A new pilot program aims to encourage equity-crowdfunding — will it work?

The night of July 6, 2013 forever changed the small Quebec town of Lac-Mégantic. A train loaded with crude oil derailed, then exploded, in the centre of the community, claiming the lives of 47 people as the town burned and worlds crumbled.

 The community pulled together in the aftermath, finding new ways to support its nearly 6,000 residents. Quartier Artisan, founded three years after the disaster, was one of the organizations that rose from the ashes. 

Its mission is two-fold: repopulate the Fatima neighbourhood — which lost residents to the disaster and has an aging population —  by building a community of artisan-entrepreneurs who contribute socially and economically, while also enabling Quebec artisans to make a good living from their craft through an eight month entrepreneurship accelerator program. 

 Now, Quartier Artisan wants to expand by building a shared workspace — something that will require people to pull together once again under a new social finance fund launched earlier this year: Fonds l’ampli.

 “I’m delighted with our local roots, and we plan to open up even more to the community,” says Sarah Girouard, Quartier Artisan’s CEO and a craftswoman herself. “For our next project, we want to offer a gathering place to the citizens, including a boutique, a bar, a café, and shared workspaces with equipment for artisans.”

 She hopes Fonds l’ampli, a participatory finance pilot project, will provide the capital Quartier Artisan needs to turn its ambitions into reality.

Fonds l’ampli is one of the four pillars of Projet l’ampli, which also include communications, financial tools and partnerships with the offices of La Coopérative de développement régional du Québec or the Quebec regional development cooperative.

“We created guides and other documents so an organization can validate whether it is ready for participative finance,” says Elías Michelina, a financial analyst with Réseau d’investissement en économie sociale du Québec. “We support a whole ecosystem.”

Created with a $1million investment from the Lucie et André Chagnon Foundation, the participatory finance tool is centred on crowdfunding and equity-crowdfunding. The first allows for donation collection and the financing of new products through pre-sales, while the second allows non-profits to issue community bonds and co-operatives to issue preferred shares. 

Transforming community support into dollars

Fonds l’ampli’s ultimate goal is to financially incentivize the use of equity crowdfunding by matching investment dollars. For every dollar invested by an individual investor in community bonds or preferred shares, Fonds l’ampli will lend an additional dollar, up to $100,000 dollars.

Participative finance often attracts investors driven by social dividends, as well as financial returns — citizens who believe investing in a non-profit, a co-operative or any other type of local project will make their community more vibrant, resilient, inclusive, and pleasant. 

 Participative finance also allows social economy businesses, which sell goods or services that benefit their members or the community at large, to leverage community support. “The projects backed by participative finance investors have proven to the community that they are necessary,” says Nathalie Villemure, executive director of Réseau d’investissement social du Québec. 

Fonds l’ampli was first designed for non-profits, to address concerns about finding the down payment required when applying for loan, says Charles Gagnon, development agent and analyst for Le Chantier de l’économie sociale. “Businesses can issue stocks, and co-operatives can issue shares,” says Gagnon. “Non-profits can do neither. Fonds l’ampli aimed at helping them by matching any amount raised issuing community bonds … we’ve broken the vicious circle of financing, where non-profits were cornered from all sides.”

Community bonds are issued directly by a non-profit. It sets the amount and the terms. No financial institution is required for the transaction. Community bonds are mainly sold to non-qualified investors. In Quebec, a qualified investor has at least $1 million worth of financial assets —real estate does not count — or has at least $5 million value of assets, including real estate does. Or, the qualified investor demonstrates annual net revenues of $200,000 dollars for the two years before the investment. Investors who buy community bonds are rarely high-net-worth individuals referred to as qualified investors. They are non-qualified. In Quebec, a non-profit can collect up to $10,000 per non-qualified investor when issuing community bonds. 

 Financial institutions accept community bonds as down payments because they include a clause stating issuers aren’t obligated to repay capital and interest if doing so could negatively impact the organization’s finances — something that benefits non-profits.

