9.

And fin

ally, if you

cou

ld get th

e inform

ation you ha

ve iden

tified

as im

portan

t to you ab

out the

timing an

d the risks of investin

g in a new

or y

oung

business, how

much mon

ey wou

ld you

be

prep

ared

to invest at m

ost? W

ould you

say…

.

0 Nothing

at a

ll 1

$1-‐499

2 $5

00-‐999

3 $1

,000

-‐1,999

4 $2

,000

-‐3,499

5 $3

,500

-‐4,999

6 $5

,000

-‐9,999

7

$10,00

0 or m

ore

9

Don’t k

now/N

ot su

re

<Add

closin

g an

d than

k you>

NON-‐IN

VESTORS

– EXE

MPT

MAR

KET IN

VESTMEN

T OPP

ORT

UNITIES (Part T

hree, 12-‐Mar-‐13)

E.

NOT INTERE

STED

IN SME INVE

STING

1.

Wha

t are th

e three main reason

s why you

aren’t interested in

investing in new

or y

oung

businesses? <Note: Use E2 for

coding

. We will provide

add

ition

al cod

es fo

r other categories>

a. __

____

____

____

____

____

____

____

____

____

____

____

__

b. __

____

____

____

____

____

____

____

____

____

____

____

__

c. __

____

____

____

____

____

____

____

____

____

____

____

__

2a.

Which of the

reason

s listed be

low explain why you

are not

willing to invest in new

or y

oung

businesses? Please choo

se all

that app

ly. <rand

omize orde

r>

2b.

Which ONE of th

ese reason

s BEST explains why you

are not

willing to invest?

1

1 My mon

ey is locked

-‐in – I may not be ab

le to

get it b

ack

2

2 I can


t to someo

ne else

3

3 Po

tential for frau

d

4 4

The pe

ople promoting the compa

ny m

ay not

give m

e the full picture

5

5 Risk of losing my mon

ey

6

6 I kno

w very little

abo

ut th

e compa

ny

7

7 Th

ere is no

way to

predict how

much mon

ey I

will m

ake, if any

8

8 Th

ere is no

ong

oing

inform

ation ab

out h

ow th

e

investmen

t is d

oing

9 9

I don

’t trust d

oing

business o

ver the

internet

The Bron


arket Investor S


miss

ion

45

0

Non

e of th

e ab

ove

3.

Please ra

te you

r interest in investing in unregulated

mutua

l fund

s or investm

ent fun

ds using

a 1-‐10 scale whe

re 1 m

eans

‘No interest at a

ll’ and

10 means ‘V

ery interested

’. By an

un

regu

lated fund

, we mean an

y fund

that m

akes riskier

investmen

ts. Th

is m

eans you

are m


r mon

ey, b

ut you

have the po

tential to earn m

ore. A

s well, it is

sometim

es difficult to get y

our m

oney out. The

regu

lator d

oes

not loo

k at th

ese fund

s.

__

___ Ra

ting (1-‐10)

4.

<Ask only if E3 is ra

ted 7-‐10

, Else Skip to

E5>

Wou

ld you

be

comfortab

le investing in unregulated

fund

s in the following

ways. Please check all tha

t app

ly.

1

Over the

Internet with

out a

dvice using the web

site of

the fund

2 Over the

internet with

out a

dvice using a web

site that

offers investmen

t in several

diffe

rent fu

nds

3

Over the

internet but with

advice from

a fina

ncial

advisor

4

Throug

h my regu

lar finan

cial adviso

r with

out u

sing the

internet

8

Non

e of th

e ab

ove

<Skip to Closing

> 5.


ted 1-‐4>

Which of the

reason

s listed

below

explain why you

are not interested

in investing in unregulated

fund

s? Please choo

se all that app

ly. <rand

omize orde

r>

1

It may be ha

rd to

get m

y mon

ey out

2

I don

’t know

eno

ugh ab

out u

nregulated

fund

s to invest

comfortab

ly

3

Potential for frau

d 4

The pe

ople promoting the fund

may not give me the

full picture

5

Risk of losing my mon

ey

7

There is no

way to

predict how

much mon

ey I will

make, if any

8 Other re

ason

s (please describe)

____

____

____

____

____

____

____

____

____

___

<A

dd closing

and

than

k yo

u>

NOTE: P

ROGRA

MMING IN

STRU

CTIONS IN THE FR

ENCH

VER

SION ARE

IN ENGLISH

. ONLY THE QUESTION TEX

T IS TRA

NSLAT

ED.

RESP

ONDEN

TS DO NOT SEE TH

E PR

OGRA

MMING IN

STRU

CTIONS.

TOUS LES INVE

STISSEURS

– POSSIBILITÉS DE PLAC

EMEN

TS

EXONÉR

ÉS SUR LE M

ARCH

É (partie

1, 12 mars 2

013)

Ce so

ndage est m

ené au

nom

d’un organism

e go

uverne

men

tal qui est

respon

sable de

certains types sp

éciaux de protectio

n et d’édu

catio

n fin

ancières des con

sommateu

rs. Le sond

age pren

dra en

viron 15

-‐20

minutes de votre temps et v

os ré

ponses se

ront gardé

es stric

temen

t confiden

tielles. L’in

form

ation qu

e vous nou

s com

mun

ique

z pe

ut fa

ire

une gran

de différen

ce pou

r les ty

pes d

e po

ssibilités d

e placem

ents qui

seront offe

rts a

ux personn

es com

me vous dan

s le futur.

Avan

t de commen

cer le sond

age, voici que

lque

s que

stions que

nou

s de

vons vou

s poser.

A.

PRÉ-‐SÉLECT

ION

1.

Que

l âge avez-‐vous?

__

__ <En

ter a

ge, terminate if less th

an 20 years o

ld>.

The Bron


arket Investor S


miss

ion

46

2a.

Avez-‐vou

s déjà dé

tenu

un type

d’in

scrip

tion lié aux valeu

rs

mob

ilières? C’est-‐à-‐dire, vou

s êtes-‐vous inscrit aup

rès d

e commission

s des valeu

rs m

obilières provinciales, par exemple :

une firme de

cou

rtage ou

un conseiller finan

cier?

1

Oui, je suis présen

temen

t inscrit.

[Terminate]

2

Oui, j’étais inscrit dan

s le pa

ssé, m

ais je ne

le su

is plus

[Terminate]

3

Non

, je n’ai jamais é

té inscrit.

2b.

Veuillez ind

ique

r lesqu

els d

es produ

its fina

nciers su

ivan

ts vou

s po

sséd

ez m

ainten

ant, y compris les p

rodu

its inclus dan

s un

REER

. Si vou

s ne po

sséd

ez pas le produ

it mainten

ant, veuillez

indiqu

er si vou

s l’avez po

sséd

é au

cou

rs des cinq de

rnières

anné

es <rand

omize orde

r of p

rodu

cts>?

Po

sséd

er Po

sséd

er au cours

Ne pa

s Pas

Mainten

ant des 5 dernières ann

ées p

osséde

r certain

1 2

3

9

Fond

s com

mun

s de placem

ent

(ou d’au

tres fo

nds d

e placem

ent)

1

2

3

9

Actio

ns qui ne sont pas dan

s un

fond

s com

mun

de placem

ent

1

2

3

9

Obligations d’État o

u de

société

(sau

f les obligations d’épa

rgne

du

Cana

da)

1

2

3

9

Dépô

ts à te

rme, CPG

ou

ob

ligations d’épa

rgne

du Ca

nada

1

2

3

9

Placem

ents com

plexes, com

me

Les o

ptions, les con

trats à

term

e

de gré à gré, les fo

nds s

péculatifs,

les p

lacemen

ts exoné

rés s

ur le

marché ou

les p

arts de société en

comman

dite.

<C

ontin

ue if any produ

ct is “ow

n no

w” or “ow

ned pa

st 5y”. If

not, accept 400

who

don

’t qu

alify by ow

nership an

d then

term

inate all others. Rep

ort o

n rate of termination. >

3.

Êtes-‐vou

s de sexe…? <set q

uotas for gen

der to 50

+/-‐2%>

1

Masculin

2

Féminin

4.

Dans que

lle ré

gion

hab

itez-‐vous? <Ba

lance region

al

represen

tatio

n by 201

1 census>

1

Atlantique

2 Qué

bec

3

Ontario

4

Prairie

s (M

an., Sask.)

5

Albe

rta (y com

pris les T

erritoires d

u Nord-‐Oue

st, N

t)

6

Colombie-‐Brita

nnique

(y com

pris Yn)

9

À l’extérieur du Ca

nada

<Term

inate survey>

B.

CLAS

SIFICA

TEURS

– Don

nées dém

ograph

ique

s et p

lus

1a.

Que

l est le niveau supé

rieur d’édu

catio

n qu

e vous avez

atteint?

1

Étud

es prim

aires o

u un

e pa

rtie des étude

s secon

daire

s

<Skip to B2>

2 Un diplôm

e d’étud

es se

cond

aires

<Skip to B2>

3 Un diplôm

e d’étud

es collégiales ou un

program

me de

certificat

<Skip to B2>

4 Un grad

e de

premier c

ycle d’une

université

5

Un diplôm

e d’étud

es su

périe

ures d’une

université

1b

. Lesque

ls de

s diplômes ou titres p

rofessionn

els a

vez-‐vous?

[Coche

z toutes les rép

onses q

ui correspon

dent]

1

MBA

2 An

alyste fina

ncier a

gréé

3 Co

mptab

ilité (C

A, CGA, CMA)

The Bron


arket Investor S


miss

ion

47

4

Droit (LL.B, JD)

5

Gestio

nnaire de placem

ent a

gréé (C

IM)

6

Baccalau

réat en commerce (B

.Com

.)

2.

En prena

nt to

utes les é

pargne

s et tou

s les investiss

emen

ts en

considération (dan

s un RE

ER ou pa

s), m

ais e

n exclua

nt votre

maison, que

l est le m

ontant to

tal actue

l que

vou

s avez é

pargné

ou

investi?

1

Moins de 25

000

$

2

Au m

oins 25 00

0 $, m

ais m

oins de 50

000

$

3

Au m

oins 50 00

0 $, m

ais m

oins de 10

0 00

0 $

4

Au m

oins 100

000

$, m

ais m

oins de 25

0 00

0 $

5

250 00

0 $ ou

plus

9

Ne sais pa

s/Ne veux pas le dire

3.

Que

l est le re

venu

de votre foyer a

vant les impô

ts? Est-‐ce…

1

Moins de 25

000

$

2

25 000

$ -‐ 49

999

$

3

50 000

$ -‐ 74

999

$

4

75 000

$ -‐ 99

999

$

5

100 00

0 $ -‐ 1

49 999

$

6

150 00

0 $ ou

plus

8

Ne veux pas le dire

4.

Au cou

rs de l’ann

ée dernière, à que

lle fréq

uence

approxim

ative avez-‐vou

s utilisé

l’Internet pou

r cha

cune

des

activ

ités s

uivantes? <ran

domize orde

r of a

ctivities>

<C

reate scale with

(1) P

lusie

urs fois p

ar m

ois, (2

) De 1 à 4 fois

tous les trois mois (3) De 1 à 4 fois au

cou

rs de l’an de

rnier, (4)

Jamais>

f. Ré

server et p

ayer pou

r des dép

lacemen

ts

g. Ac

heter d

es billets d

e loterie

ou joue

r à des jeux d’argen

t en

lign

e

h. Pa

yer d

es fa

ctures en utilisant les s

ervices b

ancaire

s en

ligne

i.

Ache

ter d

es produ

its en ligne

(p. ex. : Am

azon

, e-‐Bay,

Kobo

, site

Web

d’entreprise, etc.)

j. Ac

heter d

es fo

nds c

ommun

s de placem

ent o

u d’au

tres

placem

ents

5.

Lequ

el des éno

ncés su

ivan

ts décrit le m

ieux ce qu

e vous

pensez des placemen

ts?

1 Je su

is prêt à

gagne

r un pe

u moins d’argen

t si je pe

ux

être certain de ne

pas en pe

rdre

2 Je su

is prêt à

accep

ter d

es petite

s baisses et d

es petite

s ha

usses d

ans m

es placemen

ts si je peu

x gagn

er plus

d’argent

3 Je su

is prêt à

accep

ter d

es fo

rtes variatio

ns de la valeu

r de

mes placemen

ts, y com

pris des pertes d

’argen

t si

j’ai la chan

ce d’en gagn

er plus

9

Je ne suis pas certain

C.

PROPE

NSION POUR LES PLAC

EMEN

TS COMMER

CIAU

X 1.

Avez-‐vou

s déjà investi dan

s une

petite

entreprise?

1

Oui, m

a prop

re entreprise

2 Oui, l’entreprise

de qu

elqu

’un d’au

tre

3

Non

9 Ne sais pa

s/pa

s certain

2.

Le gou

vernem

ent son

ge à fa

ciliter l’investiss

emen

t des gen

s da

ns des entreprises can

adienn

es. En

supp

osan

t que

le

mon

tant d’argen

t impliqué

et les risque

s vou

s paraissen

t raison

nables, q

uelle est la proba

bilité qu

e vous investissiez

dans une

toute no

uvelle entreprise en

dém

arrage qui n’est

pas c

otée

en bo

urse? À l’aide d’un

e éche

lle de 1 à 10

, où 1

The Bron


arket Investor S


miss

ion

48

signifie

« n’in

vestir DÉ

FINTIVE

MEN

T PA

S » et 10 sig

nifie

«

investir DÉ

FINITIVEM

ENT », veu

illez évaluer la proba

bilité qu

e vous investiss

iez.

__

___

Classemen

t : désire

r investir

3.

