enfr

Crowdfunding: How Does It Work?

The new year is coming and many of you are probably thinking about starting your business or working on a new project. Having the necessary funds to bring your project to life is essential and many have turned to crowdfunding to reach their financial goals. How does crowdfunding work? Keep reading to find out!

Of course, please take this as legal information and not legal advice. If you have any questions regarding crowdfunding, send us an email at info@artylaw.ca.

 

What is crowdfunding?

Crowdfunding allows individuals or businesses to raise a certain amount of money from various people through an online platform. This money is usually used to finance a particular project.

 

Types of crowdfunding

There are two types of crowdfunding: donation based/pre-sale crowdfunding and equity based crowdfunding.

 

1. Donation based/pre-sale crowdfunding

Donation based crowdfunding is relatively straightforward. People give money to fund a project they support, the same way they’d donate money to a charity, without receiving anything in exchange.

Pre-sale crowdfunding, on the other hand, implies the purchase of the product currently being funded. People who give money will usually receive different considerations in depending on how much they contribute to the campaign.

Neither of these are regulated by the Autorité des marchés financiers (AMF).

 

2. Equity or securities based crowdfunding

This type of crowdfunding involves the issuance of securities in exchange for funds, the same way that a publicly traded business issues shares in exchange of capital. Securities based crowdfunding, as opposed to donation based or pre-sale crowdfunding, is regulated by the Autorité des marchés financiers (AMF).

 

Rules

If you are a startup that would like to fund its activities or a particular project using equity based crowdfunding, you may choose the startup crowdfunding exemptions, which exempt you from publishing a prospectus the same way a publicly traded company should in an initial public offering (IPO). However, some rules still need to be followed. Here are a few of them:

  • You are allowed 2 campaigns per year
  • People can invest up to 1,500$ per campaign
  • You can raise up to 250,000$ per campaign
  • Campaigns can last up to 3 months (90 days)
  • A document including information about you (the business), the business’ direction, what the funds will be used for, amongst other things, will need to be published on the platform you are using for you equity based crowdfunding campaign

 

Fiscal obligations

Pre-sale crowdfunding not being regulated by the AMF does not imply the absence of fiscal obligations regarding the money you have secured through your campaign. If you are offering a product in exchange for funding, you might have to collect sales tax (if you make more than 30,000$ during four consecutive trimesters). However, you should keep in mind that signing up to collect sales tax even if you have not made more than 30,000$ can be very beneficial, as it will allow you to ask for the reimbursement of sales tax paid on your expenses.

Obviously, the money secured through crowdfunding can also be considered taxable income, so make sure you plan your campaign well and don’t hesitate to contact Revenu Québec for any fiscal questions.

As for equity based crowdfunding, the investment made a campaign contributor will either be considered as debt or as issued share capital.

Remember that crowdfunding platforms will not collect taxes for you or remind you to pay income tax on the money you have collected.

 

If you need some advice or additional information regarding crowdfunding, do not hesitate to send us an email at info@artylaw.ca or click the link below to schedule a consultation.

About the author

Leave a Reply