Should my business have 100 or 1,000,000 shares? How do Shares work?

Over the last two weeks I’ve had two different clients who were somewhat confused about how shares work in a corporation.  Both were small business owners.

One owner was trying to pass the family business on to their children.  They asked me how to ‘transfer their shares’ from the established corporation to the new corporations of their children.  Can one do this?

The other client was a pair of entrepreneurs who wanted to bring on a third partner and have his investment go into the company.  They weren’t sure how to accomplish this. 

I taught them how they could achieve their goals by splitting their existing shares and have the corporation issue new shares to the new partner.

Not sure what I’m talking about?  Learn how to use a corporation’s shares to make your deals in this video: https://youtu.be/1EjKjSAd1F8

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[VIDEO STORY] Mini Storage Mess! I tell the story about a mini-storage deal gone bad (but the risk was controlled)

Have you ever wanted to own a mini-storage warehouse business?  I have.  All the pleasures of collecting rent with none of the hassles of toilets and other inconveniences.

Check out this story of the time I tried to build one with some partners.  It ended in a loss!




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Is Equity Crowdfunding really Co-Op 2.0?

The New Brunswick Securities Commission has recently changed the rules about raising capital through the sale of securities (shares, bonds, debentures, warrants, etc.) along with 5 other provinces.

The new rules will allow companies to publicly raise up to $250,000 twice each year without going through the hassle of creating the sizeable and expensive prospectus documents that investors in large companies may be familiar with.

This initiative has been driven by the ‘new economy’ of online companies who brought us sales and donation based crowdfunding that has been operating online for years.  Securities regulators have, until now, not endorsed these types of fundraising methods to sell ownership or debt in a business.

If you were to try to raise share capital for your new business you basically had three options if you didn’t want to, or couldn’t afford to, create bulky prospectus documents; ask your family and friends, ask people with whom you’ve done business in the past, or ask an ‘accredited investor.’  Accredited investors are those very wealthy people to whom the securities laws don’t apply because they’re deemed to know enough to watch out for themselves.

In a May 18 article appearing in the Times & Transcript, a commentator from the startup organization Planet Hatch is quoted as saying that the fundraising limit is too low to really help a lot of internet startups.  I agree, but the crowdfunding rules from the securities commission are about to change things in a whole new way.

In my 2014 Amazon best seller Invest Local, I give very specific reasons why you should not want to be a shareholder in a privately controlled corporation, especially if someone else had a large ‘control block’ of shares.  There are far safer ways to invest in small businesses for financial gain.  

I will repeatedly tell anyone who will listen that buying shares of these small businesses, especially via this crowdfunding technique is not a way to invest one’s money.  It’s very speculative... unless you have other motives.

While $250,000 is not much money for a tech startup, it could mean life or death for a restaurant, a sports bar, a corner store, a daycare or any number of real, everyday, local businesses that you or I may wish to patronize.  Drum-roll please.  I’d like to introduce you to the ‘investomer.’

I first saw this word a few weeks ago related to an American company who was helping restaurants find funding via crowdfunding of equities.  US rules also changed recently to allow this option for small companies. 

Putting the idea out there that you want to build a new café in a certain location and asking the neighbouring residents to invest via crowdfunding tackles several problems at once for the small business owner:

• You get to raise money to pay for the costs of the business.
• You get to survey the market to see how many people REALLY want to see the business open.
• You have the opportunity to develop a fiercely loyal customer base who share in the excitement of the new enterprise.

The result is a business with a self-interested owner, a profit motive and a highly motivated and supportive customer base of ‘investomers.’  Who wouldn’t want to have a solid base of customers who want to patronize the company and possibly share in the profits down the road?

I believe this will create a new era of community based businesses which will succeed where co-ops often fail. 

In my opinion, the reason that co-ops fail is because there is no owner pushing to ensure that the business works for the customers.  In the last decade the Sobeys grocery chain has built at least four new stores in Metro Moncton.  The Co-op chain of grocery stores closed a store and is down to one.

 

Crowdfunding for shares in businesses could create a new era of small businesses built to serve the needs of our communities which will be resilient and motivated to grow rather than stagnate simply because they will have owners that want to taste success.

