April 24th, 2017
Securities Crowdfunding Breakthrough
On May 14, six Canadian provincial securities commissions smartly moved to the forefront of debt and equity crowdfunding in North America by issuing the rules under which start up and early-stage companies can tap this new source of capital via funding portals.
These rules are in force for five years, up to May 13, 2020 at which time, presumably, the experience of the preceding five-year period will be assessed and a decision made to continue, continue but modify or discontinue the initiative.
Those six are: British Columbia, Saskatchewan, Manitoba, Québec, Nova Scotia and New Brunswick. They have each committed to allowing individual investors in their own provinces to put a maximum of CAD $ 1,500 per distribution into those companies. Issuers are allowed up to CAD $250,000 per distribution, with two distributions per year permitted. And, there is a dealer registration exemption for persons seeking to operate a funding portal.
The rules (eg., see BC 45-316 Start-up Crowdfunding Registration and Prospectus Exemptions [Multilateral CSA Notice]) come ring-fenced with constraints that apply to the issuers and the funding portals along with considerable investor protection measures.
For instance, the issuer must be a non-reporting issuer and cannot be an investment fund. As well, the issuer’s head office must be in one of the participating jurisdictions. And, the issuer will need to provide an offering document using a required form. However, the issuer will not have to provide investors with financial statements either at the point of sale or on an ongoing basis. And, none of the promoters, directors, officers and control persons of an issuer can be a principal of a funding portal that is used to raise funds for that issuer. A funding portal’s head office needs to be in Canada and the majority of its directors must be Canadian residents. A funding portal cannot provide advice to an investor or recommend a security or receive a commission or fee from an investor. Finally, an investor has the right of withdrawal as long as that right is activated within 48 hours of subscription to the offering.
Why Now and What’s Next?
Why have these provincial securities regulators acted? Partly, it’s the dearth of capital from other sources of supply of early stage company financing particularly in those areas of the country that are relatively underserved. For instance, the Canadian Venture Capital and Private Equity Association reported that $338 million of $362 million, or 93%, of venture investments occurred in only three provinces in Q 1 of 2015. Ontario alone received $237 million in investing dollars in Q 1, or 65% of the total for the country, while Nova Scotia firms managed to attract only $14 million, or 2.2% in that same period.
In addition, this action by the Group of Six is recognition that investor appetite may be significant given that Canada is in the top ten countries for broadband internet penetration. Canada also has a deep pool of investors with a long tradition of backing early-stage firms in mining and oil and gas exploration. So, it is no surprise that crowdfunding has elicited huge interest in Canada. One only has to look at the overflow crowds attending introductory conferences and seminars put on by the National Crowdfunding Association of Canada.
In the short time that has elapsed since the six regulators acted, companies and investors are already moving to take advantage of the new freedom. For instance, a crowdfinancing firm in Vancouver is already reporting on the progress made by several companies towards achieving their fund raising targets with one reaching 33% of its goal in less than two weeks. But, it’s early days yet and crowdfunding participants are adjusting to the new opportunities that opened up with last month’s announcement.
Over the longer term, it is quite likely that levels of funding activity we will see in the next six to nine months in those provinces will jump. Canadian public policy has put a premium on spurring new company formation as incubators and accelerators have sprung up like mushrooms across the country.
All attention is now focused on Alberta and Ontario and what their crowdfunding plans might be going forward. Alberta has recently had a provincial election that resulted in the longstanding party in power being unceremoniously tossed out. One of the new government’s early decisions will be to name a new head of the Alberta Securities Commission (ASC). So, it’s not surprising that Alberta has lagged.
In Ontario, It’s likely that the actions of the six provincial regulators will prompt the Ontario Securities Commission (OSC) to speed up its own deliberations. Prior to May 14, officials had said that the OSC would release its own amended proposals in the fall of 2015.
The OSC had already indicated in its opinion funding portals would need to be registered while investor and issuer limits could be raised to, respectively, CAD $2,500 per investor per investment with a CAD $10,000 per year maximum and an annual company raise of a maximum of CAD $1.5 million.
Interestingly, the six provinces that have already moved to permit securities crowdfunding have committed to working on an ‘integrated crowdfunding exemption’ together with the OSC. And, higher investing and offering limits as envisaged by the OSC could even co-existing with, and complement, those announced in mid-May.
What Crowdfunding Means for Politics and for Capital Providers
Despite the protections built in by the six securities regulators, there are those who don’t believe that people can be trusted with their money and who will still try to rob crowdfunding of its potential. They will continue to push regulators to tighten the rules in the name of investor protection. However, these naysayers will likely lose out to a coalition of financial libertarians, for whom people should be free to decide what to do with their money, and entrepreneurs and investors. Entrepreneurs feel the pinch of the capital shortage facing early-stage firms once they exhaust the family and friends route while investors have become increasingly fed up with the performance and prospects of securities on offer in public markets and who are actively looking for greater exposure to private market alternatives, much as the largest institutional investors in the country are already doing.
Securities crowdfunding has also stoked the fires of debate around where it fits in relation to angels and domestic venture capitalists. Is crowdfunding the new competitor on the block? Or, will it turn into a venue for collaboration wherein angels and venture capitalists partner with successfully-crowdfunded enterprises to taken them to the next stages of growth? In short, is crowdfunding a potentially disruptive threat or a massive opportunity for the established suppliers of capital? Time will tell but there are already indications of crowdfunding organizations partnering with these capital providers to the mutual benefit of one another.
And, the reality is that the early-stage company financing market is so large that there will be more than ample room for all.
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 1100+ 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.