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Crowdfunding needs investor safeguards, VCs and angels warn

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Crowdfunding needs investor safeguards, VCs and angels warn
Two groups representing angel and VC investors welcome a new way to tap into startup capital. But careful consideration must prevail to keep investors and startups safe, they say. 7/27/2012, By: Christine Wong

Don't let hype overshadow investor safety if equity crowdfunding becomes legal in Canada, two of the country's angel and venture capital groups warn. Some leaders in Canada's angel and VC sector say equity crowdfunding is a great opportunity to boost access to early stage capital, but warn safeguards must be woven in to protect both investors and startups if it's legalized in Canada. “I'm excited about it. We certainly need more capital out there,” said Bryan Watson, executive director of the National Angel Capital Organization (NACO), a Toronto-based association for angel investors. Crowdfunding (using social media channels to raise equity capital for startups) could particularly help fill the gap between early stage friends and family stage financing and larger funding from angels or VCs, Watson said. What's not clear is whether protective rules will be included so investors and startups don't take undue risks, he said. Under accredited investor rules in each province, Watson said, an individual can only invest a certain maximum percentage of their net worth in equity investments. The rule is meant to prevent people from putting too much of their money at once into higher risk ventures.

“There's different types of (accreditation) thresholds … (so) that if (a startup ) fails, the impact it would have on the investor would not necessarily adversely affect the investor. So a situation like „Martha (loses) her entire life savings,' that wouldn't happen.” A similar protective threshold has been written into the U.S. JOBS Act legalizing equity crowdfunding south of the border. But since the move to legalize it in Canada is still in its infancy, it's unclear if such safeguards will be written into any regulatory changes that might be made in each province here, Watson said. Investor accreditation Some commentators have expressed concerns that crowdfunding will attract investors who are less experienced, have a smaller financial cushion to fall back on, and don't appreciate how high the startup failure rate is when putting in their money. Due to those concerns, investor safeguards like accreditation thresholds like the ones described above should be included in any crowdfunding laws, said Genevieve Morin, co-president of Reseau Capital, Quebec's VC industry association. “We might be getting money perhaps from people that are earning quite a bit less than even angel investors,” Morin said. “The amount they're allowed to put into a single company or (invest in various startups) all together should be kept to a maximum.”

Summary
Two groups representing angel and VC investors welcome a new way to tap into startup capital. But careful consideration must prevail to keep investors and startups safe, they say.

Description
Some commentators have expressed concerns that crowdfunding will attract investors who are less experienced, have a smaller financial cushion to fall back on. Due to those concerns, investor safeguards like accreditation thresholds like the ones described above should be included in any crowdfunding laws, said Genevieve Morin, co-president of Reseau Capital, Quebec's VC industry association.

“We might be getting money perhaps from people that are earning quite a bit less than even angel investors,” Morin said. “The amount they're allowed to put into a single company or all together should be kept to a maximum.”

Tags: crowd funding, Crowdfunding, Crowdsource, Crowdsourcing, Jobs Act, SEC, US President Barack Obama

Posted by Luis Enrique Morales

Jul 28, 2012 12:40 am GMT Viewed 985 times

Author: Christine Wong Source

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