À l’aide de

la m

ême éche

lle de 1 à 10

, ind

ique

z la proba

bilité

que vous investissiez dan

s une

jeun

e en

trep

rise qu

i n’est pas

cotée en

bou

rse.

__

___

Classemen

t : désire

r investir <If ratin

g is 1-‐3, skip to

B5>

4.

Il y a plusieurs é

lémen

ts d’une

entreprise qu

i peu

vent vou

s inciter p

lus o

u moins à investir da

ns celle-‐ci. Po

ur cha

cune

des

descrip

tions énu

mérée

s ci-‐d

essous, veu

illez évaluer à que

l po

int e

lles p

ourraien

t affe

cter votre volon

té d’in

vestir à l’aide

d’un

e éche

lle de 1 à 5, où 1 sign

ifie « be

aucoup

MOINS

suscep

tible d’in

vestir », 5 sign

ifie « be

aucoup

PLU

S suscep

tible

d’investir » et 3 sign

ifie « au

cun im

pact su

r votre volon

té

d’investir ». <Ra

ndom

ize orde

r – Add

a “Sans objet” column>

o.

Il s’agit d’un

e en

trep

rise locale qui pou

rrait v

ous ê

tre

utile

p. Une

fois qu

e votre argent est investi, vous ne po

uvez

pas le retirer avant plusieu

rs ann

ées

q. Il s’agit d’un

e en

trep

rise bien

établie qui a un no

uveau

plan

de croissan

ce

r. Il s’agit d’un

e en

trep

rise en

dém

arrage qui a une

idée

qui vou

s plaît

s. Vo

us ne savez rien de

s propriétaire

s de l’entreprise

t. Vo

us con

naissez b

ien le se

cteu

r d’activité

de

l’entreprise

u. Vo

us pou

vez investir par l’en

trem

ise de

votre

conseiller finan

cier et o

bten

ir ses c

onseils

v. Vo

us ne po

uvez pas re

tirer votre argen

t, mais v

otre

investissemen

t vou

s procurera une

source de

finan

cemen

t stable si l’en

trep

rise réussit

w. Il se peu

t que

l’en

trep

rise ne

rapp

orte pas beaucou

p d’argent, m

ais il s’agit d

’une

nob

le cau

se

x. Il n’y au

ra pas beaucou

p d’inform

ation sur l’entreprise

parce qu

’elle est jeun

e y.

Il se peu

t que

vou

s deviez attend

re que

lque

s ann

ées

pour sa

voir si votre investissemen

t est re

ntab

le.

z. Il est facile d’acheter des parts de l’entreprise sur

l’Interne

t aa. Il n’y a au

cun moyen

de savoir combien

d’argen

t vou

s gagn

erez et v

ous risq

uez de

tout le perdre

bb. T

out ce qu

e vous sa

vez sur l’entreprise

se trou

ve su

r l’Interne

t

L’un

e des n

ouvelles tenda

nces d’investiss

ement sur l’Internet s’ap

pelle

le « fina

ncem

ent collectif ». Il y a quelques e

xemples de fin

ancement

collectif au

RU et il est su

r sa lancée aux É.-‐U

. L’idée de ba

se du

finan

cement collectif est q

u’un

group

e de petits investiss

eurs

investiss

ent d

es so

mmes d’argent relativem

ent p

etite

s dan

s des

nouv

elles o

u jeun

es entreprises qui leur plaise

nt. Il ne s’ag

it pa

s d’un

marché réglem

enté com

me le m

arché bo

ursie

r, mais il ressemble plus à

e-‐Ba

y où

vou

s pou

vez v

oir u

ne descriptio

n du

« produ

it » en lign

e et

décider d

e l’acheter. La gran

de différence, c’est que vou

s achetez un

placem

ent p

lutôt q

u’un

objet que vou

s pou

vez tenir d

ans v

os m

ains. Il

n’est p

as garan

ti qu

e vous gag

niez de l’argent a

vec celui que vou

s avez

investi et il y a un risqu

e bien ré

el que vou

s le perdiez en entier. Vo

us

êtes libre de décider si vou

s vou

lez a

ppuyer l’idée parce que vou

s pensez que l’entreprise réussira.

5.

En su

pposan

t que

le m

ontant d’argen

t impliqué

vou

s paraît

raison

nable et que

l’idée

de l’entreprise vous plaît, que

lle est la

prob

abilité que

vou

s investissiez dan

s une

nou

velle ou jeun

e

The Bron


arket Investor S


miss

ion

49

entrep

rise pa

r l’entremise d’un

site de fin

ancemen

t collectif

sur l’In

ternet? Ve

uillez évalue

r la prob

abilité que

vou

s investissiez su

r une

échelle de 1 à 10

, où 1 sign

ifie « n’investir

DÉFINITIVEM

ENT PA

S » et 10 sign

ifie « investir

DÉFINITIVEM

ENT ».

__

___

Classemen

t : désire

r investir

<If rating is 1-‐3, sk

ip to

section E (Part 3

), ELSE sk

ip to

section D (Part 2

)

INVE

STISSEURS

DU SEC

TEUR DES

AFFAIRE

S – PO

SSIBILITÉS

DE PLAC

EMEN

TS EXO

NÉR

ÉS SUR LE M

ARCH

É (partie

2, 12 mars 2

013)

D.

INVE

STIR PAR

LE BIAIS DU

FINAN

CEMEN

T CO

LLEC

TIF

1a.

Investir da

ns une

entreprise da

ns un marché no

n réglem

enté

comme celui-‐ci com

porte plusieurs risqu

es poten

tiels. Q

uand

no

us parlons de marché no

n réglem

enté, n

ous v

oulons dire

un

marché de

placemen

ts plus risqu

és. C

ela sign

ifie qu

e vous êtes

plus su

scep

tible de pe

rdre votre argen

t, mais v

ous a

vez la

possibilité d’en gagn

er plus. Aussi, il est parfois difficile de

retirer votre argen

t. L’organism

e de

réglem

entatio

n ne

surveille pas les m

archés non

réglem

entés. À l’aide

de la liste

des risqu

es énu

mérés ci-‐d

essous, veu

illez iden

tifier c

eux qu

i vous préoccupe

nt en ce qui a trait à

l’investiss

emen

t dan

s des

marchés non

réglem

entés p

ar le biais du fin

ancemen

t collectif.

<ran

domize orde

r>

1b.

Que

ls sont les D

EUX risqu

es qui vou

s préoccupe

nt le plus?

1

1 Mes fo

nds s

ont immob

ilisés –

Il se

peu

t que

je

ne

puisse pa

s les re

tirer

2

2 Je ne pe

ux pas ven

dre cet investissemen

t à

qu

elqu

’un d’au

tre

3

3 Po

ssibilité de frau

de

4

4 Les g

ens q

ui fo

nt la promotion de

l’en

trep

rise

peuven

t ne pa

s me do

nner

l’ape

rçu glob

al

5

5 Risque

de pe

rdre m

on argen

t

6 6

J’en sais très peu

sur l’entreprise

7

7 Il n’y a pa

s moyen

de savoir combien

d’argen

t

je gagne

rai, si j’en

gagne

rai

8

8 Au

cune

inform

ation n’est com

mun

iqué

e sur

l’état d

e l’investissemen

t 9

9 Je ne fais pas con

fiance au

x affaire

s con

clue

s

sur l’In

ternet

2.

L’éche

lle ci-‐d

essous m

ontre le m

ontant que

vou

s seriez prêt à

investir en

utilisan

t le fin

ancemen

t collectif. En supp

osan

t que

vous aim

ez les idé

es de l’entreprise po

ur fa

voriser sa

croissan

ce et p

ensez qu

’elle offre un

bon

poten

tiel, qu

elle est

la so

mme maxim

ale qu

e vous se

riez prêt à investir da

ns

chacun

e de

s circ

onstan

ces s

uivantes? <U

se th

ree diffe

rent

slide

r bars w

ith peo

ple assig

ned rand

omly: 0

$ -‐ 2 00

0 $; 0 $ -‐ 4

000 $; and

0 $ -‐ 6 00

0 $. A

llow any value

to be selected

but put

visual m

arkers in as a

ppropriate. R

ando

mize orde

r of a

-‐i>

j. Vo

us con

naissez les propriétaire

s de l’entreprise

k. De

s amis ont investi dan

s l’entreprise et la

recomman

dent

l. Le plan d’affaire

s est très détaillé

m. Vo

tre argent est investi de façon pe

rman

ente – Vou

s ne

pou

vez pa

s le retirer

n. L’en

trep

rise s’attaqu

e à un

e cause en

laqu

elle vou

s croyez

o. L’en

trep

rise a dé

jà d’excellents a

ntécéd

ents

p. Le se

cteu

r d’activité

de l’entreprise

est en pleine

croissan

ce

q. Ch

aque

ann

ée, vou

s recevez un rapp

ort finan

cier

vérifié par un cabine

t com

ptab

le indé

pend

ant

r. L’en

trep

rise ne

dém

arrera pas avant d’avoir accumulé

suffisammen

t de capitaux de placem

ent

The Bron


arket Investor S


miss

ion

50

3a.

En con

sidéran

t la somme d’argent poten

tiellemen

t impliqué

e,

deman

derie

z-‐vous des con

seils professionn

els a

vant de

pren

dre la décision d’investir?

1 Oui

2

Non

<Skip to D4>

3 Pa

s certain

<Skip to D4>

3b

. À laqu

elle des personn

es su

ivan

tes s

eriez-‐vous le plus

suscep

tible de de

man

der d

es con

seils?

Choisissez une

répo

nse.

1

Un conseiller q

ui est autorisé

à ven

dre de

s actions

2

Un conseiller/plan

ificateur fina

ncier q

ui ven

d de

s fon

ds

commun

s de placem

ent e

t des

CPG (m

ais p

as des actions)

3

Comptab

le

4

Avocat

5

Autre (veu

illez décrire)

4.

Veuillez é

valuer l’im

portan

ce de chacun

des ty

pes

d’inform

ation suivan

ts pou

r vou

s aider à décider d’in

vestir

dans une

entreprise. Utilisez une

échelle de 1 à 5, où 1 sign

ifie

que l’information « n’est p

as du tout nécessaire

», 3 sign

ifie «

qu’il est bien de

l’avoir »

et 5

sign

ifie qu

’elle est « essen

tielle ».

<ran

domize orde

r>

h. Inform

ation fin

ancière sur l’entreprise

i. Plan

d’affa

ires d

étaillé, y com

pris les p

rodu

its/services

clés

j. Inform

ation sur les propriétaire

s et les promoteu

rs de

l’entreprise, y com

pris des vérificatio

ns des casiers

judiciaires e

t des infractio

ns aux lois su

r les valeu

rs

mob

ilières

k. Inform

ation fournie an

nuellemen

t sur l’état de

l’entreprise

l. Le m

ontant que

les p

ropriétaire

s et les dirigean

ts

recevron

t pou

r leu

r travail accompli

m. Ce

que

l’en

trep

rise fera de l’argen

t obten

u de

s investisseurs

n. Risque

s liés à

l’investiss

emen

t dan

s l’entreprise

5a.

Lequ

el des éno

ncés su

ivan

ts décrit le m

ieux votre cap

acité

à

compren

dre l’état finan

cier

d’un

e en

trep

rise? [coche

z un

e répo

nse]

1

Je ne sais pas ce qu

’est un état fina

ncier

2.

Je ne les c

ompren

ds pas

3

Je com

pren

ds les b

ases

4

Je les c

ompren

ds assez bien po

ur juger à

que

l point ils

sont crédibles

5b.

<Ask ONLY if D4a is ra

ted 4 or 5> Lesque

ls de

s types su

ivan

ts

d’inform

ation fin

ancière considérez-‐vou

s être de

«

l’information fin

ancière fia

ble »? Coche

z toutes les rép

onses

qui correspon

dent.

1

Un état fina

ncier p

répa

ré par le com

ptab

le de

l’entreprise

2

Un état fina

ncier v

érifié pa

r un cabine

t com

ptab

le

indé

pend

ant

3

Une

déclaratio

n de

revenu

s de l’entreprise présen

tée à

l’Agence du

revenu

du Ca

nada

(ARC

)

4 Au

cune

de ces rép

onses

5c.

<Ask only if D4

c is rated 4 or 5> Lesque

ls de

s types

d’inform

ation suivan

ts su

r les propriétaire

s ou prom

oteu

rs de

l’entreprise dé

sirez-‐vous voir a

vant de dé

cide

r d’in

vestir?

Co

chez to

utes les rép

onses q

ui correspon

dent.

1

Antécéde

nts e

t expérience de

l’en

trep

rise

2

Faillite

s ou insolvab

ilités p

récéde

ntes

The Bron


arket Investor S


miss

ion

51

3

Vérification de

s antécéd

ents, y com

pris le casier

judiciaire et les infractio

ns aux lois su

r les v

aleu

rs m

obilières

4

Aucune

de ces rép

onses

6.

Lesque

ls de

s moyen

s suivants s

eriez-‐vous prêt à

utilise

r pou

r investir da

ns une

nou

velle ou jeun

e en

trep

rise? <Oui, N

on, Pas

certain – Ra

ndom

ize orde

r of m

etho

ds>

a.

Sur l’In

ternet sa

ns dem

ande

r de conseils en utilisant le

site Web

de l’entreprise

qui

cherche de

s fon

ds d’in

vestissemen

t

b.

Sur l’In

ternet sa

ns dem

ande


site Web

qui offre

l’investissemen

t dan

s plusie

urs e

ntreprise

s différen

tes

c.

Sur l’In

ternet, m

ais e

n de

man

dant les c

onseils d’un

conseiller finan

cier

d.

Par l’entremise

de mon

con

seiller fina

ncier h

abitu

el

sans utilise

r l’In

ternet

7.

