September 26th, 2018
Landscape changing in equity crowdfunding across Canada
The rules governing equity crowdfunding in Canada are evolving and will likely get more confusing before they get clearer.
This isn’t just a Canadian thing. They might be even more complex in the United States, where 22 states and the District of Columbia have individualized rules.
But the framework of regulation outlined by some provinces this year is only the beginning. There will likely be a series of announcements and rulings in several of them as regulators and the market acclimatize to this new type of funding.
Equity crowdfunding is the process of raising money online from a broad range of people. It’s similar to existing forms of crowdfunding for charities or early sales of a product, except it is selling stock and/or debt in a company.
It’s important because young Canadian companies, especially Atlantic Canadian companies, have a hard time raising the capital they need to grow. Crowdfunding, in theory, offers a solution to the lack of capital.
“I think the securities commissions are a pendulum that has swung too far; they’re too restrictive,” Sean Sears, founder of equity crowdfunding portal iCrowdX, said at a seminar Monday in Halifax.
“In Canada, we’ve had 10 years of steep declines in (venture capital funding) and if we don’t reverse it, we will not have a startup community.”
For that reason, regulators in six provinces, including Nova Scotia and New Brunswick, recently approved the practice for companies raising capital. No company can raise more than $250,000 in a single campaign, and investors are limited to maximum investments of $1,500 per company.
The legal term for the rule allowing this is the startup exemption. It’s an exemption to the rule requiring companies to issue a full prospectus when they raise capital.
But there is another form of crowdfunding that will soon let Canadian companies raise capital. Ontario, which is not one of the provinces mentioned, has proposed what it calls a crowdfunding exemption. This would allow companies to raise a maximum of $1.5 million each year, with a $2,500 ceiling for individual investors per deal, to a maximum of $10,000 a year. Ontario would place tighter restrictions on the fundraising portal than the other plan.
At the seminar, Abel Lazarus, senior securities analyst at the Nova Scotia Securities Commission, made it clear that Nova Scotia regulators are monitoring what is happening in Ontario, which is expected to announce its exemption before long.
If the two-track rules aren’t confusing enough, there will have to be clarification on what a company can say to promote its equity crowdfunding campaign. The strict letter of the law states that founders during a campaign can only refer potential investors to information on the fundraising portal.
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 ncfacanada.org.