Letter on Crowdfunding to The Honourable Christian Paradis, Minister of Industry

June 22, 2012

The Honourable Christian Paradis
Minister of Industry
235 Queen Street
Ottawa, Ontario
K1A 0H5

Dear Minister Paradis:

RE:  Federal support for equity based “crowdfunding” and a complementary tax credit to address funding gaps in the innovation chain

As you are aware, there is a dearth of funding available to start up new firms and grow them, and to expand many private firms wishing to explore promising new opportunities. 

While proposals in the 2012 Budget do provide some relief by dedicating much needed new funds to IRAP and venture investments, the challenge still for entrepreneurs with new ideas is finding the initial funds needed to even get started. 

CATA asks the federal government to take steps towards addressing the funding gaps in Canada’s innovation chain. 

·        We ask that the government commit to a process to develop a Model Framework for equity based Crowdfunding for Canada on which the provincial, territorial, and federal governments could draw.

 

Canada is out of step with Europe, and with the U.S. in its recent move to legalize equity based crowdfunding to enable businesses to raise up to $1 million via online "funding portals."


The support of the U.S. Congress and the Obama administration for crowdfunding and the encouragement for its timely implementation by the SEC are consistent with the gains anticipated.  

Firms less than 5 years old have reportedly accounted for all the net job growth between 1990 and 2005 in the U.S. [1]  Crowdfunding is seen as a way to further jumpstart growth and the commercialization of innovations - without drawing on government monies.  Certainly, the crowdfunding envisioned by the Jumpstart Our Business Startups Act (JOBS Act) will help the U.S. address the challenges of China and India that are strongly targeting innovation by funding commercially promising projects.   

In fact, there is every reason to suggest that frustrated Canadian entrepreneurs will see the advantages offered by the crowdfunding provisions for raising capital when those provisions are implemented in the United States, and they will take their best ideas to the U.S. to develop and commercialize.  Already, they are talking to us about the issue. 

Therefore, we are calling on the federal government to explore the potential for equity based crowdfunding in Canada by committing to a process for developing a workable Model Framework for crowdfunding for Canada.  This Model Framework could then be drawn on by the relevant governments.  We believe that a Model Framework would be an excellent way to kickstart the process. 

The creation of a Model Framework would also promote consistency and a balanced playing field for all Canadian entrepreneurs.

Quickly getting to an understanding of the issues specific to Canada and developing a draft Model Framework would enable government to act in real time and bring our public policies in step with the realities of the globally interdependent world.

Given the time challenge from Europe and from across the border, we need to get up to speed on the implications of crowdfunding for Canada.  We ask that a way be found to have the private sector develop a draft Model Framework which the provinces, territories, and federal governments could draw on. 

We suggest that a small, authoritative leadership group should develop a draft Model Framework.  This draft could then be challenged in social media forums to test out the pros and cons of the proposal in a very transparent process.

In this way, the environment could be created in which the governments could knowledgeably take action to allow for the creation of appropriate “funding portals”.

·        We also ask the government to look at providing tax credits targeted at investments that help entrepreneurs bridge specifically the funding gaps in the innovation chain

CATA calls on the federal government to look at providing tax credits specifically targeted at investments that help entrepreneurs bridge these gaps to provide added emphasis to the imperative of establishing a vibrant funding environment, i.e., one focused on eliminating the funding gaps along the innovation chain,

This is not a new idea.  As far back as 2005, The Conference Board of Canada looked at an Innovation and Productivity Tax Credit (IPTC) [2] as a useful approach to bridging the gaps.  Further, a number of provinces have already developed such tax credits.  These credits have the potential for excellent returns to both the provincial and federal governments.  For example, the report prepared for the B.C. Ministry of Small Business, Technology and Economic Development, June 2010, on the results of the venture capital program in British Columbia [3] states:

We conclude that the venture capital program is fundamentally valuable to

the province of British Columbia.  While this conclusion is based on a large

 number of observations, two findings stand out the most: (i) companies in

the program generate more taxes than they consume tax credits, and

(ii) companies consistently create new jobs.  

We encourage the federal government to review what is being achieved with existing provincial tax credits aimed at bridging funding gaps. 

