Small businesses eagerly await crowdfunding regulation

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Star Business Club | by Vikram Barhat | Feb 3, 2014

CrowdfundingFor cash-strapped small businesses, a new funding option in the works could mean a substantial and dramatic improvement for their access to capital.

Crowdfunding, more typically a platform for raising donations, is now letting business owners offer investors a stake in their companies in exchange for capital.

The contentious solution is being hotly debated between small business owners, industry advocates, and securities regulators.

Equity crowdfunding is a boon for new startups that don’t have the size or structure to raise money by going public with an initial public offering, advocates argue. Critics warn of the risks: Investors may end up with illiquid assets, negative returns or unsuitable investments for their risk profile.

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The Ontario Securities Commission is getting ready to expand equity crowdfunding in the province. Currently, only accredited investors can buy shares of new companies, in what’s called an exemption under the OSC regulations. In a move first hinted at in August, the Commission said in early December that it plans to enact a new rule to allow more investors interested in startups to get in on the ground floor via a crowdfunding portal. The new exemption will be subject to a 90-day comment period and include a registration framework for crowdfunding websites. Once enshrined, it will give more investors first crack at stakes in startups.

That could be a dramatic shift. Under the current exemption, only 3 per cent of the Canadian population qualifies as an accredited investor — high-net worth individuals deemed to be sufficiently knowledgeable of investment matters and don’t need the protection of securities legislation.

Industry stakeholders agree that it all comes down to the creation of a regulatory framework that makes equity crowdfunding possible for entrepreneurs, while minimizing the attendant risks for investors.

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Expanding the scope of crowdfunding will help businesses get off the ground by allowing access to a new source of capital to fill a critical funding gap in an efficient, transparent and cost effective way, says Myles Harding, an advisor of  the National Crowdfunding Association of Canada (NCFA Canada), a cross-Canada crowdfunding advocacy group based in Toronto.

“Small business owners seeking early stage seed capital or growth capital recognize that there is a limited availability of investment capital for those purposes,” he says.

Some of the existing alternatives to crowdfunding include debt financing, provided by banks and asset-based lenders; angel investors, who are affluent individuals or groups who provide financial backing for startups in exchange for part-ownership; and venture capital, a form of private equity that usually comes when a business has proven its potential for exponential growth. However, these options may not be available to a fledgling business unable to offer compelling proof of growth penitential or assets that lenders can use as collateral.

“As a result, they are generally in favour of crowdfunding as a potential source of capital,” Harding says.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization’s profile and gain access to a dynamic group of industry front runners. Learn more About Us | Prezi or contact us at casano@ncfacanada.org.

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