Fonds l’ampli matches funds raised with community bonds and preferred shares issued by cooperatives. “The end goal is to make participatory finance more mainstream,” says Gagnon. “Over the years, there have been a few community bonds issued in Quebec; Le Cinéma Beaubien (art), Les Cocagnes ( agriculture), and Brique par Brique (housing) are some examples.” 

 Democratizing equity crowdfunding

Marie-Josée Paquette, executive director of Le Conseil québécois de la coopération et de la mutualité, says there’s growing interest in participatory finance, but that the sector needs democratization. In its pilot phase, which should last two to three years, Fonds l’ampli wants to remove hurdles for issuers and investors. The ultimate goal is to make Fonds l’ampli a permanent fund and to add other investors to La Fondation Lucie et André Chagnon to feed it.

 Fonds l’ampli is a pilot because it is an innovation. It’s innovative in terms of behavior and regulation. The fund aims to develop a reflex among social economy enterprises to call on equity-crowdfunding, or community finance, and for the latter to adhere to it. And it aims to clear up the regulatory grey area surrounding equity-based participatory finance. “We refer to it as a grey area because there are few precedents related to equity crowdfunding in Quebec,” says Michelina.

 Under Quebec’s Securities Act, a company must produce a prospectus detailing its financial standing, along with potential risks and returns, before being allowed to issue securities. It’s a long and costly process, but one community bonds and preferred shares are exempt from under Quebec law.

 However, this doesn’t absolve non-profits issuing bonds or cooperatives issuing preferred shares from their duties to the public, Michelina says. There is information to be communicated to the public. The non-profit has to state its activities and the associated risks, along with the management team’s name and bios, and how the money raised will be used.

 “We’re going to proceed cautiously,” says Michelina. “For each file presented to us, we will request a legal opinion. This service will be financed by the Fund, and we have set up a partnership with law firms.” 

This legal opinion aims not to rule out non-compliant equity crowdfunding projects, but rather to provide the information required to adjust them so that they are compliant. For example, it is stated that the people who solicit investors cannot be remunerated. So if a non-profit was planning to do so, the legal opinion would allow them to remove a financial incentive that could have led to possible sanctions by l’Autorité des marchés financiers or the Quebec Securities Authority.

 “The idea is to accumulate the various legal opinions to build up knowledge so that we can leave the grey zone and find ourselves more in the known territory when we leave the pilot phase,” says Michelina.

 Are citizen-investors protected?

 “Citizens-investors have to be aware that they may not retrieve their capital and interest if the board of the non-profit or the co-operative they invested in concludes that it may put the organization’s finance at risk,” says Michelina. “That being said, all applications are analyzed by Le Réseau d’investissement en économie sociale du Québec. We ensure the organization is financially sound and in a good position to repay the investors’ money according to the agreed terms. We ensure that there is a plan and an exit door for these investors”. 

 The other form of protection for the investors is that the matching money the fund grants are not repaid at maturity. In this way, community investors are the first to be repaid. The Fund’s investment, on the other hand, is converted into a term-loan that will be repaid over an extended period. 

 As for la Fondation Chagnon, which invested $1 million to start the fund, its investment is protected by the expertise of le Réseau d’investissement en économie sociale du Québec, which acts as fund manager.

 A good candidate for Fonds l’ampli?  

 Both Gagnon and Michelina say that good Fonds l’ampli candidates must have strong community ties, like Quartier Artisan in Lac-Mégantic and La ferme aux petits oignons, in Mont-Tremblant. 

 “Culture has always been part of Lac-Mégatic’s DNA, including music, visual arts and crafts,” says Girouard. “Quartier Artisan was rooted in the historical sensibility of the residents to artists and craftspeople. We use culture to revitalize the region. That’s why the town gave us its support.”

