Crowdfunding reaches mining technology

Materials World magazine
,
3 Oct 2016

Crowdfunding could offer the mining industry an alternative method of fundraising. Ellis Davies reports.

Crowdfunding has made a name for itself over the past four years. It has helped to fund a great number of successful start-up projects across a variety of sectors, allowing companies to seek funds from a wider range of investors, breaking away from traditional methods. In 2015, it was estimated that the total global fundraising volume from the practice reached US$34.4 billion – more than double the 2014 figure of US$16.2 billion. After becoming increasingly popular in food, entertainment and technology, mining might now be embracing the approach. 

For many the idea might seem strange. Crowdfunding platforms were not initially set up with the intention of funding ventures such as junior mining. However, the nature of the platforms allow for a variety of investment opportunities that would otherwise be unavailable. Toronto-based company Klondike Strike Inc became the first to offer a mining-centric equity crowdfunding platform in March 2016 – Red Cloud (RC), operating in Canada.

The premise behind the RC platform is to democratise mining financing by putting all the relevant information online and bypassing the so-called ‘old boys’ club’. This setup welcomes broader investment, ruling out any intermediary roles and streamlining the whole process. 

The open format of crowdfunding platforms provides an easier start for would-be investors who do not have the connections with companies or institutions to break their way into the mining industry. Services such as RC and Australia-based Mineral Intelligence (MI) level the playing field somewhat, adding new investors to the pool of possible financial backers. In a time when funding in mining is increasingly difficult to come by, particularly for start-up companies progressing from research, preparation and infrastructural support to operation, the approach is very attractive. The slump in funding is a result of a ruthless commodities market and the decline of independent brokers, but the prospectus exemptions and ease of access provided by the platforms could bring start-ups and junior mining companies new sources of income.

Catching on

Since RC was established, other platforms have looked to follow suit with their own crowdfunding projects. MI has launched a similar portal that allows investors to obtain shares for as low as AUS$500. The MI platform allows mining projects to list their project for free, although they are subjected to due diligence by MI. In this instance, it is the investors who have to pay for access, with a required annual fee of US$2,500 to ensure that only genuine investors participate.  

However, current Australian laws and regulations do not cover investment through crowdfunding, limiting the security of this financial model. The lack of a crowd-sourced equity bill – presented to the Australian parliament in December 2015, but with no real attention at the Senate – means that the Corporations Act protects investors, but places the costs of gathering, processing and general auditing of information on the mining companies. However, even with the restrictions of the law, MI is confident that its less bureaucratic approach to mining funding is gaining momentum. 

The UK has embraced crowdfunding in various sectors, but the mining industry has yet to follow suit. If it did adopt loan- or investment-based crowdfunding, the Financial Conduct Authority (FCA) would be required to oversee and regulate the platform. As with Canada, the minimum and maximum investment could be set by the platform based on investor categories. A UK service would allow the same advantages as the Canadian and Australian equivalents and provide smaller retail investors with access to early stage investment opportunities previously shrouded by larger players. 

A break from tradition 

The main question is whether the mining industry will widely adopt this new method of finance. RC has supported successful campaigns, with Radisson Mining Resources, Canada, closing its first tranche campaign on RC in May after raising C$400,000. Radisson aims to raise C$2 million by final closure on 26 September for the O’Brien Project – a gold mining campaign at the Cadillac Mining Camp, Canada. Banyan Gold Corp has also used the RC platform, and even embarked on a cross-Canada tour in collaboration with Radisson to promote the projects.

For those who do not trust the security of these sites, both platforms screen each company vigorously before allowing them to campaign on the platform. RC says that it selects only 5% of applications to go onto the platform, and in doing so ensures that all investments are given to reputable projects. However, there are risks involved when investing via crowdfunding, with the FCA warning that it is very likely you will lose all of your money. Investment based crowdfunding is regarded by the authority as a high-risk investment activity, as well as being exempt from  any compensation through official schemes such as the Financial Service Compensation Scheme should the campaign fail. A report by AlitFi Data in 2015 said that one in five businesses crowdfunded between 2011 and 2013 were bankrupt at the time of publication.

Crowdfunding could to be a viable alternative to traditional methods of funding for mining, but RC and MI stand alone, with no other platforms straying into the industry as yet. Whether this new endeavour will catch on among the more established investors remains to be seen. 

How does it work? 

RC relies on offering memorandum exemption in Canada under section 2.9 of National Instrument 45-106 Prospectus Exemptions (NI 45-106) as an exempt market dealer through National Instrument 31-103 Registration Requirements, Exemptions and On-going Registrant Exemptions (NI 31-103). This means that RC can allow companies to gain investment from a variety of sources. The company splits these into two main categories – those who meet certain income or asset thresholds (eligible), and those who do not (non-eligible). The minimum investment is set at C$2,500, with non-eligible hitting a maximum of C$10,000 cumulatively over a year and eligible reaching C$30,000.

There is another block of investors available through RC that includes institutional and accredited investors along with family, friends and business associates. RC uses an equity-based model, in which investors receive shares in return for their support of the company, but are looking to offer streaming agreement and other financing tools in the future