<ONLY present m

etho

ds th

at were marked ‘Non

’ or ‘Pa

s certain’ in

D6>

Une

« notice d’offre » fournit d

es

renseign

emen

ts de ba

se su

r une

entreprise. Elle don

ne aussi

plusieurs d

roits de pren

dre de

s mesures si l’en

trep

rise se

représen

te fa

ussemen

t, mais il est proba

blem

ent n

écessaire

d’en

gager u

n avocat dan

s ce cas-‐ci. En supp

osan

t qu’un

e no

tice d’offre était d

ispo

nible, se

riez-‐vous prêt à

investir en

utilisant cha

cun de

s moyen

s suivants?

a.

Sur l’In

ternet sa

ns dem

ande


site Web

de l’entreprise

qui

cherche de

s fon

ds d’in

vestissemen

t

b.

Sur l’In

ternet sa

ns dem

ande


site Web

qui offre

l’investissemen

t dan

s plusieu

rs entreprises différen

tes

c.

Sur l’In

ternet, m

ais e

n de

man

dant les c

onseils d’un

conseiller finan

cier

d.

Par l’entremise

de mon

con

seiller fina

ncier h

abitu

el

sans utilise

r l’In

ternet

8.

À qu

el point pen

sez-‐vous qu’il est risq

ué d’in

vestir da

ns des

nouvelles o

u jeun

es entreprises? Utilisez une

échelle de 1 à 5,

où 1 sign

ifie « faible risque

», 3 sign

ifie « risqu

e moyen

» et 5

sig

nifie

« risque

élevé »?

__

__ Classem

ent d

u risqu

e

9.

Et fina

lemen

t, si vous pou

viez obten

ir l’information qu

e vous

avez iden

tifiée comme étan

t impo

rtan

te re

lativ

emen

t au choix

du m

omen

t et a

ux risque

s liés à

l’investissemen

t dan

s une

no

uvelle ou jeun

e en

trep

rise, que

l mon

tant se

riez-‐vous prêt à

investir?

Diriez-‐vou

s...

0

Rien

du tout

1 1 $ -‐ 5

00 $

2

500 $ -‐ 9

99 $

3

1 00

0 $ -‐ 1

999

$

4

2 00

0 $ -‐ 3

499

$

5

3 50

0 $ -‐ 4

999

$

6

5 00

0 $ -‐ 9

999

$

7

10 000

$ ou plus

9

Ne sais pa

s/pa

s certain

<Add

closin

g an

d than

k you>

The Bron


arket Investor S


miss

ion

52

NON-‐IN

VESTISSEURS

– POSSIBILITÉS DE PLAC

EMEN

TS

EXONÉR

ÉS SUR LE M

ARCH

É (partie

3, 12 mars 2

013)

E.

PAS INTÉRE

SSÉ À INVE

STIR DAN

S LES PE

TITES OU

MOYENNES ENTR

EPRISES

1.

Que

lles s

ont les trois raisons prin

cipa

les p

our lesqu

elles v

ous

n’êtes pas intéressé à investir da

ns les n

ouvelles o

u jeun

es

entrep

rises? <N

ote: Use E2 for c

oding. W

e will provide

ad

ditio

nal cod

es fo

r other categories>

a. __

____

____

____

____

____

____

____

____

______

____

____

b.

__

____

____

____

____

____

____

____

____

____

____

____

_ c.

__

____

____

____

____

____

____

____

____

____

____

____

__

2a.

Lesque

lles d

es ra

isons su

ivan

tes e

xplique

nt pou

rquo

i vou

s n’êtes pas prêt à

investir da

ns des nou

velles o

u jeun

es

entrep

rises? Ch

oisissez to

utes les rép

onses q

ui correspon

dent.

<ran

domize orde

r>

2b.

LAQUELLE de ces raisons explique

LE MIEUX po

urqu

oi vou

s n’êtes pas prêt à

investir?

1 1

Mes fo

nds s

ont immob

ilisés –

Il se

peu

t que

je

ne

puisse pa

s les re

tirer

2

2 Je ne pe

ux pas ven

dre cet investissemen

t à

qu

elqu

’un d’au

tre

3

3 Po

ssibilité de frau

de

4

4 Les g

ens q

ui fo

nt la promotion de

l’en

trep

rise

peuven

t ne pa

s me do

nner

l’ape

rçu glob

al

5

5 Risque

de pe

rdre m

on argen

t

6 6

J’en sais très peu

sur l’entreprise

7

7 Il n’y a pa

s moyen

de savoir combien

d’argen

t

je gagne

rai, si j’en

gagne

rai

8

8 Au

cune

inform

ation n’est com

mun

iqué

e sur

l’état d

e l’investissemen

t

9

9 Je ne fais pas con

fiance au

x affaire

s par

l’entremise de

l’Internet

3.

Veuillez é

valuer votre intérêt à

investir da

ns les fon

ds

commun

s de placem

ent o

u fond

s de placem

ent n

on

réglem

entés à

l’aide

d’une

échelle de 1 à 10

, où 1 sign

ifie « pa

s du

tout intéressé » et 10 sign

ifie « très intéressé ». Par fo

nds

non réglem

enté, n

ous v

oulons dire

tout fo

nds q

ui présente de

s risqu

es plus é

levés. Cela sign

ifie qu

e vous êtes p

lus s

usceptible

de perdre votre argent, m

ais v

ous a

vez la possibilité d’en

gagn

er plus. Aussi, il est parfois difficile de retirer votre argen

t. L’organism

e de

réglem

entatio

n ne

surveille pas ces fo

nds n

on

réglem

entés.

__

___ Classemen

t (1-‐10

) 4.


ted 7-‐10

, Else Skip to

E5>

Vou

s paraîtrait-‐il

raison

nable d’investir da

ns des fo

nds n

on ré

glem

entés d

es

façons su

ivan

tes? Coche

z toutes les rép

onses q

ui

correspo

nden

t.

1 Sur l’In

ternet sa

ns dem

ande

r de conseils en

utilisa

nt le

site Web

du fond

s 2

Sur l’In

ternet sa

ns dem

ande

r de conseils en

utilisa

nt le

site Web

qui offre l’investissemen

t dan

s plusie

urs

fond

s différen

ts

3

Sur l’In

ternet, m

ais e

n de

man

dant les c

onseils d’un

conseiller finan

cier

4

Par l’entremise

de mon

con

seiller fina

ncier h

abitu

el

sans utilise

r l’In

ternet

8

Aucune

de ces rép

onses

<Skip to Closing

> 5.


ted 1-‐4>

Lesqu

elles d

es ra

isons énu

mérée

s

ci-‐dessous explique

nt pou

rquo

i vou

s n’êtes p

as intéressé à

The Bron


arket Investor S


miss

ion

53

investir da

ns des fo

nds n

on ré

glem

entés? Cho

isissez toutes les

répo

nses qui correspon

dent. <rand

omize orde

r>

1

Je peu

x avoir d

e la difficulté à re

tirer m

on argen

t

2 Je ne conn

ais p

as assez bien les fon

ds non

réglem

entés

po

ur m

e sentir à l’aise d’investir

3

Possibilité de frau

de

4

Les g

ens q

ui fo

nt la promotion du

fond

s peu

vent ne

pas

me do

nner l’ap

erçu globa

l

5 Risque

de pe

rdre m

on argen

t

7 Il n’y a pa

s moyen

de savoir combien

d’argen

t je

gagn

erai, si j’en gagn

erai

8

Autres ra

isons (veu

illez les d

écrire)

__

____

____

____

____

____

____

____

__

<A

dd closing

and

than

k yo

u>

>

The Bron


arket Investor S


miss

ion

54

APPE

NDIX B.

CROWDF

UNDING – LITER

ATURE

REV

IEW – 01-‐28

-‐2013

The literature review

was con

ducted

during the mon

th of Jan

uary 201

3 on

the topic of ‘crowdfun

ding

’. Crowdfun

ding

is quite a new

area of acade

mic

research and

stud

y on

ly dating ba

ck to

a cou

ple of years. Most o

f the

research th

at has bee

n cond

ucted so fa

r, concen

trates predo

minately on

the topic

of crowdsou

rcing. The

literature includ

ed in th

is re

view

is fo

cused on

‘equ

ity-‐based

’ crowdfun

ding

. Tw

o clear a

nd con

cise definition

s of crowdfun

ding

are:

the “practice of m

any (i.e. crowds of) peop

le investing sm

all amou

nts o

f mon

ey over the Internet in early-‐stage businesses in exchan

ge fo

r equ

ity interests

that are not re

gistered with

the Securities a

nd Excha

nge Co

mmiss

ion (an exchan

ge com

miss

ion)”.

i

“The use of the internet to

raise

mon

ey th

roug

h sm

all con

tributions from

a large nu

mber o

f investors”ii

Amon

g the literature review

it is gen

erally accep

ted that crowdfun

ding

will provide

small business a

nd entrepren

eurs with

an alternative metho

d to

raise capital outside

of traditio

nal ban

k loan

s and

credit, an

d relying on

friend

s and

family. Crow

dfun

ding

introd

uces an en

tirely ne

w m

etho

d of ra

ising

capital tha

t offe

rs investing op

portun

ities to

peo

ple ou

tside of th

e accred

ited investor exemption an

d provides investmen

t opp

ortunitie

s tha

t have

form

erly not bee

n available to th

em. It is also accepted

that crowdfun

ding

will attract a num

ber o

f unsop

histicated

and

novice investors s

igna

lling

the

need

for full and

fair disclosure stan

dards e

specially th

ose pe

rtaining

to risk and

investor protection. A

t the

same tim

e, re

gulatio

ns can

not b

e overly

burden

some an

d costly th

at entrepren

eurs and

small businesses a

re barred from

participating in crowdfun

ding

. Th

e literature is organ

ized

und

er fo

ur

main them

es:

1. Inform

al Investors;

2. Crow

dfun

ding Overview;

3. Re

gulatory; and

4.

Ad

ditio

nal sou

rces of interest from th

e med

ia and

acade

mia.

To highlight a fe

w key points from th

e literature review

, the

re are tw

o markets fo

r crowdfun

ding

: seed mon

ey outsid

e of friend

s/family and

the gap

betw

een an

gel investors and

ven

ture cap

italists. Some sectors m

ay be more suita

ble to crowdfun

ding

than

others, in particular con

sumer-‐fa

cing

prod

ucts versus tho

se with

com

plex intellectua

l prope

rty an

d specialized

techno

logy.

The Bron


arket Investor S


miss

ion

55

For the

crowdfun

ding

investor, the

re are intrinsic

and

extrin

sic m

otivators involved. Intrin

sic m

otivators relates to

pleasure of doing

a certain ta

sk. (i.e.

recogn

ition

, persona

l satisfaction, excite

men

t in be

ing involved

in a start-‐up

). Extrin

sic motivators a

re externa

l rew

ards. In th

e case of e

quity

crow

dfun

ding

this is profit-‐driv

en and

can

also includ

e bu

ilding ne

tworks and

relatio

nships. M

otivators to pa

rticipate in crowdfun

ding

, as a

n en

trep

rene

ur/small business o

wne

r, includ

e the fin

ancial statem

ent (raising capital/finan

cial goa

l); pub

lic atten

tion that arises aroun

d the project; an

d ob

taining feed

back abo

ut th

e prod

uct/service offered. A

gain, w

e see bo

th intrinsic an

d extrinsic motivators a

t play.

Success o

f traditio

nally-‐fu

nded

ven

tures is o

ften

linked

to geo

grap

hy. Bo

th ang

el investors a

nd VC invests in a bu

sine

ss th

at is on average 50

km close to

ho

me or office. Wha

t role will th

e geog

raph

y of investors p

lay in crowdfun

ding

? Ac

cording to th

e literature, locatio

n proxim

ity se

ems to be

the case

amon

g crow

dsou

rcing projects.

From

a re

gulatory point of view, a m

ain challeng

e will be ba

lancing the interests o

f the

entrepren

eur/SM

E an

d the crow

dfun

ding

investor. Setting

disclosure re

quire

men

ts th

at are fu

ll, fa

ir an

d cost efficien

t while protecting investors from th

e inhe

rent risks involved in crowdfun

ding

investing will be

key. Interm

ediarie

s can

play a role with

com

pliance. Self-‐p

olicing capa

bilities o

f crowd may also play an im

portan

t role in oversight via fo

rums,

discussion

s boa

rds, re

view

s, and

project ra

ting sche

mes th

at will help wee

d ou

t fraud

ulen

t players.

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

56

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

INFO

RMAL

INVE

STORS

Investmen

t Pattern of Informed

Investors in the Albe

rta Private

Equity M

arket

http://w

ww.ic.gc.ca/eic/site

/061

.nsf

/vwap

j/Practicesan

dPatterns_e.pd

f/$FILE/Practicesan

dPatterns_e.pd

f

Robinson

, Micha

el J. and

Th

omas J. Cottrell

Journa

l of Small B

usiness

Man

agem

ent 2

007

45(1), pp

.47-‐67

“This s

tudy identifies three m

ain types o

f inform

al investors in private equity m

arkets:

relatio

nship investors, opp

ortunity-‐based

investors, and

ang

el investors. W

e fin

d evidence

that th

e first tw

o investor ty

pes a

re a m

ajor

total sou

rce of cap

ital and

they prefer to invest sm

aller a

mou

nts c

lose to

ho

me an

d in th

e context o

f existing

relatio

nships. W

ith re

spect to an

gel investors,

we fin

d evidence of stratificatio

n in th

eir d

esire

d investment a

mou

nt which is con

sistent with

a

mod

el where th

eir investm

ents evolve thou

gh a

life cycle of investing. W

e also find

evidence that

chan

ges to capital m

arket regulations th

at

allow fo

r low

er investment a

mou

nts b

y this type

of investor increase th

e am

ount of cap

ital

available for e

arly-‐stage firm

s.”

