Going Over 50 Shareholders Isn't a Bad Thing

Selena Romero
August 21, 2022
2 minute read
Share this post

Opening your fundraising round to retail investors through equity crowdfunding has grown in popularity in both Canada and across the globe, and for good reason. You can source capital from a previously untapped market and engage your community in a way unlike ever before.

In the last seven years, FrontFundr has been able to host over 100 successful equity crowdfunding campaigns, helping startups and growth businesses raise over $120 million collectively. And while interest in equity crowdfunding continues to grow, so do the questions we receive from companies interested in using equity crowdfunding as a source of capital. But one question, in specific, always comes up: What happens if I go over 50 shareholders?

Let’s break it down.

Going over 50 shareholders is not a bad thing. Let me repeat, not a bad thing. Nor is it difficult to manage. You just need to have the right filing in place.

Typically, a company is formed and starts raising money from shareholders using the Private Issuer Exemption. ‘Exemption’ in this respect does not mean that the company is exempt from securities regulation, it means that the private placement rule used to issue securities exempts the company from filing a full prospectus.

The Private Issuer Exemption allows companies to raise money from the following groups of people, with no need to file a report of distribution of securities after closing of the capital raise with the securities commission(s):

  • Accredited investors
  • Family members of the directors, senior officers or control persons
  • Close personal friends or close business associates of the directors, senior officers or control persons
  • Directors, officers, employees or control persons of the issuer
  • Current security holders of the company

Once a company has 50 or more shareholders, it can no longer use the Private Issuer Exemption. However, a company can still raise funds from the groups of people mentioned above, and more, so long as it files a two-page Report of Exempt Distribution associated with an exemption available, such as Crowdfunding or the Offering Memorandum Exemption. In utilizing the Report of Exempt Distribution, the company does not become a reporting issuer or a public company.

This report includes information such as names of investors, number of securities and the prospectus exemption being used. At FrontFundr, we collect this information throughout the raise and work alongside you to make the process of filing with the Securities Commission as simple as possible.

So, having 50 or more shareholders isn’t complicated. It simply involves an additional process, made easy with FrontFundr. Just ask tiptap (476 investors), Key (146 investors) or Ecologyst (316 investors).

And if you’re wondering how to manage the mass amount of new investors you can gain through equity crowdfunding, there are steps you can take to make sure all those investors sit under one line on your cap table: a Voting Trust Agreement (VTA).

A VTA temporarily transfers the voting rights associated with the shares to a trustee (typically a company's CEO), who is obligated to vote the shares in line with the majority of non-VTA holders.

So, yes, you can gain hundreds of new investors, but no, it won’t be messy (as long as you have a VTA).

Equity crowdfunding is a great way to open up your funding round to new investors, ones who are the very people using and believe in the potential of your business. By allocating part of your raise to “the crowd” you have the chance to strengthen your community while being an early adopter of a new wave of alternative funding and investing.

If you’re curious about learning more about equity crowdfunding and raising capital from the people who believe in your company most, reach out to our team today.

This article is for general information only. It is not intended to provide specific customized advice including, without limitation, investment, financial, legal, accounting or tax advice.

The contents of this article are given in summary form and do not purport to be complete.

FrontFundr recommends companies and investors obtain professional legal advice before any capital raise or investments are considered. For further information regarding private placements in BC, please visit the BC Securities Commission website.

Share this post
Selena Romero