Wikipedia dates modern crowdfunding back to 1997. That said, the casual business observer likely only took note of crowdfunding sometime over the last few years. A late 2015 decision by the OSC (and four other provincial securities commissions) permitting expanded use was a major step in bringing crowdfunding to the mainstream.
Simplified, the new OSC regulation allows non-accredited investors to invest up to $10,000/annually in crowdfunding campaigns. This decision opens up the pool of available investment capital as regulators attempt the balancing act between (hopeful) economic expansion and investor protection.
As a quick refresher, I like this succinct crowdfunding definition: crowdfunding is a method of collecting many small contributions, by means of an online funding platform. Note the use of the term “contributions” instead of something closer to “investments.” This is because crowdfunding can take many forms – some more aligned with contributions (think charity) and others more aligned with investments (think earning a return).
Most observers organize crowdfunding into four categories: straight gifting, cash for early-stage “merch” (before available to the masses), lending and equity ownership. The ideas and questions ahead focus on the two latter following a business context.
So with crowdfunding on the rise and without signs of slowing, how might your accountant add value in assisting you make the most of your crowdfunding endeavours?
Financial reporting. The OSC requires crowdfunding issuers to provide interested parties with a complete and accurate financial statement. It is therefore imperative that these financial statements capture the economic reality of crowdfunding transactions. As financial reporting standards will always lag new business innovation, sound professional judgment, the hallmark of many CPA’s, is required in appropriately accounting for new ways of doing business. Here are just a few questions financial statement preparers and users might ponder alongside their trusted CPA:
- How are crowdfunding receipts accounted for prior to meeting any minimum investment threshold? What right of return provisions exist?
- When should revenue be recognized on cash received for early stage “merch”?
- Acknowledging that funds received can be a combination of two or more of the four broad categories – is each component accounted for separately and appropriately?
Income tax reporting. Tax is always a popular topics as no one wants to pay a cent more in tax than they absolutely have to. Here are considerations for crowdfunding issuers and investors to sort through with their accountant:
- As an issuer, are program expenses finance or operational in nature? Are they tax deductible? If so, do specific provisions impact the timing or extent of the deduction?
- Are gifts (using the term loosely) taxable? Consider the intentions of the issuer receiving the gift. Are intentions entirely altruistic (i.e. money for a sick child) or might they take a subtle form of commerce (i.e. an artist trying to launch a career)?
- Is cash for “merch” taxable? If so, which costs can be deducted against the revenue?
Raising capital. Let’s face it, in many cases businesses are turning to alternate financing sources, such as crowdfunding, as traditional commercial banks are not providing the capital that start-ups (or otherwise) need. Is your accountant assisting with the following?
- Reviewing financing options, crowdfunding included, and providing contacts? Be aware of any commissions or related fees trading hands.
- Getting specific, are peer-to-peer lending options being considered? These loans are a subset of crowdfunding and are typically carried out through an online app. They also tend to have a local/regional aspect which many find appealing. InvestNextDoor has been successful with this business model in the US and have recently setup shop in Canada.
As a plug for out-of-the-box thinking, don’t confuse crowdfunding as an option only for tech start-ups. Back in April, a Canadian exploration company, IDM Mining, raised $10 million through equity crowdfunding – primarily from retail investors. It’s safe to say no one in the currently cash starved exploration camp saw this coming five years ago…
Investing capital. While sourcing and sizing up investment opportunities begins with your investment advisor, accountants in public practice are often the most trusted advisor tasked with “bringing it all together” and providing a second set of eyes on all business matters. A few final considerations for you and your CPA to mull over:
- Do you truly understand what you’re investing in? Keep in mind the disclosure required by the OSC for crowdfunding issuers is considerably less than found in a prospectus.
- Start-ups are inherently risky investments – are you putting too much capital at risk? Can you achieve your financial goal absent the (likely) large return promoted?
- What due diligence geared to fraud have you carried out? Are you purchasing your investment through an OSC approved online funding portal? What about a background check on the principals?
The world of crowdfunding is new to the masses and becoming increasingly complex. The discussion above is a modest account of some key elements. Your accountant, ideally a CPA in public practice, is uniquely positioned to guide you through a successful venture into crowdfunding from any vantage point.
Our team at parker simone is experienced and informed on all things crowdfunding. Whether you’re dipping your toe in for the first time, a seasoned veteran, or somewhere in between, parker simone is certain to add value to your crowdfunding initiative.
Pat Kenney, CPA, CA, is a senior manager with parker simone LLP and an eleven year veteran of the public accounting space. He is a self-described student of all things business, accounting, taxation, personal finance and current events (thank-yous to Steve Paikin and John Moore). Pat’s interest in sports and local organized runs was the driving force behind his existing stance as a fitness and wellness enthusiast at-large. Pat is active in community based volunteer work focused on financial literacy and was recently nominated for a CPA Canada volunteer award in this capacity.
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