• Co

mpa

nies th

at ra

ise cap

ital throu

gh priv

ate

equity te

nd to

be in early-‐stage of b

usiness.

• Risks to investors include

: techn

olog

ical risk

(cap

ability of firm

to brin

g prod

uct to market);

market risk

(customer dem

and, ado

ption an

d compe

tition); agency risk (in

form

ation

asym

metry between man

agem

ent a

nd its

investors).

• Form

al investors (institu

tiona

l) are be

lieved to

care m

ore ab

out m

arket risk

than

agency risk.

To m

itigate m

arket risk

, investors sp

ecialize in

certain indu

strie

s. Inform

al investors a

re less

concerne

d with

weaker m

anagem

ent /marketin

g expe

rtise

of firm

as c

ompa

ny can

hire

these as

firm m

atures and

business n

eed de

velops.

Preferen

ce is to

invest with

entrepren

eurs with

strong te

chno

logy sk

ills. A

pproach: “bu

y an

d grow

” •

Inform

al investors s

creen more on

agency than

market risk

and

rely m

ore on

their n

etwork to

gather inform

ation ab

out investin

g op

portun

ities. Th

ey put m

ore diligen

ce on

assessing man

agerial skills vs. te

chno

logical

soph

istication. A

pproach: “bu

y an

d watch”

• An

othe

r type of inform

al investor is th

e “buy

an

d ho

pe”. This type of investor has less

investmen

t cap

ital tha

n the typical angel

investor and

doe

s not actively seek out

investmen

t opp

ortunitie

s but th

ey do represen

t an

impo

rtan

t poo

l of cap

ital available.

• Re

lativ

ely little

research has been do

ne on the

investmen

t beh

aviour of e

arly-‐stage investors .

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

57

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

This is th

e type

of inv

estor c

rowdfun

ding

will

target.

• Inform

al investors p

refer to invest close to

hom

e •

Inform

al investors p

refer to invest whe

re th

ere is

an existing relatio

nship.

• Inform

al investors p

refer to invest in indu

strie

s they und

erstan

d.

• Inform

al investors p

refer to invest in firm

s with

more tangible assets.

• Early

-‐stage angel investors c

ontribute sm

aller

amou

nts to diversify agency risk .

• Governm

ent regulations th

at lower m

inim

um

investmen

t for inform

al investors w

ill increase

the nu

mbe

r of ind

ividua

ls in th

e marketplace

and total cap

ital invested.

• Inform

al investors a

re a larger so

urce of cap

ital

at early-‐stage firm

s tha

n institu

tiona

l (form

al)

investors.

• An

overlo

oked

category of inform

al investor is

the no

vice angel. Th

ey to

o invest in early stage

but a

re not as b

ias tow

ards firm

s in ho

me

province.

Practices and

Patterns o

f Informal

Investors

http://w

ww.ic.gc.ca/eic/site

/061

.nsf

/vwap

j/Practicesan

dPatterns_e.pd

f/$FILE/Practicesan

dPatterns_e.pd

f

Riding, D

r. Allan

Principa

l, Eq

uino

x Professor o

f Finan

ce

Scho

ol of B

usiness

Carle

ton University

Ottaw

a, ON

Stud

y looks a

t cha

racteristics, practices,

patterns and

perspectiv

e of Can

adian inform

al

investors (private eq

uity investors). Provides

upda

ted profile of typical individu

al investor

(age, edu

catio

n, occup

ation, fina

ncial traits);

private eq

uity investmen

t patterns (siz

e, se

ctor,

stage, freq

uency); investors’ experience of

private eq

uity investmen

t opp

ortunitie

s in

Cana

da. Special focus on SM

E’s. Total of 6

1 pa

rticipan

ts across C

anad

a.

• M

ajority

of informal investors h

ave a po

st/and

or

unde

rgradu

ate de

gree. Most com

mon

professio

nal designa

tions amon

g pa

rticipan

ts are

C.A.s a

nd professiona

l engineers.

• It is likely that inform

al investors a

re “repe

at”

private eq

uity investors. O

ver 7

0% invest in at

least o

ne inform

al investmen

t every tw

o or th

ree

years a

nd one

-‐third invest se

veral tim

es ann

ually.

On average, investors rep

ort h

aving slightly

less

than

$1M

M available for e

ach private eq

uity

investmen

t. • Software de

als a

re m

ost p

opular, b

ut average size

of each de

al te

nds to be

small. De

als in fin

ance

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

58

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

and real estate sector accou

nt fo

r a

dispropo

rtiona

te amou

nt invested

. • Investors invest in multip

le se

ctors.

• Investmen

ts m

ade pred

ominately at se

ed and

start-‐up

stages.

• Investmen

ts te

nd to

be local. 68%

of d

eals located

with

in 50km to

investor’s hom

e or office.

• Po

tential investm

ent o

pportunitie

s com

e mainly

through referrals from business a

ssociates

(accou

ntan

ts, b

ankers, law

yers, o

ther investors).

Investors a

re often

app

roache

d with

op

portun

ities.

• Investors a

re looking for o

pportunitie

s with

the

right peo

ple; with

market p

oten

tial and

whe

re

they can

add

significant value

.

• Inform

ation/du

e diligen

ce investors p

erform

includ

e review

of finan

cial statem

ents;

projectio

ns; m

eet w

ith prin

cipa

ls; con

duct

inform

al re

ference checks on principa

ls’ track

record. Others h

ire te

am of legal, accou

ntan

ts to

scrutin

ize de

als.

• Investors h

ave expe

ctation of high rate of returns

and exit tim

e expe

ctations. Th

e majority

will look

to exit investm

ent w

ithin 3 – 5 years. Po

tential

exit type

s are IPOs; acquisitions; b

uy-‐backs;

second

ary sale; and

write-‐offs.

• SM

Es are ill-‐p

repa

red to attract priv

ate

investmen

t. •

They have un

derdevelop

ed business p

lans.

• Po

orly develop

ed ideas a

bout m

arkets and

revenu

e stream

s.

• Inab

ility to

man

age commercialization

process.

• Th

ey te

nd to

have un

willingness to relinqu

ish

control and

expect tha

t large investmen

ts

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

59

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

from

outsid

e will com

e with

little

interferen

ce from

investors.

• En

trep

rene

urs ten

d to overvalue

the idea and

un

dervalue

fina

ncial and

non

-‐fina

ncial m

eans

requ

ired to grow and

develop

a business.

CR

OWDFU

NDING OVE

RVIEW

The Ve

nture Crow

d: Crowdfun

ding

Equity In

vestmen

t Into Bu

siness

http://w

ww.nesta.org.uk/library/do

cumen

ts/The

VentureC

rowd.pd

f

Collin, Liam and

Yan

nis

Pierrakis

Nesta Ope

ratin

g Co

mpa

ny

Nesta 201

2

Crow

dfun

ding is big business. The

idea of

finan

cing projects o

r businesses w

ith sm

all

contrib

utions from

large nu

mbe

rs of p

eople is

catching on in a big way and

now

accou

nts for

significan

t amou

nts. In 20

11 alone

, $1.5 billion

was ra

ised through crow

dfun

ding fo

r projects

and bu

sinesses in ne

ed of fun

ds. Not only do

es

the mod

el provide

fina

nce bu

y also access to a

large nu

mbe

r of p

eople who

can

test and

market a

n idea. Crow

dfun

ding ta

kes a

num

ber

of differen

t forms, th

e most successful of w

hich

has b

een the reward-‐ba

sed mod

el whe

re

participan

ts re

ceive no

n-‐fin

ancial re

wards in

exchan

ge fo

r don

ating to a project. Th

e mod

el

effectively ha

rnesses n

ot only the contrib

utors’

desire for the

reward bu

t also

the intrinsic

or

social m

otivation to back a project. Other fo

rms

of th

e mod

el are, h

owever, also

growing

rapidly. The

most recen

t of the

se is equ

ity

crow

dfun

ding, w

here individu

als receive sm

all

stakes in a priv

ately ow

ned youn

g bu

siness in

return fo

r investm

ent.

While equ

ity crowdfun

ding sh

ares m

any

features of the

reward mod

el, o

ne significant

diffe

rence is the combina

tion of both fin

ancial

• Tw

o markets fo

r crowdfun

ding are se

ed m

oney

outside of friend

s/family and

the gap be

tween

angel investors and

ven

ture cap

. •

First step of crowdfun

ding process is gettin

g on

to

platform

. Platform

ope

rators re

view

plan an

d some level of vettin

g is do

ne. Some vetting

dimen

sions are likelihoo

d of frau

d, re

putatio

n of

entrep

rene

ur(s), an

d suita

bility to crowdfun

d.

Some platform

s will con

duct due

diligence on

ce

target fu

nding ha

s been reache

d bu

t before

release of cap

ital. Pitche

s are th

en uploa

ded for

prospe

ctive investors to brow

se. Usually video

or

text explains b

usiness m

odel, o

wne

r backgroun

d,

how m

uch capital is s

ought, pu

rpose of cap

ital for

and ho

w m

uch eq

uity is being offe

red.

• Increased interaction be

tween en

trep

rene

ur and

po

tential investors m

ay be via forums o

n platform

, em

ails, m

eetin

gs to

upd

ate fund

raising progress.

• Th

e ‘all-‐or-‐nothing’ m

odel – com

pany se

ts fu

nding

date (fun

ding windo

w) to meet target o

f raisin

g capital. If deadline is no

t met, receives n

othing

and mon

ey is re

turned

to investors. Cap

ital raised

cann

ot exceed target amou

nt.

• Fees th

at are cha

rged

are m

ost d

epen

dent on

success o

f fun

ding. A fixed

percent is cha

rged

if

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

60

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

and no

n-‐fin

ancial m

otives fo

r investin

g. The

mod

el also

differs form other fo

rms o

f equ

ity

finan

cing. Crow

dfun

ded bu

sinesses d

o no

t have

to adh

ere to th

e stric

t accou

nting stan

dards

requ

ired of pub

lic com

panies and

unlike othe

r risk capital provide

rs, crowdfun

ding investors

may have no

experience in m

aking such

investmen

ts.

Repo

rt Con

tents:

1.

The rise of crowdfun

ding

2.

Wha

t is e

quity

crowdfun

ding?

3.

The market o

pportunity fo

r equ

ity

crow

dfun

ding

4.

Th

e crow

dfun

ding m

odel fa

ces s

everal

challenges

5.

The future fo

r the

mod

el

6.

Endn

otes

target is re

ache

d. Som

e platform

s also

cha

rge an

investor fe

e.

• Tran

sfer of m

oney to

entrepren

eur is throu

gh

escrow

accou

nt. Som

e platform

s (i.e. Seedres)

operate a no

minee and

man

agem

ent system

represen

ting interests o

f investors.

• Th

ere is varia

tion across sites in term

s of investor

votin

g rig

hts.

• Some sectors m

ay be more suita

ble to

crow

dfun

ding th

an others. (i.e. con

sumer –facing

busin

ess v

s. com

plex IP or v

ery high-‐tech).

• Difficult to se

t valua

tions as a

ssets m

ay be in fo

rm

of intellectua

l prope

rty an

d valuations based

on

future of m

arket size, com

petition, re

venu

e etc.

Idea is to

ben

chmark valuations against similar

busin

esses o

n the platform

. •

German

platform (Inn

ovestm

ent) ope

rates o

n market-‐driven

app

roach. Investors bid fo

r sha

res

wha

t the

y are willing to pay. Th

ose that pay th

e most g

et in on the de

al.

• Frau

d de

tection metho

ds includ

e platform

pre-‐

vets business b

efore laun

ching; staggered release

of fu

nds linked to m

ileston

es; crowd vetting via

discussio

n forums to commen

t on qu

ality

and

validity

of lau

nche

d prop

osals.

• Signalling an

d he

rding is a prob

lem with

group

-‐ba

sed de

cisio

n system

. Visib

ility of investor type

and motivation to invest cou

ld offs

et th

is.

Potential a

reas fo

r future research:

• How

effe

ctive is the crow

d at evaluating po

tential

of you

ng business?

• Wha

t types of b

usiness d

oes the

crowdfun

d mod

el

work be

st fo

r?

• Wha

t is b

alan

ce between fin

ancial and

non

-‐fin

ancial m

otivations of e

quity

crowdfun

ders and

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

61

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

how doe

s this a

ffect th

e op

eration of th

e mod

el?

• Wha

t ran

ges o

f fun

ding can

equ

ity crowdfun

ding

raise

for b

usiness?

• Wha

t levels o

f return can eq

uity crowdfun

ding

deliver?

• Wha

t are th

e be

st ways o

f harne

ssing the crow

d of

investors to assis

t with

business d

evelop

men

t?

• How

successful are business a

t raisin

g follow-‐on

capital after crowdfun

ding?

•

CROWDFU

NDING OF SM

ALL

ENTR

EPRE

NEU

RIAL

VEN

TURE

S http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=1

6991

83

Schw

ienb

ache

, Arm

in

and Be

njam

in Larralde

Book cha

pter, H

andb

ook

of Entrepreneuria

l Fina

nce (Oxford

University

Press)

Septem

ber 2

8, 201

0

In th

is chap

ter, we discuss c

rowdfun

ding as a

n alternative way of finan

cing projects, with

a

focus o

n sm

all, en

trep

rene

urial ven

tures. The

structure of th

e remaining cha

pter is as follows.

The ne

xt se

ction provides a descriptio

n of

crow

dfun

ding and

disc

usses e

xisting research

on th

e topic. The

follow-‐up section pu

ts

crow

dfun

ding into perspectiv

e of

entrep

rene

urial finan

ce and

thereb

y de

scrib

es

factors a

ffecting en

trep

rene

urial preferences

for c

rowdfun

ding as s

ource of fina

nce.

