After two years of pushing for regulations that would let startup companies raise money by selling securities online to pools of small investors, the crowdfunding industry got much of what it hoped for Thursday.
Proposed rules unveiled by the Ontario Securities Commission are designed to give entrepreneurs room to raise up to $1.5-million during a 12-month period without the expense of an initial public offering while giving investors some degree of protection without the benefits of a formal prospectus.
“We’ve been pushing for two years for crowdfunding regulation, so I’m very happy they are allowing small companies to raise capital in an economic way,” said Sandi Gilbert, founder of SeedUps Canada, a Calgary-based portal that connects small businesses with investors.
Equity crowdfunding is different from project-based crowdfunding organized through websites such as Kickstarter that exchange money for immediate perks such as t-shirts or the joy of watching a movie the contributor helped fund.
Ms. Gilbert, who is also the co-f0under of the Equity Crowdfunding Alliance of Canada, said she has some minor quibbles that might push up costs for small companies but is pleased the OSC is “going in the right direction” along with jurisdictions including the United States and United Kingdom.
After more than a year of study and extensive consultations that included input from firms hungry for funding as well as investor advocates with concerns that online equity crowdfunding would provide a new venue for fraudsters, the OSC concluded that crowdfunding is appropriate for Canada’s largest capital market.
“We think that crowdfunding through an appropriately regulated crowdfunding portal can be a viable method for start-ups … to raise capital,” the regulator said in a thick document containing three additional proposed changes to capital raising in the province.
Under the new rules, which won’t come into force until after a 90-day comment period to allow for feedback and possibly revisions, portals will be required to register with the regulator and conduct background checks on firms raising money. Investors will be limited to a $2,500 investment in any single venture, and $10,000 in a calendar year, and must sign a “risk-acknowledgement form” that says the investor could lose all the money invested.
There are also tight restrictions to ensure that the company raising money and its board of directors have strong Canadian connections.
Howard Wetston, chair of the OSC, said proposed new rules for raising capital including crowdfunding “will transform Ontario’s exempt market” by providing greater access to capital for businesses and expanding investment opportunities.
“We have done so in a balanced and responsible manner that is intended to facilitate capital raising while maintaining an appropriate level of investor protection,” he said. In an interview, Mr. Wetston said the regulator was determined to “align” the needs of businesses and investors as much as possible while removing barriers to innovation and economic growth.
That doesn’t run contrary to investor protection, he said, adding that investing is risky by nature.
“We want investors to understand and appreciate the risk,” he said of the crowdfunding rules.
The OSC and other Canadian regulators began mulling the new method of capital raising in 2012 in the wake of new legislation in the United States. On Thursday, crowdfunding proposals were also published by regulators in Quebec, Saskatchewan, New Brunswick, Manitoba and Nova Scotia. British Columbia appears to be opting for a more limited “start-up” exemption.
“Today was not a good day for for co-operative regulation in that we saw a patchwork approach and a certain amount of confusion [that is] not helpful to consumers,” said Neil Gross, executive director of the Foundation for the Advancement of Investor Rights (FAIR Canada).
He said he is pleased the portals governed by Ontario’s regulator will be forced under the new rules to do some due diligence on those who will be using them to raise money. However, he said regulators are simply doing what they can to inject investor protection into a fundraising tool that is being driven by global trends.
Canadian regulators are “embracing it by necessity,” Mr. Gross said.
Crowdfunding will become part of the roughly $100-billion exempt market, which has historically been subject to less regulatory scrutiny because it does not require companies to file expensive and detailed prospectus documents before selling securities to investors.
The OSC has opened comment on additional proposed exemptions to allow capital to be raised, such as allowing friends, family and existing securities holders to purchase equity without a prospectus vetted by regulators. These exemptions are already popular in Western Canada and Quebec, as is another proposed exemption that would allow the sale of securities using a simplified offering memorandum instead of a prospectus. These rules will also be subject to the 90-day comment period.