March 28th, 2017
Let’s protect investors from risky startups: Roseman
The Ontario Securities Commission wants to let you invest in startup firms over the Internet. But its embrace of crowdfunding has risks.
In the 1990s, many Canadians were urged to put their retirement savings into labour-sponsored venture capital funds.
It seemed like a no-brainer to receive $1,500 back on a $5,000 purchase because of federal and provincial tax credits. And the RRSP tax deduction reduced your cost even further.
The only thing wrong with this scenario was that labour-sponsored funds had mediocre results. Only a handful made any money at all, even over the eight-year holding period required to avoid repaying the tax credits.
And many funds suspended redemptions after the 2008 stock market crash, leaving investors on the hook for an even longer period.
Labour-sponsored funds flamed out once the provincial tax credits vanished. But a new venture capital idea is making the rounds – one with the potential to part people from their savings in an equally devastating way.
When you pledge money in a crowdfunding campaign, you get rewards, such as a newsletter or a new product when it’s commercially available.
But with equity crowdfunding, you get securities. You become an investor in a startup company.
Here’s the problem: These firms are still searching for a market niche and a pathway to profit. Since their shares are not traded on stock exchanges, they can be hard to sell in a crisis.
The Ontario Securities Commission wants to make it easier to raise capital among small to medium sized enterprises. It plans to release new rules in the first quarter of 2014, with a 90-day comment period before taking effect.
“It will happen,” OSC vice-chair James Turner said in a speech last week to the CFA Institute. “There is a new generation that expects to invest on the Internet. They want regulators to get out of the way.”
The OSC is suggesting possible ways to limit losses for participants:
Your investment is capped at $2,500 in a single issuer or $10,000 in a calendar year.
You have a cooling off period of two business days to withdraw from your investment decision.
You have to go through a registered investment portal to invest, instead of dealing directly with the issuer.
You must sign a form, acknowledging that you understand you may lose your entire investment and you can bear that loss.
“This is extremely high risk capital,” Turner said. “Ninety-nine per cent of startups won’t succeed. You’re not investing for your retirement. We want people to know that.”
In an OSC survey, 12 per cent of respondents who identified themselves as “low risk investors” expressed a strong interest in crowdfunding. This raised concerns about vulnerability to losses and fraud.
Marian Passmore, policy director at FAIR Canada, listed other ways to protect investors in her speech at the same event:
Limit crowdfunding investments to five per cent of a person’s income or financial assets.
Give investors a statutory right to sue for misrepresentation against the issuer and the registered investment portal. This includes the right to start a class action to seek recovery for losses.
Require issuers to use any capital they raise to expand their business or create jobs within Canada.
Require issuers to supply audited financial statements and tell investors if they plan to use the money they raise in a different way than disclosed in the information statement.
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