Thereafter, w

e elab

orate diffe

rent business

mod

els u

sed to ra

ise m

oney from

the crow

d, in

particular with

respect to the structure of th

e crow

dfun

ding process. B

uilding on

this

discussio

n, we presen

t and

disc

uss e

xten

sively a

case stud

y, nam

ely Media No Mad

(a French

start-‐up

). Fina

lly we conclude

with

recommen

datio

ns fo

r entrepren

eurs se

eking to

make use of crowdfun

ding and

with

suggestio

ns

for researche

rs abo

ut yet une

xplored aven

ues

of re

search.

• Crow

dfun

ding is fina

ncing of a project or a

ven

ture

by a group

of ind

ividua

ls instead professio

nal

parties (ba

nks, ven

ture cap

italists or b

usiness

angels). Th

e typical m

ode of com

mun

ication in

crow

dfun

ding is via internet.

• Intrinsic

and

extrin

sic m

otivators for investing in

crow

dfun

ding projects. Intrin

sic m

otivation

relates to pleasure of d

oing a certain ta

sk. (i.e.

recognition

, persona

l satisfactio

n, excite

men

t in

being involved

in a start-‐up

) Extrin

sic m

otivator

is external re

ward such as m

oney or g

oods or

building ne

twork/relatio

nships.

• Other m

otivators for ra

ising m

oney via

crow

dfun

ding is th

e pu

blic atten

tion an

d validation for p

rodu

ct before bringing it to

market.

• “W

isdom

of crowd” m

eans th

at crowds m

ay be

more efficient th

an individu

als to offer solutions.

These are aggregated

by crow

d an

d offer b

etter

solutio

ns (‘collective intelligence’). Kno

wledge

becomes m

ore im

portan

t as c

ommun

ities sh

are

it.

• Investors w

ill need access to

same level of

inform

ation to base investing de

cisio

ns.

• Vo

ting po

wer can

be given to crowdfun

ders fo

r

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

62

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

specific de

cisio

ns abo

ut produ

ct

desig

n/corporate strategies. Not likely to

be

man

ageable for a

ny kind of m

anagerial decision

. •

Not-‐fo

r-‐profit organizatio

ns te

nd to

be more

successful (focus m

ore on

qua

lity than

profit

alon

e) in achieving fu

ndraising ta

rgets tha

n for-‐

profit compa

nies.

• Th

ere are concerns re

latin

g to intellectua

l prop

erty rights. En

trep

rene

ur will have to

disclose ideas to pu

blic/crowd in advan

ce,

creatin

g IP risks –

will th

is de

ter som

e from

tapp

ing the crow

d, especially in sp

ecialized

, highly te

chnical com

panies?

Crow

dfun

ding:

The New

Frontier for Finan

cing

Entrep

rene

urship?

http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=2

1574

29

Giudici, G

iancarlo,

Riccardo

Nava,

Cristina Ro

ssi Lam

astra

and

Chiara Verecon

do

Depa

rtmen

t of

Man

agem

ent,

Prod

uctio

n an

d Indu

stria

l Engineerin

g Po

litecnico di M

ilano

Via Lambruschini 4 –

2015

6 Milano

ITAL

Y

Purpose: This p

aper aim

s to take stock of th

e extant kno

wledge on

an em

erging practice in

the en

trep

rene

urial finan

ce land

scap

e:

crow

dfun

ding

, which se

ems to play an

increasin

g im

portan

t role for the

seed

fina

ncing

of entrepren

euria

l projects. W

e provide a

system

atization of wha

t it is k

nown on

this

them

e, which can

be useful to

scho

lars,

practitione

rs, and

policym

akers interested in

the ph

enom

enon

from

differen

t angles.

Design/metho

dology/app

roach: Ado

pting a

phen

omen

on-‐based

app

roach, which is deemed

to be ap

prop

riate whe

n investigating ne

w and

rather une

xplored ph

enom

ena, we first re

view

the em

ergent literature on the them

e to single

out the

aspects th

at so

far h

ave attracted the

bulk of scholarly interest. The

n, we compa

re th

e crow

dfun

ding with

other fo

rms o

f en

trep

rene

urial finan

ce. Finally, w

e offer a

first

survey on Ita

lian crow

dfun

ding

platform

s.

Orig

inality

/value

: The

pap

er will add

value

to

• Crow

dfun

ding is “an

ope

n call, essen

tially

through the internet, for th

e provision

of

finan

cial re

sources e

ither in fo

rm of d

onation or

in excha

nge for som

e form

of rew

ard an

d/or

votin

g rig

hts in orde

r to supp

ort initia

tives fo

r specific pu

rposes.”

• “G

ettin

g large grou

p of peo

ple to fina

nce a

project b

y using a web

site or other online tool to

solicit fund

s.”

• Crow

dfun

ding is m

oving from

embryonic stage

to growth stage.

• Ex post facto crowdfun

ding is whe

n fin

ancial

supp

ort is g

iven

in excha

nge for a

produ

ct.

• Ex ante crow

dfun

ding is whe

n fin

ancial su

pport

is given at fron

t end

to assist in achieving a

mutua

lly desire

d result.

• Success o

f crowdfun

ding so

far is d

ue to

the

shortage of cap

ital invested as a re

sult of th

e glob

al fina

ncial crisis an

d cred

it crun

ch in lend

ing

(deb

) to sm

all business. Evolutio

n of W

eb 2.0

techno

logies also

a fa

ctor.

• M

ain reason

s entrepren

eur e

ngage in

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

63

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

entrep

rene

urial finan

ce field by sy

stem

atizing

extant kno

wledge on

crowdfun

ding, w

hich

appe

ars to be

fragmen

ted an

d still in a pre-‐the

oretical stage.

Practic

al im

plications: The

outcomes of the

pa

per m

ight be useful fo

r perspectiv

e en

trep

rene

urs, who

are con

sidering

crow

dfun

ding to

fina

nce their v

entures, to

po

licym

akers tha

t are called to re

gulate

crow

dfun

ding (B

ellefla

mme et al, 20

11) a

re th

e fin

ancing statem

ent; pu

blic atten

tion that arises

arou

nd th

e project; feed

back abo

ut th

e prod

uct/service offered.

• Ad

ditio

nal m

otivators (Gerger e

t al, 20

11)

includ

e estab

lishing re

latio

nships; receiving

legitim

acy; re

plicating successful experiences,

and increasin

g aw

aren

ess a

bout crowdfun

ders’

work through social m

edia.

• Crow

dfun

ding platforms (CFPs) a

re m

ulti-‐sid

ed

platform

s tha

t are “en

abling organizatio

ns” by

conn

ectin

g en

trep

rene

urs a

nd investors. The

re is

direct interaction with

investors. Platforms

provide inform

ation an

alysis, ra

ting or re

view

by

specialists.

• CFPs im

portan

t an role in start-‐up

ven

tures b

ut

don’t rep

lace VC. V

Cs offe

r add

ition

al value

to

entrep

rene

ur by offerin

g man

agem

ent sup

port,

marketin

g efforts, networking, and

post-‐fin

ance

mon

itorin

g.

• At th

e presen

t mom

ent, crow

dfun

ding has

emotiona

l and

social value

. Th

e Dy

namics o

f Crowdfun

ding:

Determ

inan

ts of Success and

Failure

http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=2

0882

98

Mollick, Ethan

Th

e Wha

rton

Schoo

l of

the University

of

Penn

sylvan

ia

July 25, 201

2

Crow

dfun

ding allows fou

nders o

f for-‐profit,

artistic, and

cultural ven

tures to fund

their

efforts b

y draw

ing on

relativ

ely sm

all

contrib

utions from

a re

lativ

ely large nu

mbe

r of

individu

als u

sing the internet, w

ithou

t stand

ard

finan

cial interm

ediarie

s. Crowdfun

ding has

been

drawing substantial atten

tion from

policy

makers, m

anagers, and

entrepren

eurs, b

ut

relativ

ely little

notice from

acade

mics, even

thou

gh it to

uche

s on man

y topics of impo

rtan

ce

to sc

holars of e

ntrepren

eurship, includ

ing the

determ

inan

ts of ven

ture su

ccess a

nd th

e geog

raph

y of entrepren

eurship. Drawing on

a

• Projects ra

nge in goa

ls an

d magnitude

, from

small artistic projects to en

trep

rene

urs s

eeking

seed

cap

itals as alte

rnative to ven

ture cap

ital

investmen

t.

• Unclear if crowdfun

ding effo

rts reinforce or

contradict existing theo

ries a

bout ra

ising cap

ital

and achieving success. Also unclear whe

ther

projects deliver produ

cts p

romise

d over th

e long-‐term.

• Social networks of fou

nders s

eem to

play a large

role in su

ccess o

f new

ven

tures a

nd access to

capital. High qu

ality

pitche

s also

predict su

ccess.

• Success o

f traditio

nally-‐fu

nded

ven

tures is o

ften

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

64

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

dataset o

f nearly

47,00

0 projects with

combine

d fund

ing over $19

8M, this p

aper

offers an initial descriptio

n of th

e un

derly

ing

dyna

mics o

f success and

failure amon

g crow

dfun

ded ventures. It suggests tha

t pe

rson

al networks and

und

erlying project

quality

help pred

ict the

success o

f crow

dfun

ding effo

rts, and

that geo

grap

hy plays

a role in both the type

of p

rojects p

ropo

sed an

d successful fu

ndraising. Finally, I find

that th

e vast m

ajority

of fou

nders m

ake serio

us effo

rts

to fu

lfill their o

bligations to

fund

ers, but th

at

over 75%

deliver produ

cts later th

an expected,

with

the de

gree of d

elay predicted

by the level

and am

ount of fun

ding a project re

ceives.

linked to geo

grap

hy.

• Project m

ix of crowdfun

ding re

flects c

ultural

prod

ucts of city

. i.e. N

ashville (m

usic); San

Fran

cisco (gam

e an

d de

sign prod

ucts)

• Highe

r propo

rtion of creative individu

al in th

e foun

der’s city

, highe

r cha

nce of su

ccess.

• Majority

of p

rojects w

ere de

layed, close to

25%

were de

livered

on tim

e.

• Larger projects h

ave more de

lays th

an sh

orter

ones.

• Projects gen

erally su

cceed by sm

all m

argins or

fail by big one

s.

• Social cap

ital and

project qua

lity increase

chan

ces o

f project su

ccess.

Commun

ity Finan

cing Options

http://arbri.atha

bascau

.ca/hinton

-‐gc/docum

ents/H

intonG

rand

eCache

Sum

marySustainab

ilityRe

port3-‐15

-‐12

.pdf

Dr. M

ike Gism

ondi,

Atha

basca University

“With

the increasin

g difficulty

of a

ccessin

g trad

ition

al fo

rms o

f finan

cing and

investmen

t, commun

ities have be

gun to look to

inno

vativ

e ideas a

nd initiatives to

help in ra

ising

local cap

ital. To

a greater exten

t, commun

ities

are looking inward to create a

clim

ate of investmen

t and

coo

peratio

n with

in

the po

pulatio

n. As m

ore commun

ity m

embe

rs

participate, th

ey sh

are bo

th th

e risk an

d rewards in creating stronger local

econ

omies. The

re is also

a greater emph

asis on

local empo

wermen

t becau

se th

e control of the

fund

s, sc

hedu

le and

outcomes

stays w

ithin th

e commun

ity and

is not ced

ed to

ou

tside control. A circuit o

f local cap

ital is

diffe

rent th

an th

at of the

globa

l investm

ent

market. It is ba

sed on

raising poo

ls of cap

ital

from

a se

lf-‐de

signa

ted

commun

ity to

invest in a local business o

r

• Local investor b

ehaviour sh

are common

value

s an

d commun

ity vision

. •

Local finan

cing and

investmen

t mecha

nism

s:

• Credit U

nion

s – The

y arecctive in com

mun

ity

and tend

to have go

od und

erstan

ding of

commun

ity needs. Bu

siness loa

n are the ba

sic

form

of local lend

ing bu

t reflect least sen

se of

commun

ity owne

rship.

• Crow

dsou

rcing – En

trep

rene

ur posts business

online with

requ

est for start-‐up

fund

ing an

d those

interested

don

ate. N

o ow

nership.

• Exem

ptions fo

r Accredited an

d Eligible

Investors -‐ ind

ividua

ls of a certain income level

and ne

t worth to

purchase exem

pt m

arket sha

res

in a local business w

ithou

t tha

t business h

aving to

provide an

offe

ring do

cumen

t. •

Commun

ity In

vestmen

t Fun

ds (C

IFs) -‐

Investors p

urchase shares in an investmen

t fun

d which is th

en invested

into a local business.

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

65

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

infrastructure. R

esiden

ts can

invest by

purcha

sing local securities in th

e form

of sha

res

(equ

ity; essen

tially owning a part o

f the

firm

) or

bond

s (de

bt; loa

ning th

e firm a fixed am

ount

over an agreed

up

on duration of time an

d interest ra

te)

• Co

mmun

ity Bon

ds -‐ Co

mmun

ity Bon

ds are a

debt instrumen

t tha

t ena

bles com

mun

ities, as w

ell

as not-‐fo

r-‐profits and

cha

rities, to

raise

cap

ital.

typically used to fina

nce the pu

rcha

se of a

large

capital asset su

ch as a

building.

RE

GULA

TORY

The JOBS

Act of 2

012: Balan

cing

Fund

amen

tal Securities Law

Principles W

ith th

e De

man

ds of the

Crow

d http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=2

0409

53

Martin

, Tho

mas A.

Willam

ette University

Co

llege of Law

, 201

2.

