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Cannabis crowdfunding sites for your business
An easier alternative to business loans for financing your cannabis startup.
The Canadian cannabis industry is growing and more financing options than ever are available to help get your business started. Despite being legalized federally in 2018, many financial institutions are yet to hop on the Mary Jane train and open loan options for business owners in the cannabis industry.
If you’re having trouble finding a traditional lender to give you a business loan for your new edibles shop, you may want to explore non-traditional financing options, such as crowdfunding.
Why should I consider crowdfunding for my cannabis business?
Crowdfunding is a way for businesses to raise money from a large group of people, usually in exchange for rewards or a share of business ownership. It’s also one of the few options that cannabis businesses have had to fund their ventures long before cannabis was legalized in Canada.
Until the Cannabis Act (Bill C-45) came into effect in October, 2018, marijuana was only legally allowed to be used for medical purposes. Health Canada was the only authorized marijuana seller from 2001 until 2014, when the market was opened to allow private businesses to produce and sell medical marijuana as well.
Crowdfunding bypasses a lot of the red tape and social perceptions that can hinder cannabis business owners from getting the money they need. A number of popular websites exist to help facilitate the process — though it’s not without its challenges.
Crowdfunding platforms to consider for your cannabis business
These 3 cannabis crowdfunding platforms can help you raise funds for your pot shop.
FrontFundr is a Canadian-regulated website, and was used to host Canada’s first ever Cannabis crowdfunding campaign in 2018. The site prides itself on connecting investors and business directly, and welcomes new investors as well as seasoned veterans of the business.
FrontFundr doesn’t exclusively work in cannabis business crowdfunding. It allows many types of campaigns to run on the site, including pet transportation, new medical technologies and financial education platforms.
How FrontFundr works
As an equity crowdfunding site, FrontFundr allows investors to become part owners of the businesses they support, instead of rewards or gifts.
- Campaigns can stay open for up to 90 days
- No fees for investors
- Must raise a minimum amount of money, selected by you, in order to receive any funds.
- Could be required to file a 2-page Report of Exempt Distribution with the Canadian Securities Commission, depending on the amount of investors.
- $5,000 listing fee
- 8% of all donations go to FrontFundr
SeedInvest is a popular fundraising option for cannabis businesses that can’t legally raise funds through traditional means. So far, more than $300 million from 500,000 investors has been raised for nearly 250 projects.
The crowdfunding site invests $200,000 to each company that reaches its goal. Currently, it’s aiming to invest in as many as 50 companies over the next 2 years.
How SeedInvest Works
SeedInvest covers some of the upfront fees such as escrow set-up, legal review and filing fees. If your campaign doesn’t end up earning its desired amount of money, SeedInvest eats those costs for you.
- SeedInvest may reimburse as much as $3,000 of accounting fees after launching your campaign
- $0 retainer
- High transaction fee (7.5%)
- No mobile app
- 7.5% placement fee on donations
- 5% equity fee on donations
Regulation A: What to know about crowdfunding on a US-based platform
Even though several American states have legalized cannabis, US federal law still prohibits it. However, the creation of Regulation A investment transactions allowed legally-operating cannabis business owners in the US to begin fundraising for their enterprises.
Investments in Canadian cannabis companies listed in American crowdfunding sites must fall within the scope of Regulation A transactions. (Among other requirements, your company must be seeking to raise at least $2 million). You should note, however, that while SeedInvest works with Canadian companies, not all US crowdfunding sites do.
Top 3 challenges you could face when crowdfunding
The legal grey area in which the cannabis industry works means that things are never simple. Here are some of the most common problems cannabis businesses run into with crowdfunding:
- You might need a bank account. Banks don’t like to work with cannabis businesses, meaning that accessing funds is a lot more difficult than some lenders make it out to be.
- It may be hard for ordinary people to invest. Some cannabis crowdfunding sites, particularly in countries where cannabis has not been legalized, aren’t open to the public; you have to register as an accredited investor. This provides businesses with some legal cover, but it also means that ordinary people could have trouble contributing to – or even hearing about – your cannabis business crowdfunding campaign.
- Platforms can have bank problems too. American crowdfunding platform 420fundme was shut down for 30 days after its bank decided not to work with them – even after it was pre-approved for business. While you don’t necessarily stand to lose any money, it can make attempts to fundraise frustrating.
5 tips for a successful cannabis crowdfunding campaign
- Pay attention to your business plan. A business plan is the backbone of any cannabis crowdfunding campaign. Make sure it’s easy to understand, persuasive and – most importantly – sounds enticing to investors.
- Invest in marketing. Investors might not be able to (or want to) get in touch with you, so your profile is all you have to work with. Many businesses hire marketing consultants to help with their cannabis crowdfunding campaigns.
- Read your crowdfunding site’s rules. Make sure you understand what you’re getting into — you don’t want to fail to raise the funds you need due to a technicality in your platform’s terms and conditions.
- Stay on top of regulations. Even though cannabis is legal in Canada, there are still a number of federal, provincial and territorial rules governing its use. The last thing you want is to be shut down for for failing to stay within regulations. Because provincial and territorial rules vary on some points, make sure you research what policies your business needs to follow in the area where it’s based. Consider hiring lawyer if keeping up is too much for you.
- Prepare for some slip-ups. Cannabis is a new industry, and its murky legality means that roadblocks are likely. Be prepared by exercising all of your financing options to make your business grow.
Want a loan instead? Compare lenders that can serve cannabis businesses
Even though cannabis is legal in Canada, most of the large banks aren’t comfortable providing investments in cannabis businesses yet. BMO is the only big bank that will at least consider your cannabis business plan; the others will not. Online lenders, smaller banks, and some credit unions may provide funding as well, but these may be more of a case-by-case situation depending entirely on the business. Online lenders will also usually require you to have been in business for a few months.
Investing in cannabis is still new, so crowdfunding is a great option to raise capital for your young business. More traditional routes such as banks might be hesitant to provide the funds needed to get your feet off the ground. Crowdfunding your cannabis business is among the easiest ways to get money and get attention from investors.
Want to learn more? Check out these useful articles below:
- How to get funding for your cannabis business
- How to legally start a cannabis business
- Can you use a personal loan for your business?
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