Disclaimer: The following is legal information, not legal advice. The following legal information is no substitute for sound legal advice from your lawyer.
What is crowdfunding?
Crowdfunding is a method of raising funds directly from supporters in order to make your artistic ideas a reality. There are many benefits of crowdfunding. For one, it can be a faster way to raise funds than a grant. Also, the process of publicly campaigning for funds can help you promote yourself as an artist, and you can develop a solid fan base for your work going forward.
When deciding whether to use a crowdfunding website, you should weigh these benefits against some potential pitfalls. The following information will identify some items to watch out for when considering crowdfunding, and if so, which crowdfunding service to use.
What to watch out for
1. Availability in Canada
- Crowdfunding is gaining popularity, and there are currently dozens of websites operating in Canada.1
- Not all of the most well-known websites are available to Canadians. Some websites may restrict access based on residence, while others may require a US credit card or bank account.
- In terms of general-purpose crowdfunding platforms, IndieGoGo and Fundrazr are two of the largest currently operating in Canada, and more of the larger US websites will be available to Canadians soon. There are also numerous specialty or niche crowdfunding services that have launched or will launch soon. Art Market Canada, a platform specifically for artists, plans on launching in fall 2013,2 and FundWeaver (for Aboriginals)3 and Crowdhelps (for women)4 are both in the early stages of development.
1 Canadian Media Fund, “Crowdfunding in a Canadian Context”, online: <http://crowdfunding.cmf-fmc.ca/>.
2 “Art Market Canada”, online: Art Mark Can <http://www.artmarketcanada.com>.
3 “FundWeaver”, online: FundWeaver <http://www.fundweaver.com/en>.
4 “Crowdhelps”, online: <http://www.crowdhelps.com/>.
2. Copyright control
- Most websites require you to give them a licence to copy and reproduce the content you upload. The terms of the licence may vary as well.
- When reading the user agreement, look for headings with the words ‘Intellectual Property’, ‘IP’, ‘Copyright’, or ‘Content’ to find out what rights you give up by using the service.
- Here is an example of language to look for: “you grant us a perpetual, irrevocable, non-exclusive, transferable, sub-licensable, royalty-free, worldwide licence to use any content that you post on or in connection with our service (IP License).” This sentence means that you are giving the website a free and permanent (perpetual and irrevocable) right to use anything you post for anything related to the website (such as promotion) anywhere in the world. Moreover, the website may sell (“transfer”) the right or the permission to use it (sub-license).
- For more information on copyright, see our copyright section.
3. Project control
- Some websites may have restrictions on the type, nature and content of projects you can crowdfund for. Most websites reserve the right to terminate or suspend your funding campaign for any reason.
4. Setting and Reaching the Fundraising Goal
- When setting your fundraising goal, you should consider how much money you really need, and what the consequences are of failing to reach your goal.
- Some platforms will refund donors’ money if you do not reach your goal. Other platforms transfer money to your account as soon as it has been donated, giving you access and rights to use it before you have reached your goal. And sometimes these two different approaches are options on the same website. IndieGoGo, for example, permits you to choose between a ‘fixed’ goal (you get nothing if your goal is not reached) and ‘flexible’ goal (you get whatever has been donated when your campaign ends).
- Some platforms may charge higher commissions or impose additional fees if you do not achieve your fundraising goal.
5. Combining funding sources
- Some websites restrict your ability to seek funding from multiple sources, while others do not. For example, IndieGoGo, Fundrazr, Art Market Canada allow you to apply to other funding sources for your project after you have already run a campaign. Nor do they require you to have applied to other sources for funds before starting a campaign.
- Be aware that you may have contractual obligations towards your donors even if you do not reach your funding goal. For example, IndieGoGo gives project creators the opportunity to offer things (called “Perks”) in exchange for funds such as high fives, official accreditation as a funder of the project, t-shirts, or copies of whatever is produced. If you promise something in exchange for funds and you receive those funds, you will have to follow through on that promise even if you do not reach your goal.
6. Cost of using a crowdfunding service
- If you are unable to complete your project you may have to refund the money or come to an understanding with your donors.
- Fees vary somewhat, but are often in the 8-15% range depending on several factors including the website, payment methods (i.e. PayPal, credit card, etc.), and whether or not you have to reach your funding goal before funds are released.
7. Are the funds a loan, a donation, or a payment for a good or service?
- Many of the largest crowdfunding websites in Canada help you raise donations and/or payments for token goods or services. This is the model used by Fundrazr, IndieGoGo, and Art Market Canada. Few websites operate on a debt/loan model, and none permit you to sell ‘shares’ or ‘stakes’ (in legalese, ‘equity’) in your project because Canadian law currently forbids it.1
- But Canadian law in this area is changing, and you may soon be able to offer your donors greater interest or equity stake in your project in exchange for funding. Offering equity stakes in a project is relevant, for instance, in the film industry because it opens up a new financing avenue in exchange for a share of profits, distribution rights, or an ownership stake.2 Currently, only selling distribution rights is legal in Canada.3
- This means that at most, you will have to fulfil any promises you made in exchange for certain funding levels (i.e. you promised a copy of your recording for a $100 contribution), but in many cases you won’t have to do anything except complete your project. And nobody will own any part of your final creation except you and your collaborators.
1 Canadian Media Fund, “Canadian securities law and private financing”, (24 April 2013), online: Crowdfunding Can Context Regul Update <http://crowdfunding.cmf-fmc.ca/regulatory_updates>.
2 John W Cones, 43 Ways to Finance Your Feature Film: A Comprehensive Analysis of Film Finance (SIU Press, 2008).
3 NCFA Canada, “Crowdfunding”, online: NCFA Can <http://www.ncfacanada.org/crowdfunding/>.
8. Tax implications
- The Canada Revenue Agency is currently conducting a review of crowdfunding to determine how to classify and tax revenue generated from crowdfunding campaigns.1
- See our tax section for more information.
1 Canadian Media Fund, “Provincial and federal tax credits – CMF Crowdfunding in Canada”, (24 April 2013), online: <http://crowdfunding.cmf-fmc.ca/regulatory_updates/provincial-and-federal-tax-credits>.
9. Sending rewards across borders
- Because many crowdfunding websites permit users to fund campaigns internationally, you may end up having to send perks and rewards across borders.
- You should call customs at the Canada Border Services Agency about sending goods abroad.
10. Other resources
- The National Crowdfunding Association of Canada publishes an extensive list of crowdfunding platforms in Canada here: http://www.ncfacanada.org/canadian-crowdfunding-directory/
- The Canadian Media Fund maintains a website with up-to-date information on the status of Canadian law as well as useful how-to guides: http://crowdfunding.cmf-fmc.ca/
- The Canadian Media Fund also published a report on crowdfunding in Canada: http://www.cmf-fmc.ca/documents/files/about/publications/CMF-Crowdfunding-Study.pdf
- The National Crowdfunding Association of Canada website contains valuable resources: http://crowdfunding.cmf-fmc.ca/regulatory_updates/provincial-and-federal-tax-credits