I examine the JOBS

Act of 2

012, especially its

crow

dfun

ding provisio

ns. In Section II., I disc

uss

the main areas o

f the

JOBS

Act, spe

cifically

crow

dfun

ding, emerging growth com

panies,

chan

ges to the sm

all issue

s exemption, and

the

repo

rting compa

ny th

reshold. I no

te a strong

shift to

wards deregulation, in con

trast w

ith

Sarban

es-‐Oxley (2

002) and

the Do

dd Frank Act

(201

0). In Section III., I ana

lyze th

e principles

behind

the U.S. securities laws, especially th

e Securities A

ct of 1

933 an

d the Securities

Exchan

ge Act of 1

934. The

specific po

licies

exam

ined

are as follows: investor protection,

market stability, and

maintaining th

e integrity

of U.S. cap

ital m

arkets. W

ith re

gards to specific

provision

s of the

JOBS

Act, I ask whe

ther th

e be

nefits o

f the

JOBS

Act, m

ost n

otab

ly th

e po

tential for econo

mic growth, exceed its risks,

includ

ing an

increased risk of frau

d an

d increased market u

ncertainty. In Section IV., I

explain eq

uity-‐based

crowdfun

ding as a

new

an

d un

ique

mod

el fo

r raisin

g capital. I examine

elem

ents of the

crowdfun

ding structure,

namely a relativ

ely sm

all amou

nt of m

oney

raise

d from

a large nu

mbe

r of ind

ividua

ls, m

any

of who

m are non

-‐accredited. I exam

ine the

• Crow

dfun

ding -‐ “the

use of the

internet to

raise

mon

ey th

rough sm

all con

tributions from

a large

numbe

r of investors.”

• Und

er th

e JOBS

Act, the

issuer m

ust p

rovide

to

the Co

mmiss

ion, interm

ediary and

poten

tial

investors the

following:

• 1. Basic iden

tifying inform

ation of issuer;

• 2. Nam

es of d

irectors, offices a

nd each pe

rson

ho

lding more than

20%

of sha

re of the

issuer;

• 3.De

scrip

tion of business a

nd anticipated

bu

siness p

lan;

• 4.De

scrip

tion of fina

ncial con

ditio

n of issuer;

• 5. Descriptio

n of stated

purpo

se and

intend

ed

use of cap

ital raised

• 6. Targetin

g offerin

g am

ount, d

eadline an

d regular u

pdates re

garding iss

uer m

eetin

g these;

• 7. Pric

e to pub

lic of securities;

• 8. Descriptio

n of owne

rship an

d capital structure

of issuer.

• Type

of finan

cial inform

ation disclosed de

pend

s on

target amou

nt of cap

ital to be

raise

d.

• Crow

dfun

ding interm

ediarie

s have du

ty to

ed

ucate investors a

nd re

view

s investor

education inform

ation in accorda

nce with

stan

dards e

stab

lishe

d by Com

miss

ion.

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

66

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

wisd

om of the

crowd theo

ry, q

uestion the

continue

d ne

ed fo

r accreditatio

n requ

iremen

ts,

and no

te th

e crow

d's p

roclivity

towards fu

nding

social goo

d projects, w

ith poten

tial or

significan

t positive externa

lities o

n the

commun

ity. I con

clud

e that alth

ough th

e JOBS

Ac

t con

tains a

swath of m

easures lim

iting

governmen

t oversight of this n

ew m

arket, these

risks are outweighed

by the substantial

econ

omic ben

efits th

at accom

pany th

e de

struction of m

arket e

ntry barrie

rs to

the

entrep

rene

ur.

Interm

ediarie

s must m

akes su

re investor

unde

rstand

s risk

of losing en

tire investmen

t and

that th

ey cou

ld bear such a loss. Also m

ust

ensure th

at investor und

erstan

ds level of risk

investing in start-‐up

s, emerging businesses a

nd

small issue

rs; and

und

erstan

d of risk illiquidity.

• How

ever, com

pliance with

these requ

iremen

ts is

ambiguou

s.

• Crow

dfun

ding is similar to sm

all issue

s exem

ptions but differen

t in the greater n

umbe

r of non

-‐AI investors.

• Uniqu

e aspe

cts to crow

dfun

ding m

odel:

1. Large investmen

t class with

no distinction

betw

een AI and

non

-‐AI investors;

2. Relatively low investmen

ts amou

nts tha

t are

pooled

together;

3. N

atural bias tow

ards pop

ular projects a

nd a

large po

rtion focussed

on social goo

d.

• Crow

d represen

ts both po

tential investors and

consum

ers.

• Crow

d usua

lly invest in so

mething th

ey wan

t for

them

selves. Ve

sted

interest in su

ccess o

f compa

ny.

• Crow

d acts as q

uasi-‐market research tool.

• Th

ere is contrast between those that believe

that th

e ‘crowd’ m

akes bad

decision

and

shou

ld

not b

e trusted to m

ake wise

fina

ncial decision

s (i.e. herding beh

aviour) a

nd th

ose that su

pport

‘wisd

om of crowd’ th

eory th

at su

ggests

collective intelligence make wise

r cho

ices th

an

individu

al.

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

67

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

The JOBS

Act of 2

012: The

Struggle

Betw

een Ca

pital

Form

ation an

d Investor Protections

http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=2

1497

44

Whitbeck, Britton

SMU Dedman

Schoo

l of

Law

This Article details at th

e provision

s of the

JOBS

Ac

t and

ana

lyzes the

ir im

pact on capital

form

ation an

d investor protection. Part I

discusses the

Reo

pening American

Cap

ital

Markets to

Em

erging Growth Com

panies Act, examining

the em

erging growth com

pany status and

the

impa

ct on iss

uers and

investors. Part II d

iscusses

Access to

Cap

ital for Jo

b Creators Act, w

hich

lifts th

e ba

n on

gen

eral so

licita

tion for o

fferin

g mad

e up

solely of a

ccredited investors o

r qu

alified

institu

tiona

l buyers. Part III discusses

the Ca

pital R

aisin

g Online While Deterrin

g Frau

d an

d Une

thical Non

-‐Disc

losure Act, w

hich

legalizes equ

ity crowdfun

ding. Part III will

exam

ine the crow

dfun

ding provisio

n an

d the

requ

iremen

ts fo

r issue

rs, intermed

iarie

s, and

investors. Part IV discusses the

Small Com

pany

Capital Formation Ac

t, which increases the

cap

on

Regulation A offerin

gs from

$5 million to $50

million. In

con

clusion, Part V

disc

usses b

oth

Private Co

mpa

ny Flexibility an

d Growth Act and

Ca

pital Expan

sion Ac

t, which increase th

e shareh

olde

r lim

it for p

rivate compa

nies and

ba

nks.

• Man

y crow

dfun

ding investors m

ay lack

soph

istication to und

erstan

d risks. Including risk

of frau

d, fa

ilure by sm

all business a

nd th

e liquidity of securities purchased

.

• Exem

ptions provide

means of finan

cing to

majority

of e

ntrepren

eurs th

at lack ability to

raise

cap

ital throu

gh ban

ks, V

C firms o

r IPO

s.

• Most start-‐ups lack so

phistication or re

sources

to m

eet b

urde

n an

d costs o

f securities

regulatio

n. VCs are m

ore interested

in

busin

esses w

ith high grow

th poten

tial in certain

sectors (i.e. Techn

olog

y, biomed

ical)

• Crow

dfun

ding exemptions includ

e a maxim

um

on amou

nt of cap

ital raised; re

stric

tions on total

investmen

t amou

nt based

on an

nual income of

investors o

r net worth; lim

it on

aggregate

amou

nt of securities issuer can

offe

r or sell to

investors; re

stric

tions on sale and

tran

sfer of

crow

dfun

ding sh

ares by investors.

• Issuers m

ust d

isclose inform

ation ab

out the

compa

ny, its fina

ncial con

ditio

n, th

e offerin

g,

owne

rship an

d capital. Issuer m

ust d

isclose

names of d

irector, o

fficers and

any person

holding 20

% of issue

r’s sh

ares. M

ust d

isclose

busin

ess a

nd anticipated

business plan

. Fina

ncial disc

losure varies d

epen

ding on am

ount

of ta

rget cap

ital raised.

• Tax returns p

rovide

little fina

ncial disc

losure

inform

ation to investor.

• Issuer m

ust d

isclose ta

rget offe

ring am

ount,

dead

line for reaching the target and

regular

upda

tes o

n prog

ress in m

eetin

g offerin

g am

ount.

• Issuer m

ust d

isclose pric

e or m

etho

d for

determ

ining price an

d this po

ses c

hallenges

arou

nd valua

tion.

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

68

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

• Issuer m

ust d

isclose how

crowdfun

ding

securities m

ay be “m

aterially limite

d, diluted or

qualified

by rig

hts o

f any other class of security

” includ

ing minority

owne

rship, corpo

rate actions,

additio

nal issue

s, sa

le of the

issuer or its assets

and related tran

sactions”.

• With

tran

sactions online there is an

ease an

d conven

ience of investing plus app

eal of g

reater

returns a

nd excite

men

t of investin

g in start-‐up

s all pose risks to

crowdfun

ding investor.

• Need to develop

stan

dard langua

ge abo

ut

issue

rs’ d

isclosure re

garding risks, and

provide

a

checklist or list of q

uestions designe

d to guide

the iss

uer h

ow to

disc

lose risks.

• Ad

vertising offe

rings is limite

d to dire

cting

investors to iss

uer’s interm

ediary.

• Th

ose prom

oting iss

ue m

ust d

isclose

compe

nsation.

• Ru

les o

n prom

otion, advertising, ann

ual

repo

rting requ

iremen

ts are not clear.

• Interm

ediarie

s must p

rovide

risk disc

losure and

investor edu

catio

n inform

ation to investors.

• Fund

ing po

rtals m

ust n

ot offe

r advice or

recommen

datio

ns, solicit pu

rcha

se, sale or offe

r to buy th

e securities o

n its web

site. Fun

ding

portals m

ust n

ot com

pensate pe

rson

s for

solicita

tion or sa

le of securities on its web

site.

They can

not h

old, m

anage, possess or h

andle

investor fu

nds o

r securities.

• Investor m

ust “po

sitively affirm” that th

ey

unde

rstand

the risk of losin

g en

tire investmen

t an

d can sustain such a loss. Investor m

ust

answ

er que

stions th

at dem

onstrates

unde

rstand

ing the level of risk

related to start-‐

up and

small issue

rs, risk

of illiqu

idity

.

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

69

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

• De

velop stan

dards for re

view

and

selection of

issue

rs th

at m

ay includ

e op

erating history,

technical expertise, indu

stry experience, so

me

type

of e

valuation of offe

ring an

d bu

siness p

lan.

• Th

ere is a po

ssibility of “blurrin

g line be

tween

full an

d fair disclosure and

assessin

g merits of

the investmen

t. “

CROWDF

UNDING OR

FRAU

DFUNDING? SO

CIAL

NETWORK

S AN

D TH

E SECU

RITIES

LAWS—

WHY TH

E SPEC

IALLY

TAILORE

D EX

EMPT

ION M

UST BE

CONDITIONED

ON M

EANINGFU

L DISCLO

SURE

http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=1

9540

40

HAZ

EN, THOMAS

LEE

NORT

H CA

ROLINA LA

W

REVIEW

[Vol. 90], p

ages

1735

-‐177

0.

Social networks have be

en used as a m

edium

for finan

cing film

s and

other perform

ing arts, as

well as for cha

ritab

le so

licita

tions.

Crow

dfun

ding can

also

be used

to fina

nce sm

all

busin

ess e

nterprise

s, which, in contrast to

other

crow

dfun

ding effo

rts, is a highly regulated

activ

ity by virtue

of the

securities law

s.

Securities law

s are designe

d to provide

investor

protectio

n. This A

rticle provide

s an overview

of

the ap

plicab

le se

curities law

s and

evaluates th

e vario

us propo

sals an

d the recently ena

cted

JOBS

Act which purpo

rted

ly provide

s a

workable exem

ption for crowdfun

ding th

at

wou

ld not und

uly comprom

ise investor

protectio

n. The

Article examines th

e prop

osals

and en

suing legisla

tion an

d conclude

s tha

t the

on

ly app

ropriate exemption for crowdfun

ding is

one cond

ition

ed on meaningful disc

losures

abou

t the

com

pany and

the term

s of the

offerin

g.

• Re

quire

d disclosures include

purpo

se of o

fferin

g,

targeted

amou

nt to

be raise

d, deadline for

reaching ta

rget, o

fferin

g price, inform

ation ab

out

the compa

ny’s business including business p

lan,

capital structure and

fina

ncial con

ditio

n.

• Au

dited fin

ancial statem

ents are re

quire

d for

offerin

gs over 5

00k.

• Interm

ediary (fun

ding portal or b

roker) will be

requ

ired to ‘take step

s to en

sure th

at investor has

review

ed disc

losure, answers q

uestions and

un

derstand

s risk

s of loss, includ

ing risk of losin

g all

investmen

t.

• Interm

ediary also

requ

ired to m

ake sure

compa

ny’s officers, d

irectors a

nd m

ajor

shareh

olde

rs are in com

pliance with

regulator.

• Limiting offe

rings to sm

all amou

nts p

er investor

will not deter sc

ammers. Small investors m

ay be

the least a

ble to bear the

risks o

f the

ir low

investmen

ts.

• Social m

edia te

chno

logies increase ra

ther th

an

decrease poten

tial for frau

d.

• Crow

dfun

ding investors w

ill not likely “know

” the

compa

ny excep

t for wha

t is v

isible an

d available

abou

t the

com

pany on its web

site. Unlike an

gels

and VC

’s, w

ho have a more pe

rson

al re

latio

nship

with

com

pany and

officers.