 When Quartier Artisan wanted to spread the word about its plan to revitalize the Fatima neighborhood, Sarah Girouard did what any politician would do to win votes — she went door-to-door. It took her four days to visit Fatima’s 200 homes and present Quartier Artisan’s vision. “The people I’ve met appreciate that we’re doing economic development on a human scale,” says Girouard.

“We’re not trying to fit a circle into a square. What we do is organic, we have ideas, and then we codesign our projects with the community.”

 The bond between La ferme aux petits oignons and its community is based on self-sufficiency, local agriculture and access to fresh produce. Véronique Bouchard created La ferme aux petits oignons with her spouse François Handfield in 2011 and became its sole owner in 2019. Véronique decided she didn’t want to wear the responsibility alone because farming is a very demanding business. Since March 2023, the farm has been a solidarity cooperative. 

 The solidarity co-operative status has existed in Quebec since 1997 and, like all cooperatives, it’s a member owned enterprise. A solidarity co-operative must include at least two of these three categories of members: worker members, user members and support members. Each member participates in the democratic life of the company and can exercise his or her right to vote on its direction. Elsewhere in Canada, the solidarity co-operative is called a “multi-stakeholders co-operative.” La ferme aux petits oignons has 12 workers and 9 support members. 

 The next step for the solidarity co-operative is to buy the farm from Véronique Bouchard, so all members can be owners, with the assistance of Fonds l’ampli. The objective is to raise $100,000 from the community and receive the same amount from the fund. In the end, the solidarity co-operative wants to transfer the land and the buildings into a social utility trust, a structure protecting the mission of a construction, farm, or natural infrastructure like a forest in perpetuity. 

 La ferme aux petits oignons serves its community in three ways. It sells subscriptions for weekly deliveries of vegetable baskets and also operates a responsible grocery store featuring organic, local, and fair-trade products and adapted and practical zero-waste solutions. Its bistro offers homemade products made with vegetables from the farm.

 Must a non-profit or a cooperative be as integrated into the fabric of its community as Quartier Artisan and La ferme aux petits oignons to qualify for financing from Fonds l’ampli?

“Applicants must think of their equity crowdfunding as a product just like the products or services they already sell to the community,” says Gagnon. “There has to be a demand for those community bonds or preferred shares because the money raised by the issuing will generate revenues then used to repay the community. When we evaluate a dossier, we will validate if the applicant has a strategy for the whole spectrum: from having enough traction in the community to being able to refund the investors.” 

But not all applicants will plan to raise $100,000, adds Gagnon. 

“We will match funds starting at $10,000, ” he says. “The organization often solicits its first circle of close friends for this amount. Thus, it does not need as much traction in the community as the NPO or the cooperative wanting $100,000”.

 Aside from community ties, a Fonds l’ampli applicant must also demonstrate sound financial fundamentals, just like applicants to any other fund, says Michelina. 

 Although this fund is designed for social economy organizations, some might find it difficult to qualify because they do not generate autonomous revenues or depend on grants that will not allow them to reimburse the investors and the fund. This financing targets entrepreneurial projects that will generate revenue — it is not a lifeline. Quartier Artisan generates revenues from its business accelerator and by renting apartments above its headquarters. La ferme aux petits oignons generates revenues by selling food baskets and groceries.

 What it will take to scale this pilot?

 “From our side, it will be mostly about the legal framework,” says Gagnon. “We will continuously ensure that this framework is respected. If some NPO or cooperatives issue community bonds or preferred shares that do not respect the legal framework, the whole pilot will be at risk. The government, which supports us in this initiative, and the regulatory authorities must be convinced that this project not only does not increase the risk for investors but that they are well protected”. 

 And equity crowdfunding is still under the radar of social economy organizations, says Gagnon. The quality of the sensitization and the support from regional partners will be critical. 

 But the end goal always remains the same, Michelina concludes: “That both the investors and the fund are reimbursed.”

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