Wefunder & Equivesto: Demystifying Equity Crowdfunding

Price noted the number of rigorous fraud checks, which are taken very seriously by Wefunder.

“The protection of retail investors is one of the reasons why the SEC requires a higher level of financial disclosures requirements for Regulation Crowdfunding (Reg CF) vs. Regulation D – e.g., companies raising exclusively from accredited investors don’t need audited financials to raise $5M. One of the product features we’ve rolled out over the last couple of years is ‘Lead Investors’, meaning a lead investor writing a larger check (typically around 5% of the round) is prominently featured on the page. It’s one example of how we’re trying to help investors with “signals” that can help them assess investment opportunities.”

As explained previously, in Canada the Exempt Market Dealer (EMD) is a licensed securities dealer that allows them to help connect companies in the exempt market (private companies looking to raise capital from all manner of Canadian investors). Equivesto must comply with numerous regulatory requirements to protect both the companies and investors beyond the platform.

For private companies, Equivesto must first complete a process called “Know your product”, gathering a detailed understanding of the product before it’s put on the platform and made available to investors. All companies that want to raise capital must have a minimum viable product/service (MVP) or current revenue from operations. Equivesto will verify this information to ensure the company has created a unique IP. In addition, Equivesto will do the following:

• ID verification of founders and company
• Background and criminal checks on directors
• Full review of legal documents
• Full review of documents (pitch decks, strategy) pertaining to the raise
• Companies will certify information is truthful and valid before it is made available to investors – with further review from Equivesto for validation

Morsink notes that companies raising via 45-110 Startup crowdfunding must prepare an offering document, outlining all pertinent information, including detailed risks to investors.

“Companies raising via the Offering Memorandum exemption must provide more detailed disclosure compared to the 45-110, including financial statements. In the case of any material changes to the company or the offering, the company is legally obligated to inform Equivesto. We will, in turn, provide the appropriate campaign update and duly notify the investors.”

Morsink notes that there is a 48-hour backout window for participating investors, essentially giving them the option to request a full refund, no questions asked. This can also apply to any material change to the offering.

Unlike the US, soliciting investments outside of the prospectus or prospectus exemptions rules is illegal in Canada. Therefore, companies who raise capital via ECF can post about it on social media but are subject to strict guidelines regarding what can and cannot be posted. Clients planning to use social media, press releases, ads, billboards, videos, email blasts, etc. must first provide the materials to Equivesto for a compliance review. He highlights,

“Companies cannot publish detailed terms of the investments on those platforms, and cannot make promissory statements like XXX return guaranteed, or zero risk etc.”

Morsink reiterates the importance of the onboarding process and the KYC and suitability review for investors, which clearly disclose the riskiness of the investments, and set maximum limits for each investor based on their personal financial position and risk profile.

Assuming there are many investors in one equity crowdfund, how does a startup founder manage the deluge of investors?

For founders raising on Wefunder, the lead investor will sign on behalf of the thousands of investors within the SPV. Therefore, only one signature is required. The founders have a legal obligation to provide one annual report. Price suggests the importance of more frequent updates to keep investors engaged. They’ve complemented their offering with a product feature called “Lead Investor”, which prominently features investors who write checks typically ~5% per round, that can be a signal to other investors when assessing investment opportunities.

In Canada, the process is much different. NI45-110 specifically will not allow investments into companies via SPV, which means that every investor does need to go directly onto the cap table. Equivesto simplifies this process by recommending companies raise by issuing a new class of non-voting shares and requiring investors to sign a voting trust agreement. Now, investors are essentially silent partners. On the capitalization table, the new share class will be represented as one line item, with the full details of the individual investors accessible if required.

With the non-voting shares, voting trust and cap table setup, Morsink notes that both founders and VCs have confirmed they are comfortable with the structure and does not affect the company’s ability to be managed or to raise future capital. At some point in the future should the company attract a lead investor, Equivesto can structure the voting trust to provide the voting control to the lead, depending on the agreement between the lead and the VC.

Equivesto also recommends companies provide quarterly investor updates:

“Founders often find that having many smaller investors can actually be a sizable benefit. The company now has a large list of believers and supporters, who can be asked for help to grow the company, like introducing potential sales leads of a certain type, testing out a beta version of a product, or giving feedback on general public marketing etc.”

What are cost considerations for founders who are considering Equity Crowdfunding?

Wefunder charges 7.5% success fee on the amount of capital raised. This is not paid upfront but subtracted from the funds disbursed to the startup upon a successful close. Price indicates that for founders using standard SAFE/Convertible Note templates, they don’t incur upfront legal fees. If they are raising on a priced round, their lawyer will typically draft the subscription agreement. As per price,

“Usually, the only upfront cost for founders is for the CPA review/audit. If they are raising between $124K and $1.235M, founders need a CPA review. If they are raising from $1.235M up to $5M, they need a CPA audit.”

In addition, startups will spend money to advertise/market the raise. For those raising on community rounds, especially those with large audiences, marketing costs can be quite low. Replit and Mercury, who raised $5M on Wefunder in one day from their customers spent $0.

For Equivesto, there are 3 costs related to an ECF campaign:

a. Platform itself (Equivesto fees) – Equivesto charges CAD $3,000 + tax up front, and 7% of the total amount raised (no warrants). Other Canadian platforms charge other fees and may take warrants.

b. Legal fees – For a standard campaign, Equivesto can connect companies to our partner law firms that can provide a fixed price for legal support ~CAD $5,000 assuming standard needs. This includes amending articles of incorporation to add non-voting share class; review and edit of the 45-110 Offering document; report filing of Exempt Distribution with securities regulators; and assistance with legal paperwork with respect to issuance of shares post raise.

c. Marketing expenses – This component will depend on the size of the community, like what price outlined. Morsink noted that some companies can spend up to 10-20% of their targeted raise on marketing and advises that companies should target gathering up to 30% their targeted raise on the pre-campaign waitlist before they go live.

Will we see more companies going this route? And is this how ECF disrupts the VC space especially now that this lowers the investing threshold and opens opportunities for those who had not traditionally invested before?

Price agrees with this principle of democratization to allow angel investors to invest smaller amounts and adds it allows investors to not only access early opportunities, but also to diversify their risk and invest in more companies. Price notes that the playing field is not level just yet.

“The vast majority of startups in the US are still raising through Regulation D and retail investors don’t have access to invest in them. Over time, we hope more and more startups open access to let their fans invest, on the same terms as VCs.”

Morsink agrees that more investors have access to early stage investing through ECF but also believes that ECF and venture capital can work alongside each other rather than replacing the other,

“Venture capital firms typically can provide much larger amounts of capital than can be raised via ECF, and while some VC firms participate at the earlier stage with smaller checks, most operate at Series A and beyond. ECF via 45-110 is limited to a maximum raise of 1.5MM per company per rolling 12 months, where most VCs invest in deals raising 5MM plus.”

He notes that VCs investing alongside angels on the same terms provide valuable advice and the provision of capital for faster growth for companies.

What’s clear is there is fertile ground to introduce and attract a new type of investor especially as innovation is poised for some critical disruption in the coming decade. And with the once-exclusive investment access to many cool technologies, Equity Crowdfunding could be just the solution to level the playing field and increase capital raising opportunities for entrepreneurs.