Business Finance: Considering crowd currency

(NC) -- Access to financing is critical to the success of small and medium sized businesses, and while many are successful at securing funding from conventional sources like banks, credit unions, government, leasing companies, family and friends, venture capitalists and angel investors, the cost to borrow can be high and the sale of shares can dilute an owner's ability to manage his or her own business.

To mitigate these consequences, small to medium sized owner managed businesses are exploring how crowd funding may help as an alternative source of financing. Crowd funding involves going to social media for investors. But as Peter Klohn, partner at Stewart McKelvey, one of Atlantic Canada's most prominent law firms, says, “while crowd funding may well be another new ingredient in the financing brew, as any good cook knows, too much in the wrong proportions or the incorrect recipe will yield poor results.”

According to Klohn, entrepreneurs should first decide if their business - its product, target market and scale - is amenable to crowd funding or if, perhaps, strategic, informed investors, who can contribute expertise and experience, will be more beneficial to the business building process. Klohn says owners should consider the following when assessing whether or not to turn to crowd funding:

Early public disclosure. Atlantic Canadian business owners are, generally speaking, social media savvy and are likely to embrace the “wisdom of the crowd” that comes with crowd funding. That said, owners should consider the impact of early public disclosure of an innovation or idea on competitive advantage.

Corporate governance. Corporate governance and the level of clear communication required to meet it can be very challenging with crowd funding given the large number of stakeholders involved. Think about the risk of allegations of actionable misrepresentation under existing securities legislation that could arise due to simple misunderstandings.

Equity. Consider equity versus non-equity models of crowd funding where participant investors are given goods or services in lieu of dilutive equity and note that the sale of securities using a crowd funding model is not yet legal except in limited circumstances.

In the end, the choice is up to the business, but no matter where the source of financing comes from, remember that in business, as in the kitchen, knowing your ingredients and keeping them properly balanced is the key to a positive experience.

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