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Crowdfunding could play key role in startup financing, expert says

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Guelph Mercury | By Terry Pender | February 6, 2014

John Wires at Communitech Crowdfnding Event 300x169 - Crowdfunding could play key role in startup financing, expert saysKITCHENER — A new way of crowdfunding could soon come to Ontario that has huge potential for growing businesses and creating jobs, says a lawyer focused on startups and the internet.

John Wires, an Advisor at the National Crowdfunding Association of Canada, told a technology and business audience at the Communitech Hub on Wednesday that proposed new rules for equity crowdfunding are expected from the Ontario Securities Commission sometime during the first quarter of this year.

Equity crowdfunding would allow people of all backgrounds to make investments in medium-sized businesses that are not publicly traded. Currently, securities laws only allow accredited investors, or those with net assets of at least $1 million and annual incomes of $200,000 a year, to make such investments.

Equity crowdfunding would enable a company to raise capital without preparing a prospectus at a cost of at least $100,000 and issuing shares, Wires said.

"If you are an entrepreneur and you want to raise money on the public market, you are going to have a tough time," he said."There is a serious access-to-capital problem for entrepreneurs."

Equity crowdfunding should make raising money a lot easier, but it requires fundamental changes to laws and regulations.

"Laws that require you to have a prospectus, which is a grandiose disclosure document that really, at the end of the day, nobody ever reads, ironically," Wires said.

View:  Crowdfunding Presentation to Employment and Social Development Canada (Dec 2013)

Crowdfunding presents challenges, too, he said. Some businesses, including many startups, would have a hard time quickly giving an investor back their money if they wanted out. It can also be a challenge for a small company to manage a large number of investors or shareholders.

In an interview after his presentation, Wires said regulators must put in place strict rules to guard against fraud, or the potential benefits of equity crowdfunding will be reduced.

"If fraud takes over as the headline, I think the potential that equity crowdfunding holds will likely be significantly diminished," he said.

Check out:  Equity Crowdfunding Lessons from the Past 8 Years

There must be laws and regulations to protect investors with incomes — people who are not now considered sophisticated investors, he said.

"Two important points — there needs to be an effective dispute resolution mechanism to deal with this," Wires said. "Second, there needs to be, in my opinion, a better enforcement branch or enforcement policy in place to deal with the bad apples."

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