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THE CROWDFUNDING INDUSTRY IS PREDICTED TO ACCELERATE TO $5.1 BILLION IN 2013.

The Global crowdfunding market grew 81% in 2012 to a total funding volume of $2.7 billion with over 1.1 million successful campaigns receiving funding.

OSC considers crowdfunding, saying method may heighten ‘potential risk of fraud’

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Financial Post  |  Barbara Shecter | Dec 14, 2012 11:12 AM ET | Last Updated: Dec 14, 2012 4:48 PM ET

howard_wetston

The Ontario Securities Commission is seeking input about whether to allow some form of crowdfunding, where small contributions from a large number of investors are pooled in exchange for securities.

The idea of crowdfunding gained traction in the United States this year when president Barack Obama signed the JOBS Act.

A consultation paper released Friday by the OSC is also looking into the possibility of allowing certain investments based on investment knowledge or receiving advise from a registered adviser.

Crowdfunding would be part of the exempt market, which has traditionally been subject to less regulatory scrutiny because it does not require companies to file detailed prospectus documents before selling securities to investors. However, regulators are taking a closer look at the market segment, which is a growing component of capital-raising in Ontario.

According to the consultation paper, at least $86.5-billion was raised through the exempt market in Ontario last year.

“One of our goals is to consider whether any new prospectus exemptions could improve capital raising options available to SMEs (small and medium-sized enterprises) without unduly compromising investor protection,” the OSC said in the document.

Crowdfunding in other jurisdictions is done through the Internet, and the OSC document said that method “may raise heightened concerns regarding the potential risk of fraud and abuse.” As a result, the regulator said, “it is important to consider not only the potential benefits of crowdfunding, but also its potential challenges.”

Howard Wetston, chair of the OSC, said the consultation by Canada’s largest capital markets regulator is required “to appropriately address exempt market capital raising concerns and continue to deliver strong investor protection.”

The OSC document said that method ‘may raise heightened concerns regarding the potential risk of fraud and abuse’

The OSC plans to hold public consultation sessions and conduct investor research before any decisions are made.

Canadian regulators were initially looking into the possibility of narrowing exemptions for investors after finding that high net worth didn’t always equate with investment knowledge, and citing “deficiencies” in documents that take the place of a more rigorous prospectus vetted by regulators.

However, reaction to the JOBS Act in the United States aimed at increasing employment and economic growth, as well as crowdfunding opportunities in other jurisdictions such as Australia and the United Kingdom, prompted the consideration of allowing more people to participate in the exempt market.Advertisement

The OSC consultation paper highlights restrictions on crowdfunding aimed at investor protection in other jurisdictions. In the United States, for example, crowdfunding is expected to include limits on how much of an investor’s net worth or income can be invested through this method in a given year.

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2 Responses to OSC considers crowdfunding, saying method may heighten ‘potential risk of fraud’

  1. NCFACanada says:

    Yes, we agree that awareness, education and participation are key components at this stage for all stakeholders involved. To facilitate gathering public opinion on the proposed equity-based CF framework by the OSC, NCFA Canada and affiliate partners are working to provide the tools and necessary background info for the public to provide feedback to the OSC enabling them to make an informed decision.

    OPEN CALL: Please contact casano@ncfacanada.org directly if you’d like to help in this regard and participate in the planning process. We need more hands on deck!

  2. It is the job of the OSC to cry wolf. It is our job to prove ourself right. Education is the key – educating the investors, entrepreneurs, and securities regulators. There is a growing global data to support our case. http://www.healthycrowdfunder.com

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