Crowdfunding Models in Canada
There are four main crowdfunding models that can be used in Canada to raise funds for a project. Here’s an overview.
Donation-based crowdfunding is currently the best known and most popular crowdfunding model. This type of financing, introduced by platforms such as Kickstarter and Indiegogo, allows donors to receive rewards in exchange for money.
This financing model is divided into subcategories:
- Traditional donation-based: donors make a donation without expectation of reward, e.g. Kickstarter(US), Fundrazr (Canada);
- Reward-based: donors receive a tangible reward for their donation, e.g. merchandise, free video stream, movie tickets, etc. The rewards are generally varied and designed to encourage participants to donate more money in exchange for more interesting gifts;
- Government-matched crowdfunding: it exists in some countries (e.g. Sweden, Australia, the UK) – but not in Canada. With these programs, governments match the contributions made by individuals, and issue tax receipts for donations.
Among possible types of rewards, product copies may be provided upon completion (certain people associate this with loan-based crowdfunding) or donors may be invited to participate in creating the product (for example, by giving their traits to a cartoon character), to live a creative experience (such as visiting a set with the filmmaker) or to immortalize their contribution in memory (by having their name listed in a video game’s credits, for example).
The subscription model of crowdfunding can be considered as a variant of donation-based crowdfunding. Contributors finance a project or creator on an ongoing basis rather than through one-off donations.
Patreon—the most important subscription-based crowdfunding platform—supported more than 17,000 creators in 14 project categories in 2016. The platform earns certain creators more than $67,000 per month. Among the most popular categories are videos and films, music, podcasts and comics.
Creators have the choice of two types of subscription-based campaigns: monthly campaigns provide them with an ongoing source of funding whereas works-based campaigns enable them to collect funds once they have completed a new work (after each canvas they paint or podcast they upload, for example).
Like reward-based crowdfunding, creators may choose to reward their fans with gifts of different values depending on the amounts individual fans contribute.
Canadian businesses can also opt for equity crowdfunding. Under this model, investors acquire a stake in the business instead of receiving a reward.
There are two main types of equity-based crowdfunding in Canada:
- Startup/SME: funds are raised for companies with no track record or revenues; generally attract retail and angel investors.
- Real estate: funds raised are invested in a (typically) diversified portfolio of properties.
By definition, equity crowdfunding is used to finance a company rather than a project. The model is easily adaptable to certain sectors, such as video games, but creators need to evaluate if the model really suits their needs before launching such a campaign.
Lending-based crowdfunding enables creators to borrow money directly from the public instead of going through a financial institution. Instead of acquiring a stake in the company or receiving a reward, investors lend their money at the interest rate established for the project.
Platforms such as Lendingloop.ca award loans varying between $5,000 and $500,000 over periods spanning from six months to one year.
Three main types of lending-based crowdfunding exist in Canada:
- Traditional lending: standard lending terms, expectation of reimbursement of loan plus interest;
- Forgivable loans: loans reimbursed if or when the borrower generates revenue, or generates profit;
- Pre-sales: lender expects to receive a copy of the crowdfunded product;
In 2017, there were eight lending-based crowdfunding platforms in Canada, many of which focused on real estate.
Lending-based crowdfunding is still an emerging area because it is governed by the same kinds of securities rules as those which apply to equity crowdfunding.