Capital markets webinars

Convergence between equity crowdfunding and traditional finance - Pt 1

We sat down with Alexander Morsink from Equivesto to discuss some of the trends they are seeing between equity crowdfunding and traditional finance. 

 In this 2 part conversation we discuss how equity crowdfunding is starting to converge with traditional financing and what this has meant for companies using this to raise capital and how this has impacted the types of investors for these deals.




Katipult: Welcome to our conversation with Alexander Morsink from Equivesto where we’ll be discussing the convergence between equity crowdfunding and traditional finance. So Alex, to start, could you tell us a little about Equivesto?

Alexander Morsink:  Equivesto is an online investment platform and equity crowdfunding portal licensed as an exempt market dealer in all provinces and territories across Canada, and our technology proudly includes Katipult.

Katipult: As a platform offering companies multiple routes to raise capital, how familiar do you think issuers and investors are with various exemptions that are used? 

Alexander Morsink: Typically, both issuers and investors don't really understand the details of the [equity crowdfunding & offering memorandum] exemptions. Some issuers are experienced in capital raising and understand the offering memorandum exemption and the accredited investor exemption, but the vast majority of issuers and investors that we speak to don't understand how they work.

Even explaining the basics of the exemption, acting almost like a legal doorway through which the company can raise capital, is one of the primary pieces we go over with companies when we start working with them.

Katipult: Can you explain the differences between Equity Crowdfunding, as the public understands, and Equity Crowdfunding regarding the Offering Memorandum rules used in traditional financing? 

Alexander Morsink: Equity crowdfunding can be thought about as a granular way for the general public to invest in the financing [of a deal], allowing a community or a crowd to invest in and buy small pieces of ownership in a private company, which can sum up to a larger capital raise.

From a securities law perspective, Canada has a prospectus exemption specifically designed for equity crowdfunding: National Instrument 45110 Startup Crowdfunding.  Allowing a larger group of people to invest using an online platform into a private opportunity exists through that specific exemption. Also, a number of other exemptions, including the offering memorandum exemption, can be used to facilitate something similar. 

For many of the offerings on the platform open to the general public, we'll have both crowdfunding and offering memorandum exemptions available to the vast majority of Canadians. Our investors wouldn't necessarily know the details of the differences between the two exemptions, even though they're provided with the required offering documentation—either the offering document for the startup crowdfunding or the offering memorandum for that exemption. But, when it comes to the nuances of the differences, most people wouldn't know.

Barry Holder:  We’ll talk about compliance in a moment, but first, can you tell me what sort of changes you’ve seen over the past 12 months?  Have there been any notable changes to the types of issuers looking at equity crowdfunding or the OM exemption?

Alexander Morsink:  The creation of the National Instrument 45110 Exemption in September of 2021, which was a national approach to equity crowdfunding in Canada, really opened the door so more issuers could use that. Some of the other exemptions that existed weren't used in all provinces, and they didn't necessarily align, so it was harder to have a national approach.  

Since the introduction of 45110, it's certainly been a much more usable capital-raising alternative for Canadian issuers.  As we've seen that start to gain in popularity, we've also seen larger, more mature issuers that may have initially looked towards equity crowdfunding in a potentially negative light now see it as a very strong and positive avenue for capital raising.

So, the initial mentality that would only use equity crowdfunding because you can't get funds anywhere else is certainly fading away, and we're seeing a much higher frequency of larger and more mature issuers using it, as well as the newer smaller issuers.

Katipult:That's great. It's really interesting. On the other side of things, what has been the notable change you've seen regarding the types of investors coming through your platform?

Alexander Morsink:  As larger and experienced issuers use equity crowdfunding, they can send some of the investors that normally would have just invested directly into them through the platform. 

So while we were always able to take both retail investors and accredited investors, as well as investors that are corporations, through the platform, we're starting to see a wider usage of the platform by accredited and higher net worth investors.

Katipult: So it's a chicken and egg situation. The bigger the amount being raised, the bigger the investor that comes along as well. Is that where you see things going in the future?

Alexander Morsink: Yes, it's an interesting concept. With equity crowdfunding initially, the thinking was, it was really about allowing the retail investors to sort of enter the game, which is certainly what it is about. It's the main focus for us and our platform. 

The reality is, if you think about the investing landscape prior to equity crowdfunding, there was less digitization of the process. It was still rather manual, so the creation of these rules and the digitization of the process for the retail investor is trickling upstream now, back into a larger scale, almost towards private equity style investment, because it can also make the process easier for those larger issuers. 

So it's not always trickling down from the perspective of technology; it's trickling up these days.

Katipult: That aligns with the wider trend of digital technologies being so prevalent across everyday life, and the investment world needs to catch up to meet investors' expectations and provide digital interactions for all parties. 

Alexander Morsink: Exactly; when each individual transaction is worth hundreds of thousands of dollars, going over and meeting somebody at their office for the paperwork isn’t something you didn't mind doing based on the fee structure.

But that isn’t feasible when you take check sizes of one hundred, five hundred or a thousand dollars; you have to digitize everything. But once you've digitized it for the smaller investor, you realize this is also much easier for the larger investors. So you're able to serve everyone with the offering.

Katipult: Related to this, how do you see more innovative capital-raising businesses like yours converging with more traditional finance firms in the next 12 to 24 months?

Alexander Morsink: What we offer is really a complimentary service. We're not here to replace any sort of existing capital-raising structure. Instead, it's adding the technology, support, and retail investors where there weren't any before. 

So we're finding a lot of traditional players in the finance space, in the capital raising space, are interested and willing to partner with EMDs that have a platform like ours because we can help expand and improve their existing offering, rather than us being seen as a threat or a competitor.

Katipult: Thanks for this, Alex.  You’ve provided us with some really interesting insights on the trends around Equity Crowdfunding. 

Watch the second part of our conversation, where we will look at other trends around the convergence of equity crowdfunding and traditional finance.