• Likely to

attract unsop

histicated

investors.

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

70

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

PROTECT

ING THE CR

OWD AN

D RA

ISING CAP

ITAL

THRO

UGH THE

JOBS

ACT

http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=2

0460

51

Fink, A

ndrew C.

University

of

Conn

ecticut -‐ Scho

ol of

Law

April 25, 201

2

The Crow

d ha

s incredible commercial fo

rce,

eviden

ced by th

e fact th

at th

e internet is now

on

e the largest g

loba

l econo

mies T

he JO

BS Act

effectively ha

rnesses the

cap

ital-‐raisin

g po

wer

of th

e Crow

d an

d po

tentially re

volutio

nizes the

way we think ab

out cap

ital m

arkets. C

oncerns

abou

t how

to balan

ce investor protection an

d free-‐flow

ing capital-‐raisin

g chan

nels were

paramou

nt in re

aching th

e JOBS

Act. This A

rticle

highlights the

passage of the

JOBS

Act and

its

effects o

n the Crow

dfun

ding indu

stry. It w

arns

of SEC

rulemaking an

d makes propo

sals for h

ow

to best e

xecute a re

liable Crow

dfun

ding

platform

or fun

ding portal. The

states can

play

a crucial role in helping to

sustain confiden

ce in

the Crow

dfun

ding m

arket.

•

Crow

dfun

ding – “Ra

ising of cap

ital throu

gh a

large nu

mbe

r of small ind

ividua

l investm

ents to

a sin

gle en

trep

rene

ur or small business.”

• It is a convergence of m

icrofin

ance and

crow

dsou

rcing an

d is often de

scrib

ed as a

blend

of so

cial m

edia and

ven

ture cap

ital.

• Crow

dfun

ding is like inverse of m

icrofin

ancing

(which m

akes available nu

merou

s loa

ns to

thou

sand

s of ind

ividua

l throu

gh one

institu

tion).

• Crow

d consists o

f ind

ividua

ls conn

ected to other

individu

als throu

gh th

e internet. C

rowd

expe

cted

to grow at h

igh pa

ce. B

y 20

12 internet

is projected to be the world’s fifth largest

econ

omy.

• Prior to JOBS

Act equ

ity-‐crowdfun

ding m

odel not

perm

itted

. Start-‐ups limite

d to angel investors

and VC

firm

s.

• En

trep

rene

urs a

nd start-‐up

s lim

ited to ban

k loan

s, fa

mily and

friend

s mon

ey. Also isolated

by th

eir location. V

C firms typically closer

geog

raph

ically to

their investm

ents (a

verage 70

miles b

etween lead

ven

ture cap

firm

and

target

firm). Crow

dfun

ding con

nects to investors

glob

ally and

poten

tial to stim

ulate job grow

th

internationa

lly,.

• As ban

ks tighten lend

ing stan

dards (cred

it crun

ch) finan

cing sm

all business takes a hit an

d crow

dfun

ding is se

en as v

iable alternative to

depe

nden

ce on ba

nk lend

ing.

• Crow

dfun

ding will be ap

pealing to lower net

worth investors a

s typically th

ese investmen

ts

are on

ly available to th

e wealth

y.

• As well, interest in crowdfun

ding is com

parable

to investor attraction to th

e IPO m

arket ; an

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

71

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

excitin

g idea th

ey wan

t to be

part o

f and

see

grow

. May be a lack of p

rofessiona

l investors

attracted to crowdfun

ding and

with

this, an

absence of so

phisticated

investors w

ho also

act

as m

entors th

at often

help en

trep

rene

urs a

nd

small businesses g

row th

e bu

siness.

• Investor-‐based

crowdfun

ding includ

es

expe

ctation of profit by investor. Investors c

are

less abo

ut entrepren

eur’s well-‐b

eing and

likely

wan

t to little

to do with

entrepren

euria

l process.

This is in con

trast to do

natio

n ba

sed

crow

dfun

ding whe

re investors d

o no

t expect R

OI

and more an

alog

ous to charita

ble contrib

ution

mostly

motivated

by intrinsic

aspects of social

capital/c

ultural goo

d.

• Cu

rren

tly cap

ital m

arkets fram

ework an

d securities regulation is inconsisten

t cross-‐borde

r. •

Challenge is to stim

ulate early

-‐stage cap

ital but

not impo

se to

o man

y restric

tions th

at lead

s to

barrier to en

try.

• Self-‐po

licing capa

bilities o

f crowd will play

impo

rtan

t role in oversight. User reviews (eB

ay,

Amazon

) to po

lice against fraud

and

misleading

inform

ation. Rating system

is ano

ther fe

ature

that m

ay be effective in weeding out frau

d.

Forums c

an also

be he

lpful isolatin

g risky se

llers,

prom

oting qu

ality

participan

ts and

soun

d investmen

t opp

ortunitie

s.

• Crow

dfun

ding Accreditatio

n for P

latform

Stan

dards (CA

PS) –

“review

s awards

accred

itatio

n to fu

nding po

rtals b

ased

on

interviews a

nd re

view

s of the

ir tran

saction

processes.”

• Co

nsisten

t and

uniform

stan

dards (establish

ed

by re

gulator) can

help stream

line process a

nd

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

72

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

build m

arket con

fiden

ce.

• Failing crowdfun

ding portals will be forced

out

and trusted platform

s will becom

e market

lead

ers for crowdfun

ding tran

sactions.

Th

e Social Network an

d the

Crow

dfun

d Ac

t: Zuckerberg, Savern,

and Ve

nture Ca

pitalists Dilu

tion of

the Crow

d http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=2

1410

15

Wroldsen, Jo

hn S.

15 VAN

D. J. ENT. &

TECH

. L., Jan. 201

3,

Forthcom

ing

By virtue

of T

itle III of the

JOBS

Act, signe

d into

law on Ap

ril 5, 201

2, crowdfun

ding cou

ld

become a po

werful, even

revolutio

nary, force

to fina

nce start-‐up

com

panies. It d

emocratizes

entrep

rene

urs’ access to seed

cap

ital and

converts th

e masses o

f Interne

t users into

potential retail ven

ture cap

italists. M

any ha

ve

cautione

d, th

ough, tha

t crowdfun

ding poses

serio

us investmen

t risk

s of start-‐up compa

nies

failing, com

mitting frau

d, and

being

mism

anaged

. Accordingly, the

JOBS

Act includ

es

numerou

s disc

losure obligations designe

d to

mitigate su

ch dow

nside risks.

But w

hat h

as been overlooked

, and

wha

t this

Article ana

lyzes from a ven

ture cap

italist

perspe

ctive, is th

at even if a crow

dfun

ded start-‐

up com

pany is su

ccessful, crowdfun

ding

investors c

an lose th

e value of th

eir investm

ent

if they lack ven

ture cap

ital legal protections.

Whe

n successful start-‐up

com

panies ra

ise

additio

nal fun

ds from

professiona

l ven

ture

capitalists, the

value

of g

roun

d-‐flo

or

investmen

ts can

be severely diluted, as

colorfully dramatized

in The

Social N

etwork. In

ad

ditio

n, whe

n crow

dfun

ded compa

nies are

acqu

ired in priv

ate tran

sactions, crowdfun

ders

are at risk of b

eing left out.

Therefore, und

er a “qu

alita

tive man

dates”

• Crow

dfun

ding – “practice of m

any (i.e. crowds of)

peop

le investing sm

all amou

nts o

f mon

ey over the

Internet in early-‐stage businesses in exchan

ge fo

r eq

uity interests tha

t are not re

gistered

with

the

Securities a

nd Excha

nge Co

mmiss

ion”.

• Pape

r focuses on up

side, horizon

tal risk

s crow

dfun

ders m

ay fa

ce from

other investors, su

ch

as VC whe

n crow

dfun

ded bu

siness is s

uccessful.

• JOBS

Act – cap

s cap

ital raisin

g via crow

dfun

ding at

$1 m

illion over 12 mon

th period. Amou

nt investor

can invest is cap

ped according to ann

ual incom

e or

net w

orth. Investor cap

app

lies to aggregate

crow

dfun

ding investmen

ts in any 12 mon

th

perio

d.

• Crow

dfun

ding investmen

ts m

ust o

ccur th

rough

web

site registered

with

the commiss

ion. M

ust

disclose inform

ation relatin

g to risks investin

g in

start-‐up

s, ensure investor und

erstan

ds th

e risks

and ob

taining ba

ckgrou

nd che

ck of key com

pany

person

nel. Crowdfun

ded compa

ny m

ust p

rovide

its fina

ncial statemen

t and

repo

rt on results of

compa

ny’s ope

ratio

ns. De

gree of finan

cial

disclosure dep

ends on target amou

nt of cap

ital

raise

d.

• Que

stion on

ability of unsop

histicated

investor to

effectively judge qu

ality

of securities offe

red.

Inform

ation overload

. •

Issue of M

erit Re

view

– issuer su

bmits inform

ation

to re

gulator for re

view

and

app

roval in ad

vance of

security offerin

gs. Ju

dges ‘sub

stan

tive qu

ality

of

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

73

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

regulatory philosoph

y that m

oves beyon

d securities law

’s status-‐quo

disc

losure

requ

iremen

ts, this A

rticle propo

ses s

ubstan

tive

venture capitalist p

rotections fo

r crowdfun

ding

investors, su

ch as d

own-‐roun

d an

ti-‐dilutio

n,

tag-‐alon

g, and

preem

ptive rig

hts, to

help

safeguard the value of early-‐stage investmen

ts

in su

ccessful start-‐up

com

panies. Especially

because man

y crow

dfun

ding investors a

re likely

to be inexpe

rienced

and

unsop

histicated

in

start-‐up

-‐com

pany investing, crowdfun

ding laws

and regulatio

ns sh

ould go be

yond

disc

losure

requ

iremen

ts th

at warn investors o

f dan

ger (to

the extent investors e

ven read

or u

nderstan

d the disclosures) to

help crow

dfun

ders obtain

market-‐ba

sed econ

omic protections

characteristic of ven

ture cap

italist investm

ent

contracts.

security’. M

erit-‐review

s – costly

, tim

e-‐consum

ing,

may create ‘m

arket ine

fficien

cies by supp

lanting

judgem

ent o

f market w

ith th

at of regulator.’

•

Horizon

tal risk

s – add

ition

al fina

ncing roun

ds and

ne

w investors c

an im

pact existing shareh

olde

rs

(crowdfun

ders).

• Qua

litative Man

dates: (like VC

protections in start-‐

ups) includ

e:

• Dilutio

n of crowdfun

ders owne

rship

percen

tages w

hen compa

ny issues new

shares.

• Exclusion of crowdfun

ders whe

n othe

r stockholde

rs re

sell shares to

new

investors.

• Risk of p

rice dilutio

n (dow

n-‐roun

d) – VC

protect the

mselves with

preferred

-‐sha

red

investmen

t con

tracts.

• Risk of sha

re-‐based

dilutio

n.

• Tag-‐alon

g rig

hts (co-‐sale rig

hts) help avoid

being exclud

ed from

a profitab

le exit e

vent.

• Preemptive rig

hts “allow th

e shareh

olde

rs to

pa

rticipate in any issuan

ce of sha

re pro-‐rata

to th

eir p

ercentage ho

lding”. Sha

reho

lders

avoid dilutio

n of th

eir o

wne

rship po

sition

whe

n compa

ny issues sh

ares to

new

investors.

• VC

deal terms a

nd protections need to be presen

t by defau

lt in crowdfun

ding –investmen

t con

tract

templates. Th

e un

soph

isticated

investor wou

ld

not k

now how

to negotiate th

ese an

d they wou

ld

allow crowdfun

ders a point of com

parison

for

othe

r crowdfun

ding investmen

ts.

• Disclosure ta

bles th

at are clear and

easy to re

ad

are suggested. The

se wou

ld highlight investor

protectio

n the iss

uer is o

fferin

g an

d be

based

on

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

74

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

term

s VCs negotiate whe

n investing in start-‐up

s.

Table wou

ld provide

list of terms a

nd descriptio

n an

d if each protection is available. Suggested

list

includ

es com

mon

stock; preferred

stock; warrants;

shares-‐based

dilutio

n; pric

e-‐ba

sed dilutio

n; ta

g-‐alon

g rig

hts; drag-‐alon

g rig

hts; preem

ptive rig

hts;

pay-‐to-‐play; cum

ulative divide

nds; re

gistratio

n rig

hts; re

demption rig

hts; liqu

idation preferen

ce.

• Term

s in disclosure ta

ble likely be

disc

ussed

amon

g crow

dfun

ding investors improving an

d expa

nding the “w

isdom

of the

crowd”.

• Ab

sence of VC protectio

ns leave crow

dfun

ding

investors v

ulne

rable.

• Crow

dfun

ding investmen

t can

be ‘emotiona

l’ (excite

d by inno

vativ

e ideas w

ith poten

tial of large

profit)

Ad

ditio

nal Sou

rces from

Med

ia and

Press

The Crow

dfun

ding

Crowd Is Anxious

Corteste, A

my

The New

York Times

Jan 5, 201

3

http://w

ww.nytim

es.com

/201

3/01

/06/bu

siness

/crowdfun

ding

-‐for-‐sm

all-‐b

usiness-‐is-‐still-‐an-‐

unclear-‐pa

th.htm

l?pa

gewan

ted=

all&_r=0

Shou

ld Equ

ity-‐Based Crowd Fund

ing

Be Legal?

