Epoch Times | By Rahul Vaidyanath | May 22, 2015

Next wave, crowdfunding, a new task for already challenged regulators in fragmented system

By definition, the average Canadian hears very little about the country’s exempt or private capital markets. Not much is typically known about the raising of capital to fund the operations of small business as opposed to that of public companies that issue stock or bonds.

But private capital is critical for financing small business and entrepreneurship, and it ultimately leads to job creation. It also provides unique opportunities for wealthy investors.

The exempt capital markets feature higher-risk securities being sold to eligible investors without extensive public disclosure documentation. The investors, such as venture capitalists or private equity funds among others, can work closely with the small business or start-ups providing advice with the aim of improving the investment’s chance of success.

Small businesses and entrepreneurs cannot afford the cost of public disclosures, aren’t typically seeking the greater amount of funding sought in public markets, and don’t have the time or personnel to deal with the duties of being a public company. Their focus has to be on developing the business itself.

Growth in private market financing reportedly continues to exceed $100 billion a year, although consistent supporting data is lacking. This is an additional challenge in Canada, which doesn’t have a single national-level capital markets regulator like the U.S.’s Securities and Exchange Commission. Canada instead has separate provincial securities regulators.

As the exempt market continues to broaden, regulators have a difficult task to ensure an efficient market (transparency and pricing), investor protection, and cutting out misrepresentation.

Next Wave: Crowdfunding

Crowdfunding is a way of raising capital that makes use of advances in technology (Internet) and social media. Using online platforms such as Kickstarter and Indiegogo, small businesses can connect with a theoretically unlimited set of investors.

Canada’s finance minister Joe Oliver referred to new cooperation among several provincial regulators in his keynote address at the fourth annual PCMA Private Capital Markets Conference held Tuesday, May 19, at the Toronto Board of Trade.

“Just last week, six commissions [provincial securities regulators] agreed to a common set of rules for crowdfunding. This new way to raise capital is taking the world by storm,” Oliver said.

The change in the six provinces—British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick, and Nova Scotia—will be to allow equity crowdfunding so that early-stage investors can gain a share in the company. Previously, the rules only allowed crowdfunding investors to make donations or to receive rewards from the company such as its products.

MORE:  6 Canadian securities regulators to adopt start-up Crowdfunding Exemption

Now it can be likened to a retail investor having the same opportunity as a sophisticated institutional investor.

But with reward comes greater risk, and regulators are acting to protect investors by requiring the company to make some disclosures about itself including how it intends to use the funds. But these requirements are a far cry from a full prospectus in public capital markets.

Lack of Information

“The current state of data and information available on the exempt market is inadequate for informing any significant policy debate or for imposing new regulations,” writes Professor Vijay Jog in a University of Calgary School of Public Policy research paper.

Given this challenge, it is very difficult for regulators to get a handle on this market for the sake of investors. High net worth investors may be able to tolerate greater financial risks, but that doesn’t mean they have the sophistication to understand the risks in exempt markets. While progress is being made to broaden the applicability of crowdfunding, the overarching problem with regulating exempt capital markets in general is the lack of data.

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MPP, Hon. Brad Duguid Officially Opens the Inaugural 2015 Canadian Crowdfunding Summit on March 3, 2015 at MaRS Discovery to a sell out crowd. 

Checkout:  Video Recap | Storify | Sessions & Content Pack

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 950+ 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 ncfacanada.org.