StartUp Law 101

Late last year I had the opportunity to collaborate with Catherine Lovrics, B.A., LL.B at Bereskin & Parr LLP, on the inner workings of raising capital for entrepreneurs. Her book, Startup Law 101: A Practical Guide, published last week.

The basis of our conversations surrounded accessing funding at the right time and identifying the the business expenses that are needed most, from capital expenditures to operational costs.

As part of a panel discussion during last Wednesday’s launch event hosted at MaRS Discovery District, I was asked several great questions about funding that I wanted to discuss further.

Q: Securing funding for early-stage companies can be the biggest challenge for founders. What are some of the opportunities that have developed recently in the equity crowdfunding space for early-stage companies?

A: Without crowdfunding, the ability for early stage companies to access capital would not exist in such high numbers.

The emergence of online platforms helping private and public companies access capital from accredited and non accredited investors has literally transformed the investor landscape.Today’s private capital investor can invest as little as $50.00 into a company.  This was not possible five years ago.

Part of this transformation includes the addition of online payments. It has not only increased the speed in which an investor makes a decision to invest, but has changed the perception of how an investor views an investment. All an investor has to do is enter a credit card number using their VISA, MasterCard, American Express, etc.

With this new dynamic, companies need to have a very proactive approach to their new stakeholders.  Your investor relations strategy and tools will be the key to maintaining and growing your company.

Q: What are some of the major changes and challenges we’re seeing in equity crowdfunding?

A: The biggest challenge globally in equity crowdfunding is that companies are not ready.  We see 98 percent of companies stall in their funding process when they engage in online platforms to help startups raise capital.

What companies don’t understand is that nothing has changed from the days of applying to Venture Capital firms, Angel groups, etc.  Sites like like StartEngine, FrontFundr, BankRoll Ventures, MicroVentures, etc., expect you to have your company and critical business documents in order.

The largest barrier and one of the major delays is the lack of up-to-date corporate records. Make a checklist — update your corporate records, capitalization table, signed agreements, legals for the offering, business plan, executive summary, financials, projections, etc.

Q: There has been a lot of buzz this past year with the rise of cryptocurrencies and ICOs. What are we seeing now with the regulation (and potential demise) of ICOs and the rise of token offerings or ITOs?

A: In 2017, we saw the rise of crowdfunding v3.0 with the introduction of Initial Token Offerings (ITO).  For many in crowdfunding, ITOs have proven that people will invest from around the globe if they trust the underlying technology that is managing their investment, i.e. blockchain.  

Out of the gate, many companies took advantage of this type of capital raising and many investors lost billions of dollars. Like any new form of technology, it can be used for good and bad.  

We will see a rise of security token adoption in 2018 as companies begin issuing tokens like selling securities. But, these tokens will also have the capability to trade on secondary exchange.

This just scratches the surface of what we covered and Catherine was generous enough to provide a copy of Chapter 6, “Canadian Startup Funding Sources” for KoreConX followers.

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