Background - crowdfunding and funding gaps in the innovation chain

If Canada does not act to put in place an effective environment for crowdfunding, it will further exacerbate the pre-commercialization (startup) and pre-IPO gaps in funding along the innovation chain – gaps that have been highlighted so many times in the past by expert advisory reports and studies looking at Canada’s productivity gap.

For a diagram depicting the funding gaps along the innovation chain, see the attached Appendix.  For an analysis of these funding gaps, see Sustainable Development Technology Canada (SDTC), The Funding Gap, at http://www.sdtc.ca/index.php?page=the-funding-gap&hl=en_CA.

Historically, the traditional sources of pre-commercialization seed capital have been Angel investors and immediate family and friends.  These sources can only meet a small part of the demand.  Family and friends can only contribute so much, and "incubator programs" and other

Canadian programs targeted at startups have very limited funds available.  Banks are not interested in loaning money for startups or expansion, without significant collateral.

It is exactly in these gaps that crowdfunding can be effective in drawing in the requisite funding for firms to continue along the innovation chain and not be stalled out.  We believe that  crowdfunding should be used to complement existing support mechanisms like SR&ED, IRAP, venture funds, and incubators by providing funds where there is a disconnect in funding along the innovation chain.

The key here is that crowdfunding should not replace what is currently effective in supporting the innovation chain, but rather it should assist entrepreneurs to overcome the well known stumbling blocks in the Canadian investment ecosystem that hinder growth. 

Crowdfunding can fill the gaps by providing the means for new entrepreneurs and experienced business people alike to get a new idea "off the ground" and commercialized.  A robust, effective crowdfunding environment should be a benefit to both entrepreneurs and their local communities.

The crowdfunding mechanism can contribute to growth in all sectors of the Canadian economy where creative entrepreneurs find funding limiting.  For example, relatively small amounts of crowd funds might be sought for the development and commercialization of a new application, permitting the seamless connection and sharing of data in a community across a multiplicity of communication platforms.  Even larger amounts of funds might be sought to develop and commercialize a new laser based sealing technology; or the development and commercialization of new, lighter, sound proof flooring and wall systems for multiple housing.

For additional information on the concept of crowdfunding, your team may be interested in reviewing the following two draft papers on the subject prepared for CATA:

·        Accelerating Crowdfunding in Canada, which is a general background on crowdfunding in draft, at http://www.cata.ca/files/PDF/misc/Crowdfundingwhitepaper.pdf; and

·        Technical Whitepaper, which is a technical analysis of securities regulation in Canada and the U.S. relevant to crowdfunding in draft, at https://docs.google.com/document/pub?id=1iCwoRkyaTeCZnzy7dsB8q8i8Kgr_FMAU3KV26XPHGME

 

Conclusion

We are working with our members from across the country to develop a common understanding of the issues, and our position.  We will shortly be encouraging our members to call on their key provincial, territorial, and federal authorities to take action.

Given the importance of the complementary tax credit, we suggest that you may wish to discuss this opportunity with Minister Flaherty.

I would be pleased to have our team meet with you and/or your team to expand on our ideas and to see how best the needed initiatives could be developed.

Sincerely,

John Reid
President & CEO
CATAAlliance (www.cata.ca)
jreid@cata.ca

c.c.:
Nigel Wright, Chief of Staff, Prime Minister’s Office
The Honourable Jim Flaherty, Minister of Finance
Russ Roberts, Senior Vice President, Tax, Finance and Advocacy, CATAAlliance


APPENDIX

FUNDING GAPS

(graph to be provided)

SOURCE

Sustainable Development Technology Canada (SDTC), The Funding Gap, at  http://www.sdtc.ca/index.php?page=the-funding-gap&hl=en_CA



[1] Ewing Marion Kauffman Foundation.  Business Dynamics Statistic Briefing: Jobs Created from Business Startups in the United States, page 1, 2nd paragraph, at  http://www.kauffman.org/research-and-policy/bds-jobs-created.aspx 

[2] The Conference Board of Canada, Report April 2005, Six Quick Hits for Canadian Commercialization, Leaders’ Roundtable on Commercialization, page 7. 

[3] Thomas Hellman, University of British Columbia; Paul Schure, University of Victoria.  Report prepared for the B.C. Ministry of Small Business, Technology and Economic Development, June 2010:  An Evaluation of the Venture Capital Program in British Columbia.  In particular, the “Executive Summary” and “Policy Recommendations”, pages 4 to 7.

 

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