Lavinsky, D

ave

The Wall Street Jou

rnal,

March 8, 201

2.

http://online.wsj.com

/article/SB1

0001

4240

529

7020

3370

6045

7726

5512

7660

0993 8.htm

l

Five Key Points to know

abo

ut equ

ity

crow

dfun

ding

Prive, Tan

ya

Forbes, Jan

uary 15,

2013

.

http://w

ww.fo

rbes.com

/site

s/tanyap

rive/20

13/

01/15/5-‐key-‐po

ints-‐to-‐know

-‐abo

ut-‐equ

ity-‐

crow

dfun

ding/2/

Equity crowdfun

ding

source of

inno

vatio

n, cap

ital for start-‐up

s

Casey, Que

ntin.

Fina

ncial Post,

Octob

er 22, 201

2.

http://business.fin

ancialpo

st.com

/201

2/10

/22/

equity-‐crowdfun

ding

-‐sou

rce-‐of-‐in

novatio

n-‐capital-‐for-‐startup

s/

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

75

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

THRE

E TH

INGS BR

OKE

N IN

INVE

STMEN

T CR

OWDF

UNDING

THAT

SEC

REG

ULA

TIONS WON'T FIX

CARLETON, W

ILLIAM

JANUAR

Y 7, 201

3.

CROWDSO

URC

ING.ORG

http://w

ww.crowdsou

rcing.org/ed

itoria

l/three-‐

things-‐broken-‐in-‐in

vestmen

t-‐crow

dfun

ding

-‐that-‐sec-‐regulations-‐w

ont-‐fix/230

32/500

WHY CR

OWDF

UNDING W

ILL

EXPLODE

IN 201

3

Thorpe

, Devin

Forbes, O

ctob

er 15,

2012

.

http://w

ww.fo

rbes.com

/site

s/de

vintho

rpe/20

12/10

/15/get-‐read

y-‐he

re-‐it-‐com

es-‐

crow

dfun

ding

-‐will-‐explode

-‐in-‐201

3/

N.Y.C. small businesses a

re

turning to crowdfun

ding

sites like

CircleUp to ra

ise m

oney

Furm

an, Phyllis

NYD

ailyNew

s.com

Janu

ary 21

, 201

3.s

http://w

ww.nydailyne

ws.com/new

-‐york/n-‐y-‐

small-‐b

usinesses-‐turning-‐crow

dsou

rcing-‐sites-‐

circleup

-‐raise-‐m

oney-‐article-‐

1.12

4446

3#ixzz2Iop

B4KY

l

https://circleup

.com

/press/

Excellent so

urce fo

r recen

t med

ia stories a

nd

press releases o

n crow

dfun

ding

Additio

nal A

cade

mic Pap

ers

CROWDF

UNDING AND TH

E FEDE

RAL

SECU

RITIES LAW

S http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=1

9161

84

Brad

ford, Steven C.

Crow

dfun

ding—the use of th

e Internet to

raise

mon

ey th

rough sm

all con

tributions from

a large

numbe

r of investors—could cause a revolutio

n in sm

all-‐b

usiness finan

cing. Throu

gh

crow

dfun

ding, smaller e

ntrepren

eurs, w

ho

trad

ition

ally have ha

d great d

ifficulty obtaining

capital, ha

ve access to an

yone

in th

e world with

a compu

ter, Internet access, and

spare cash to

invest. C

rowdfun

ding sites s

uch as Kiva,

Kickstarter, an

d IndieG

oGo ha

ve proliferated

, an

d the am

ount of m

oney ra

ised through

crow

dfun

ding has grown to billions of d

ollars in

just a fe

w years. C

rowdfun

ding poses tw

o iss

ues

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

76

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

unde

r fed

eral se

curities law

. First, crow

dfun

ding

sometim

es involves th

e sale of securities,

triggerin

g the registratio

n requ

iremen

ts of the

Securities A

ct of 1

933. Registratio

n is

proh

ibitively expen

sive for the

small offe

rings

that crowdfun

ding fa

cilitates, and

non

e of th

e curren

t exemptions from

registratio

n fit th

e crow

dfun

ding m

odel. Secon

d, th

e web

sites

that fa

cilitate

crow

dfun

ding m

ay be treated as brokers or

investmen

t ad

visers und

er th

e am

biguou

s stand

ards

applied by th

e SEC.

This article con

siders the

costs and

ben

efits of

crow

dfun

ding and

propo

ses a

n exem

ption that

wou

ld free crowdfun

ding from

the registratio

n requ

iremen

ts, b

ut not th

e an

tifraud

provisio

ns,

of fe

deral securities law. Securities offe

rings fo

r an

amou

nt less th

an $25

0,00

0–50

0,00

0 wou

ld

be exempted

if (1

) each investor invests n

o more than

the greater o

f $50

0 or 2% of the

investor’s ann

ual incom

e; and

(2) the

offe

ring is

mad

e on

an Internet crowdfun

ding site th

at

meets th

e exem

ption’s req

uiremen

ts.

To qua

lify for the

exemption, crowdfun

ding

sites wou

ld

have to

: (1) be op

en to

the gene

ral pub

lic; (2)

provide pu

blic

commun

ication po

rtals for investors a

nd

potential investors;

(3) req

uire investors to fulfill a sim

ple ed

ucation

requ

iremen

t be

fore investing; (4

) prohibit certain con

flicts o

f interest; (5)

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

77

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

offer n

o investmen

t advice or

recommen

datio

ns; and

(6) n

otify

the SEC that th

ey are hostin

g crow

dfun

ding

offerin

gs. Site

s that m

eet the

se re

quire

men

ts wou

ld not be

treated as brokers

or investmen

t advise

rs.

CROWDF

UNDING: FLEEC

ING THE

AMER

ICAN

MAS

SES

http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=2

0300

01

Griffin

, Zacha

ry J

J.D. C

ase Western

Reserve University

Scho

ol of Law

. March 14, 201

2

As our econo

my continue

s to sputter a

long like

a be

at-‐up station wagon

, politician

s in

Washington are searching for n

ew ways to

boost its prospects. M

any, includ

ing Presiden

t Ba

rack Oba

ma, are looking to sp

ur sm

all

busin

ess g

rowth as a

solutio

n to our econo

mic

woe

s. How

ever, such grow

th is stym

ied by th

e lack of cap

ital available to sm

all businesses. As

Represen

tativ

e McH

enry stated

, “lend

ing to job

creators and

entrepren

eurs re

mains dism

al,

[and

] we must find ne

w and

mod

ern means fo

r capital formation to ignite our sp

utterin

g econ

omy.” Such “ignitio

n” will com

e from

crow

dfun

ding, o

r at least politician

s seem to

think so.

Crow

dfun

ding is a m

eans of cap

ital formation

that con

nects e

ntrepren

eurs with

investors o

ver

the In

ternet. Entrepren

eurs can

post the

ir bu

siness p

lans on crow

dfun

ding web

sites, and

an

ybod

y conn

ected to th

e Internet can

contrib

ute, or invest, in th

ese compa

nies.

How

ever, the

re is catch; investors are limite

d in

the type

s of returns th

ey can

receive from

their

capital con

tributions. C

urrently, investors

cann

ot re

ceive an

y form

of security

, becau

se

“crowdfun

ding doe

s not m

esh with

fede

ral

securities regulation[s].” The

Securities Act of

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

78

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

1933

makes it illegal to offer o

r sell any se

curity

unless th

e iss

uer h

as com

plied with

the

registratio

n requ

iremen

ts und

er se

ction 5 of th

e Ac

t or h

as m

et a re

gistratio

n exem

ption.

“Entrepren

eurs se

eking de

bt or e

quity

fina

ncing

through crow

dfun

ding will often

be selling

[unregistered

] securities,” as c

ompliance with

the registratio

n process is too

expen

sive for

most e

ntrepren

eurs and

the Ac

t’s exemptions

do not fit w

ith th

e crow

dfun

ding m

odel. A

s such, the

re is a trem

endo

us push in W

ashington

to create a ne

w exemption for securities issued

through crow

dfun

ding.

Unfortuna

tely, the

movem

ent to exem

pt

crow

dfun

ded securities o

verlo

oks the

de

vastating conseq

uences of such an

exem

ption. This a

rticle disc

usses w

hy se

curities

offerin

gs usin

g crow

dfun

ding sh

ould not be

exem

pted

from

the registratio

n requ

iremen

ts

of th

e fede

ral securities laws. First, the article

introd

uces th

e concep

t of crowdfun

ding and

the five diffe

rent categories o

f crowdfun

ding.

Then

it disc

usses the

registratio

n requ

iremen

ts

unde

r the

Securities Act of 1

933, why

registratio

n is no

t feasib

le fo

r most

crow

dfun

ded ventures, and

the conflicts

betw

een crow

dfun

ding and

the curren

t registratio

n exem

ptions. Finally, the

article

discusses w

hy crowdfun

ding sh

ould not be

exem

pted

from

the registratio

n requ

iremen

ts,

specifically fo

cusin

g on

how

such an exem

ption

wou

ld se

verely weaken investor protections

and op

en th

e do

or fo

r fraud

to permeate th

e market.

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

79

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

CR

OWDF

UNDING M

ICRO

STAR

TUPS:

IT’S TIM

E FO

R TH

E SECU

RITIES AND

EXCH

ANGE

COMMISSION TO APP

ROVE

A SMAL

L OFFER

ING

EXEM

PTION

http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=1

9169

85

Pope

, Nikki D.

U. O

F PE

NNSYLVAN

IA

JOURN

AL OF BU

SINESS

LAW, V

ol. 13:4, pages

101 – 12

9.

As so

cial networking web

sites and

crowd-‐ba

sed

prob

lem-‐solving initiatives gain po

pularity,

entrep

rene

urs h

ave be

gun to con

sider th

em as

possible to

ols in a fund

raising m

etho

d, kno

wn

as “crow

dfun

ding”. Current fe

deral and

state

securities regulations, h

owever, lim

it the ways

in which su

ch fu

ndraising m

etho

ds can

be

employed

by en

trep

rene

urs a

nd early-‐stage

compa

nies. This a

rticle fo

cuses o

n fede

ral

securities rules and

regulatio

ns and

recommen

ds cha

nges th

e Securities a

nd

Exchan

ge Com

miss

ion (the

“Co

mmiss

ion”) can

im

plem

ent in fede

ral securities ru

les

and regulatio

ns to

foster su

ch fu

nding initiatives

and facilitate capital formation, while achieving

its m

ission to protect investors from frau

dulent

investmen

t practices.

Crow

dfun

ding: Tap

ping th

e Right

Crow

d http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=1

5781

75

Bellefla

mme, Pau

l; Th

omas Lam

bert and

Armin Schwienb

ache

r Februa

ry 13, 201

1

The pa

per first a

ims a

t ide

ntifying a nu

mbe

r of

stylized

facts related

to crowdfun

ding th

at are

worth stud

ying from

an econ

omic perspectiv

e.

On the ba

sis of a

uniqu

e, han

d-‐collected

da

taset, we iso

late im

portan

t features o

f crow

dfun

ding. The

second

objectiv

e is to

prop

ose a mod

el of crowdfun

ding th

at

encompa

sses se

veral of the

se key fe

atures. W

e de

rive a mod

el th

at associates c

rowdfun

ding

with

pre-‐ordering an

d price discrim

ination, and

we stud

y the cond

ition

s und

er which

crow

dfun

ding is preferred

to trad

ition

al fo

rms

of externa

l fun

ding. The

mod

el highlights

the im

portan

ce of com

mun

ity-‐based

experience

for c

rowdfun

ding

The Bron

desbury Group

Exem

pt M

arket Investor S


miss

ion

80

Title

and

Sou

rce Link

Author

Abstract/Executiv

e Su

mmary

Key Po

ints

to be a viab

le so

urce. A

lso, it sho

ws tha

t crow

dfun

ding is optim

al only for low

er levels of

finan

ce, since otherwise

it lead

s to excessive

price distortio

ns between crow

dfun

ders and

othe

r con

sumers.

The Geo

grap

hy of C

rowdfun

ding

http://pap

ers.ssrn.com

/sol3/pa

pers.

cfm?abstract_id=1

6926

61

Agrawal, A

jay , C

hristian

Catalini, Av

i Goldfarb

University

of T

oron

to,

Janu

ary 6, 201

1.

Perhap

s the

most striking feature of

\crowdfun

ding" is the broa

d geog

raph

ic

dispersio

n of investors. This c

ontrasts with

existing theo

ries tha

t predict entrepren

eurs and

investors w

ill be

collocated du

e to distan

ce-‐sen

sitive costs. W

e exam

ine a crow

dfun

ding se

tting that con

nects

artist-‐en

trep

rene

urs w

ith investors o

ver the

internet fo

r finan

cing early stage musical

projects. The

average distan

ce between artists

and investors is a

bout 3,000

miles, su

ggestin

g a

redu

ced role fo

r spa

tial proximity

. Still, distan

ce

does play a role. W

ithin a single ro

und of

finan

cing, local investors invest relatively early

, an

d they app

ear less respo

nsive to decision

s by

othe

r investors.

We show

this geog

raph

y effect is driv

en by

investors w

ho likely have a pe

rson

al con

nection

with

the artist-‐en

trep

rene

ur (\family and

friend

s"). Althou

gh th

e on

line platform

seem

s to elim

inate most d

istan

ce-‐related

econo

mic

frictio

ns su

ch as m

onito

ring prog

ress, p

roviding

inpu

t, an

d gathering inform

ation, it doe

s not

elim

inate social-‐related

frictio

ns.

i Wroldsen, John S, The Social Network and the Crow

dfund Act: Zuckerberg, Savern, and Venture Capitalists Dilution of the Crow

d. 15 VAND. J. ENT. & TECH. L., Jan. 2013, Forthcoming.

ii Martin, Thomas A, The JOBS Act of 2012: Balancing Fundamental Securities Law Principles W

ith the Dem

ands of the Crowd. W

illam

ette University College of Law, 2012.

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