Legal Crowdfunding for Startups wanting to sell shares? Several provinces may be approving this soon..

I love this article.  It gives me real hope that there will soon be even more ways for small businesses to raise money.

Through my lending efforts I help a few local businesses.  This is the topic of my book, Invest Local.

By opening up crowdfunding for equity issues, there is the real possibility for companies that do less than a million dollars in sales to develop a distributed group of shareholders. I see small company share issues being used as marketing tools.  Much like when Sam Adams brewery made a share sale offering in its cases of beer so that fans could become owners.

This could make it feasible to raise as little as a few hundred dollars from each shareholder and put together an impressive sum of capital.

If it gets approved in New Brunswick, maybe I'll use it to set up a venture capital fund!

Fingers crossed.

-Dave

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Regulators unveil crowdfunding rules for startups

Jeff Gray and Janet McFarland

Globe and Mail March 20, 2014

Canadian entrepreneurs eager to use “crowdfunding” to raise capital may soon get the chance, as most of the country’s securities regulators unveiled proposed rules Thursday for selling equity over the Internet.

But investor-rights advocates warn the new rules could expose even more investors to fraud. And crowdfunding enthusiasts, while welcoming the proposals, said some of the new rules were too restrictive, and could hamper the growth of what they see as the future of raising startup capital.

The Ontario Securities Commission, for example, would allow companies to raise a maximum of $1.5-million in equity in any 12-month period through crowdfunding. Individuals would be able to invest no more than $2,500 in a single project, to a maximum of $10,000 a year.On Thursday, securities commissions in Ontario, British Columbia, Quebec, Manitoba, Saskatchewan, New Brunswick and Nova Scotia announced proposed rules to regulate the raising of limited amounts of capital, and the selling of shares, through crowdfunding websites. While many of the proposals are similar, some provinces have proposed different limits.

But the British Columbia Securities Commission says it would allow companies to raise just $150,000 per offering, twice a year. Investors would be limited to a maximum of $1,500 in a single offering.

To address widespread concern about fraud, regulators have proposed a lengthy set of restrictions. Crowdfunding websites, or portals, will have to be registered with securities commissions as “restricted dealers,” and comply with minimum capital and insurance requirements as well as various reporting rules.

They would be required to do background checks on companies and their directors or officers who are raising equity on their sites. The OSC says it will be the responsibility of a portal to shut out issuers it believes are fraudulent.

But some feel these safeguards may not be enough.

Neil Gross, executive director of the shareholder advocacy group FAIR Canada, said that with so much stock fraud already targeting unsophisticated investors in Canada, regulators have not weighed the costs and benefits of crowdfunding.

“The question is how much loss and financial ruin are these provisions going to cause, and how does that compare to the benefit in terms of funding of new companies that this is likely to generate?” he asked.

Canada’s nascent crowdfunding industry largely welcomed the proposals, but said they may need fine-tuning.

Sandi Gilbert, founder of Calgary-based crowdfunding portal SeedUps Canada, said one issue is a provision that would not allow those currently registered under existing securities rules, like her company, to also take advantage of the new registration for crowdfunding portals. This could make raising capital more expensive, she said, as many companies would need to pay fees for both.

“If this looks like it is still going to cost an issuer $50,000 of out-of-pocket money before he can go raise his $250,000, it is not going to work,” she said in an interview.

Crowdfunding has exploded in recent years as a way to raise small donations for projects ranging from films to video games to gadgets. The producers of the Veronica Mars movie earned huge publicity last year when they raised $5.7-million (U.S.) on the crowdfunding platform Kickstarter to fund their feature film.

With a growing number of small firms seeking financing through the Internet, securities regulators worldwide are facing pressure to allow companies to issue shares in exchange for funds they receive.

Meanwhile, the OSC announced another landmark proposed rule change on Thursday, which proponents say could allow new ventures to raise billions of dollars.

Under the proposal, Ontario would adopt rules similar to those in other provinces, that would allow investors to invest a maximum of $10,000 in a business that produces an “offering memorandum,” a disclosure document that falls short of a full prospectus. Investors who meet certain net asset thresholds could invest up to $30,000. Industry groups that lobbied for the changes praised the move in general but said the proposed limits were too low. [full article page here]