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What is crowdfunding?

Crowdfunding is a web-based process that gives a person or company a way to ask for small amounts of money from the general public using the internet and social media platforms to achieve a larger goal. There are a variety of both small and large crowdfunding platforms, with Kickstarter being the most common and successful. There are a wide range of reasons people set up crowdfunding campaigns, from developing new products and business ventures to philanthropic efforts such as disaster relief.

Participating in crowdfunding

There are several ways to participate in crowdfunding, including making donations, participating in presale product funding and investing. In investor-based crowdfunding (sometimes called start-up crowdfunding), investors give money to a business in exchange for bonds, shares or other securities. Ideally, investors will earn interest or participate in the future growth of that business if the value of the securities increases.

Crowdfunding considerations

Crowdfunding campaigns sometimes result in the issuance of “securities” like loan agreements, promissory notes, shares and units in exchange for investing. These transactions must all comply with securities laws. It’s not just the securities that must comply either – if someone has been helping the person or company find investors, they may also be subject to securities laws and may need to be registered.

While many campaigns are legal and beneficial, they can still have significant adverse effects on investors. Even if the crowdfunding deal is structured appropriately, it’s incredibly important to determine your goals and risk tolerance before getting involved. Below are the four risks you should consider when planning to invest in a crowdfunding opportunity:

  • Many start-ups fail: Statistically, a high percentage of start-up businesses fail. If your risk tolerance is low, start-up crowdfunding may not be the right investment opportunity for you.
  • Returns are uncertain: Getting a return on your investment depends on many factors beyond your control and the business’s control. Only invest what you can afford to lose.
  • Reselling may be difficult: Investing in a start-up crowdfund may be easy but you may have to hold onto your securities for a long time, or you may not be able to resell them at all. If you’re looking for a quick turnaround investment, start-up crowdfunding may not be for you.
  • Beware of fraudsters: As the popularity of crowdfunding increases, so does the risk of fraud from scam artists looking to capitalize on the trend. If you have questions or concerns about the legitimacy of an investment opportunity, contact the Alberta Securities Commission.

More crowdfunding information

If you want to learn more about crowdfunding, how it works and the risks involved, visit the resources visit the National Crowdfunding Association of Canada.