February 2014

Following the crowd

Companies are clamouring to provide crowdfunding services to miners, but will it catch on?

By Anna Reitman

Crowdfunding platforms are set to give Canadian miners a new fundraising channel in 2014. So far, companies have only started to dip their toes into these waters, and the ones that have can claim varying degrees of success. But even in these very early days, a growing number of platform providers are jockeying for position with niche offerings.

The basic idea behind crowdfunding is to harness the power of the Internet and online social networking to extend a project’s promotion and financing opportunities. Its roots are in the non-profit community but it is becoming an increasingly common form of fundraising in other sectors, notably technology.

Four types of crowdfunding stra­tegies exist: donation, reward-based donation, equity and lending – but it is mostly restricted to accredited and institutional investors for now. In December, Saskatchewan became the first province to create regulations for its retail investors interested in equity crowdfunding. Saskatchewan-based companies can raise up to $150,000, capped at $1,500 per investor, every six months. Ontario is now in a public consultation period. Currently, only exempt market dealers in Canada can operate equity crowdfunding portals.

Chris Charlesworth, co-founder of the donation-based crowdfunding platform Catalyst, said that one of the major benefits of crowdfunding is that it provides validation and immediate feedback at little cost. BacTech Environmental recently worked with Catalyst on a campaign to raise $30,000 that would go towards diagnostic work on the potential of using naturally occurring bacteria to remediate tailings at a site in Bolivia. BacTech CEO Ross Orr said the company looked at crowdfunding this project because the money it is raising through traditional means is being dedicated to its $20-million Snow Lake project in Manitoba, which will hopefully be running by the end of the year.

BacTech was interested in getting its name out to an environmentally and socially conscious target audience, and one of the requirements to be listed on Catalyst is that a project must have a positive social or environmental benefit.

The campaign attracted a lot of publicity and social media attention, and as a result a number of high-profile organizations have approached BacTech to pursue this and other projects. But the Toronto-based company only managed to raise a disappointing $2,035 of its $30,000 goal. One of the reasons it failed, Orr suggested, was that it did not accomplish one of the golden rules of donation-based campaigns: to have already raised about 30 per cent of the funding before launching it on the Catalyst site.

According to research from the U.K.-based equity crowdfunding platform Seedrs, every single start-up that has hit 35 per cent of its goal has gone on to get its full 100 per cent. Whereas those that started with zero per cent funding have about a 15 per cent chance of making it. There are two reasons for this, according to Seedrs. For one, potential investors want to see that the fundraiser is willing and able to do the hard work to bring in network investors. And human behaviour is another factor; people like to be part of something that has momentum.

In evaluating the experience, Oscar Alvarado, project research analyst with BacTech, said that aside from not getting the message out to enough people, the stage the project was in may have been too early for crowdfunding. He also noted that the team opted for a donation-based campaign over an equity-based one in part because of the regulatory burden. The regulations around equity share or return on investment are still uncertain, and would require applications with the Ontario Securities Commission, thus taking up more time and resources, he said.

But the regulated space is “where the real money is,” said Oscar Jofre, chief technology officer at Klondike Strike. Along with founder Jason Futko, he is launching a mining-­specific equity crowdfunding portal during this year’s PDAC convention in Toronto. “What you are going to see is a lot of vertical-based equity portals like mining, oil and gas, real estate and solar energy,” he said. “It is very exciting and a major transformation of capital because the average person will be able to invest without anyone in the middle to tell you what is or isn’t a good deal.”

In the United States, regulations around crowdfunding are contained under the JOBS (Jumpstart Our Business Start-ups) Act. There are a number of areas still under consideration, but so far no publicly traded companies are allowed to equity crowdfund, said Jofre. Only private companies can employ crowdfunding right now, he added.

ExplorationFunder is another pro­vider looking to gain entry into the crowdfunding game. It is focusing a majority of its efforts in the United States while regulations are being finalized. Damien Reynolds, co-founder of ExplorationFunder, said his team is planning to raise funds for both publicly listed and private companies. “The American equity market is the largest in the world, and we feel that natural resource investments need to be marketed more effectively to high net worth or American investors,” he said.

The site currently hosts five Canadian and two Australian explorers with assets in Africa, North America, and Australia-Pacific. This year, Reynolds would like to “pressure-test the pipes” by completing two or three financings of between $500,000 and $1 million, and to increase the number of companies represented to about 20.

Whether on a small or large scale, successful capital raising can hinge on being close to realizing revenue. “If you are two to three years away from striking something, then it is going to be difficult,” said Matthew McGrath, president and CEO of equity crowdfunding platform Optimize Capital Markets (OCM). OCM focuses on institutional-sized deals that are typically between $3 and $5 million across more than 35,000 accredited and institutional investors.

But if it is at early-stage exploration that companies have the toughest time raising funds, what is the point? McGrath believes the opportunity for miners is to access a diversified investor base that will not move the market when exiting. The average investment size on OCM is about $250,000 and about one third of the companies seeking finance are in the energy and natural resources sectors.

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