February 16th, 2017
NCFA Canada Response to Russell’s Call to Dispense with Equity Crowdfunding
NCFA Canada About Us | January 15, 2016
With the proliferation of equity crowdfunding exemptions around the world, such as Ontario's crowdfunding regime that will become live later this month on Jan 25, it is unfortunate Mr. Ian Russell views equity crowdfunding as competition to the TSX Venture Exchange when in fact it is a complement. In his Letter from the President Mr. Russell, chief executive of the IIAC (Investment Industry Association of Canada), calls on regulators to dispense with equity crowdfunding in favour of the TSX Venture Exchange. The Financial Post in an article yesterday (Scrap crowdfunding to help TSX Venture Exchange, IIAC CEO urges - January 14) repeated his view that equity crowdfunding was hurting the TSX Venture Exchange. He expanded on his dislike of equity crowdfunding again in his BNN interview today.
Equity crowdfunding addresses the capital needs of Canadian companies at the seed and early stages of their business development, and the capital needs of Canadian companies at later stages that are unsuited to be public companies but are highly valued in their communities. These companies currently struggle to find the capital they need in Canada. The TSX Venture Exchange may indeed be an “effective vehicle for raising capital” but not for companies such as these who cannot afford the cost of being a public company.
The equity crowdfunding exemption coming into force January 25, 2016 in MB, ON, QU, NB, and NS, and the start-up crowdfunding exemption, which came into force May 14, 2015 in BC, SK, MB, QU, NB, and NS, both operate to fill a serious void in our capital market system today. We believe critics like Mr. Russell will be boosters of equity crowdfunding once it has a chance to take hold and evolve in Canada as it has in several international jurisdictions. Ironically, the same critics may ultimately become avid supporters of equity crowdfunding over time as the market grows and incubates more Canadian early stage ventures to market.
Seed and early stage companies who have successfully raised capital through crowdfunding will need and look for additional capital as they ramp up and move into other development stages. Companies with a large shareholder base from equity crowdfunding are more likely to look for expansion capital through public markets like the TSX Venture Exchange when it makes sense for the company, its shareholders, and new investors.
Equity crowdfunding therefore has the potential to attract new investors and a diversified range of companies to the TSX Venture Exchange as these seed and early stage companies professionalize and grow. Albeit, not all companies who raise equity through crowdfunding will become public companies. Some companies may instead look to raise follow-on capital on accredited investor equity platforms run by investment dealers and exempt market dealers. It does not make sense to drive all companies who need capital to the public markets.
Mr. Russell in his letter suggests that regulators and the Federal Government look to the U.K. for policies that would stimulate the small business private and public markets in Canada. We agree, and wish to point out equity crowdfunding has played a big part in stimulating the U.K. economy. Since being adopted by the U.K. Government in 2011, over 1,000 companies have raised over £240 million through equity crowdfunding platforms. They have had zero fraud. In 2014, 30% of equity funding for seed stage private companies in the U.K. came from equity crowdfunding raises. In the third quarter of 2015, that number was well on its way to being around 50%. The U.K. Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which provide tax relief covering from 30% to over 75% of an investment into an eligible private company has contributed to the success of equity crowdfunding and in stimulating the U.K. economy.
A few provinces in Canada have similar tax programs to EIS and SEIS (e.g., BC’s Small Business Venture Capital Act and NB’s Business Investor Tax Credit Act). These existing provincial tax programs lack uniformity and there are no similar national tax programs like EIS and SEIS in Canada. A national tax program would go a long way in stimulating investment in private companies in Canada and would work well with equity crowdfunding. We would recommend the Federal Government design any such tax program with additional tax incentives to encourage investment in companies located in provinces and territories traditionally ignored by angel investors, venture capital funds, and investment bankers.
Dispensing with the “crowd funding” initiative as suggested by Mr. Russell would be a huge mistake and contrary to what is happening around the world today. According to a Goldman Sachs report released in 2015, the global equity crowdfunding market has grown from $400 million in 2013, to $1.1 billion in 2014, and $2.6 billion in 2015 (estimated).
As mentioned above, the U.K. has had an equity crowdfunding exemption since 2011.
In the U.S., as of this month, 29 states plus the District of Columbia have adopted or are finalizing rulemaking implementing crowdfunding exemptions, and 12 additional states are actively considering crowdfunding exemptions. Significant capital is being raised on intrastate equity crowdfunding platforms and accredited investor platforms in the U.S. According to Crowdnetic Corporation, between October 1, 2014 and September 30, 2015, there were 6,063 distinct accredited investor equity crowdfunding offerings in the U.S. raising U.S. $870 million. During the same period between 2013 and 2014, there were 4,712 offerings which raised U.S. $385.8 million. A federal equity crowdfunding exemption will be effective in the U.S. on May 16, 2016 which should further expand the use of equity crowdfunding in that country.
Equity crowdfunding is growing with a 115% average year after year growth rate over the last three years in Europe.
Equity crowdfunding rules have also been adopted and platforms operational in Australia, Asia, and a number of developing countries around the world.
Mr. Russell and the members of the Investment Industry Association of Canada may wish to save and protect the existing investment banking model in Canada but equity crowdfunding is not one of the nails in its coffin. It could indeed be one of the keys to its turnaround and salvation.
On behalf of National Crowdfunding Association of Canada (NCFA Canada)
Moving Mainstream: The European Alternative Finance Benchmarking Report, Wardrop, Robert; Zhang, Bryan; Rau, Raghavendra; and Gray, Mia, February 2015.
Crowdfunding: Strategies & Impacts for Technology Markets 2016-2020, Juniper, January 11, 2016.
Equity Crowdfunding in the UK: Evidence from the Equity Tracker, Beauhurst and British Business Bank, March 2015.
“Crowdfunded companies are doing better than average – but why don’t Equity Crowdfunding Platforms tell us this?” Griffith, Sam, AltFi Data, July 15, 2015.
“Britain has become a business-creating powerhouse” Speech by Danny Alexander, (former) U.K. Chief Secretary to the Treasury, presented at the Saïd Business School on February 23, 2015.
Developing World Crowdfunding: Prosperity Through Crowdfunding, Annual Report, Allied Crowds, January 2106.
The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 1300+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more About Us or visit www.ncfacanada.org.
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