Crowdfunding market will be learning process: study

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Financial Post by Mashoka Maimona | July 16, 2013

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The Ontario Securities Commission (OSC) and the Canadian Securities Administrators are evaluating exempt market regulations to loosen investor regimes and approve fundraising options such as crowdfunding. Photo: Thinkstock/Getty

When rules concerning equity crowdfunding are eventually handed down by North American regulators, there will be “spectacular failures” as investors and startups “lose significant sums” in litigation battles, warns a study by the University of Toronto’s Rotman School of Management. But the soon-to-be published paper in the Boston-based National Bureau of Economic Research Conference concludes that crowdfunding’s growing pains, following the first iteration of industry rules, will be smoothed over as new markets emerge as the financing model targets an “undercapitalized sector of the economy.” “There will be steep market curve in the beginning,” Ajay Agrawal, one of the report’s authors, said in a telephone interview from the NBER Conference in Boston. He pointed to Kickstarter’s sophisticated user-based platform, noting “the market will adjust as people go through a learning process to learn from their mistakes.” Crowdfunding pools small contributions from a broad base of private investors in exchange for securities. What remains to be known is whether this type of financing will “become significant or stay trivial” during the trial and error process, Mr. Agrawal said. He projected a “hybrid between online and offline investing” as recognized investors join the crowdfunding platform experiment. The potential for raising equity is tremendous for startups starved of seed capital, said John Wires, a legal advisor to the National Crowdfunding Association of Canada. “[Equity crowdfunding] democratizes access to investment opportunities,” Mr. Wires said. “The job of the securities regulators is to make sure they find the right balance between the risk of fraud and the potential benefits of funding a whole new wave of businesses.” Stringent limits on the number of “accredited” investors a company can sell stakes to without going public means using crowdfunding to fundraise is theoretically illegal — until regulators widen the definition of investors, beyond those who meet minimum income or asset ownership levels. The Ontario Securities Commission (OSC) and the Canadian Securities Administrators are evaluating exempt market regulations to loosen investor regimes and approve fundraising options such as crowdfunding. Last month, the country’s largest capital markets regulator gave the green light to the first online platform connecting accredited investors with issuers — Toronto-based non-profit Social Venture Connection, part of the MaRS Discovery District.

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