March 23rd, 2017
Canadian Regulators Heading Different Directions on Equity Crowdfunding
In an effort to get out in front of the curve, the securities regulator in Saskatchewan (The Financial & Consumer Affairs Authority or "FCAA") released a proposed equity crowdfunding framework.
Much to the author's surprise, the proposal seems to be calling for very little regulation and red tape.
The FCAA proposal comes months after the Ontario Securities Commission (“OSC”) published their own proposed (and significantly different) crowdfunding framework. Interestingly, the key difference between the two is the amount that issuers (startups, entrepreneurs or small businesses) can raise. Other key features of the two proposals are outlined in the table below.
|Offering Size||$1.5 million per year||$100,000 up to twice per year|
|Limits on the types of securities||Common shares;Non-convertible preferred shares;Non-convertible debt securities;Securities convertible into common or preferred shares||Not specified|
|Advertising||Only though a funding portal or on the issuer’s website||Not specified|
|Police Background Check on Issuers||Not specified||Yes|
|Disclosure||Disclosure document at point of sale||Minimal disclosure|
|Ongoing disclosure obligations||Annual financial statements along with proper securities registers and documentation on how funds were spent.||Not specified, but presumably as required under corporate legislation.|
|Audits||Required if more than $500,000 is raised||Not specified.|
|Investor Risk Acknowledgement||Yes, signed by each investor||Yes, signed by each investor|
|Cap per investor||$2,500 per investor and up to $10,000 per year||$1,000 per investor but unlimited number of investments with different issuers|
|Report on trades sent to regulator||Not specified||Yes|
|Funding portals must be registered with the regulator||Yes||No|
With Ontario and Saskatchewan proposing different regimes, the country’s provincial securities regulators are heading down different paths.
The risk, of course, is reducing the success of crowdfunding by restricting investors to only be able to invest in companies in their province. On that point, the Saskatchewan proposal notes that:
If these [crowdfunding] exemptions are not adopted by other jurisdictions, these exemptions will likely be limited by law to Saskatchewan issuers and Saskatchewan investors.
The Risk of Having Different Provincial Crowdfunding Regimes
The power of crowdfunding comes from leveraging online technology and social media to spread the word about a worthwhile project, business, or idea.
Crowdfunding will not be successful without access to large numbers of people. The smaller the crowd, the smaller amount any prospective issuer will be able to raise.
If Saskatchewan moves forward with its proposal in cutting out access to investors in other provinces, or indeed, investors overseas, they limit themselves to a small population of just over 1 million people.
What’s the Solution?
Canada needs a harmonized approach to equity crowdfunding. Without issuers in Saskatchewan being able to raise funds from investors in Ontario, and vis-versa, the power of crowfunding is compromised.
Other provincial regulators, including P.E.I., have said they are going to wait and see what other provinces do, and whether a more harmonized approached under the Canadian Securities Administrators (“CSA”) can be achieved. With two proposed equity crowdfunding models on the table, now more than ever, we need policy makers, the CSA and politicians to step up and focus on creating the right solution for Canadian companies and Canadian investors.
About the Author
John Wires is a lawyer and founder of Wires Law a firm providing fixed price legal services to Canadian businesses. He is also an Advisor at the National Crowdfunding Association of Canada (NCFA Canada). John comes from a background of courtroom experience practicing complex corporate commercial litigation. Having litigated shareholder and employee disputes, he understands the value of companies protecting their businesses with the proper upfront legal work so many Canadian businesses lack. You can follow John @johnwires and contact him at firstname.lastname@example.org.