September 26th, 2018
March 1, 2019: NCFA Submission to the Ontario Securities Commission on Regulatory Burden
NCFA Canada | Burden Reduction Committee | March 1, 2019
In response to the Ontario Securities Commission’s (OSC’s) January 14, 2019 request for comments, this submission responds to the eight questions set out in the OSC’s Staff Notice 11-784. This submission draws heavily on, and also updates, the Association’s earlier submission to the OSC dated August 24, 2017 (see Appendix), which primarily focused on the crowdfunding requirements in Ontario.
The National Crowdfunding and Fintech Association of Canada (the Association) represents over 2,000 fintech SMEs and individual members that support financial and capital market innovation, small businesses and technology. We are pleased that the Ontario government is undertaking this important regulatory burden reduction initiative to the benefit of all Ontarians.
The Association has consulted a number of diverse crowdfunding and fintech stakeholders – including exempt market dealers, industry experts, securities lawyers, regulators and government agencies and is proposing several recommendations to reduce unjustifiable burdens placed on Ontario’s businesses.
The Association recommends that the province undertake the following:
- The OSC conduct a review and publish a report evaluating the effectiveness of Ontario’s crowdfunding regulations (45-108) compared to other jurisdictions in Canada and international competitors such as the UK, US and Australia, including a comparison of the relative cost of capital;
- The OSC continue its recently announced work to harmonize the crowdfunding regime across Canada (CSA Staff Notice 45-324) but do so with the goal of reducing unjustified regulatory burden and establishing harmonized regulation that make sense for the sector. In particular, all jurisdictions should review B.C.’s crowdfunding regime and consider either adopting a similar approach in harmonization;
- Modify existing requirements so that they are principles based – detailed or prescriptive controls should only be imposed when clearly justified (ie. controls that can be quantified) and harmonized;
- Implement specific burden reduction amendments to crowdfunding regulations:
− Increase the 12 month issuer cap to $5 million or higher (from $1.5 million);
− Increase the 12 month investor caps to $10k (from $2.5k) and allow accredited investors to fully participate;
− Allow advertising and general solicitation on social media for all crowdfunding;
− Eliminate requirements for financial statements unless raising more than $1.5 million; and
− Allow fintech solution to streamline KYC and suitability tests.
See: NCFA: Canada Needs a Harmonized Securities Environment as Current Provincial Approach is a Fintech Innovation Killer
Implementing these recommendations will help drive entrepreneurship, innovation and job growth.
Benefits to Ontario include:
- Increased capital investment in the province and increased economic growth;
- Increased investment options for investors that support small businesses across all of Ontario;
- Crowdfunding sources remain in Canada;
- More capital and improved access to capital specifically for small businesses, rural businesses, economically-challenged sectors, and underserviced groups (ie. women or Indigenous business owners);
- Encourages liquidity and transparency in the markets;
- Improved probability of retaining high growth companies in Ontario; and
- Accelerated commercialization of new products and services.
Crowdfunding drives innovation, economic activity and job growth. It fills a critical early stage funding gap (commonly referred to as the ‘valley of death’), enables more productive investment in venture markets and strengthens early stage capital markets. Crowdlending also provides support to more mature companies looking to access capital that may fall outside the parameters of bank lending.
Background and Context
Contrary to the intent of the crowdfunding exemption, Ontario’s crowdfunding requirements hinder access to capital for SMEs across a multitude of sectors. These requirements have also restricted innovative opportunities for retail investors and our members feel the impact of this directly. Ontario’s economic growth is being hindered by regulation like the crowdfunding requirements that fails to promote economic growth. The potential of opening up regulation is significant increase in job creation and economic development. For example, Ontario’s 417,000 small businesses would benefit from the increased access to capital that crowdlending offers and the effects would be a strong boost in job creation throughout the province.
Canada has fallen behind international competitors like the U.K. and the U.S. Crowdfunding platforms now represent the largest investments at the seed stage in the U.K. and peer-to-peer platforms now represent 15% of all new bank lending to small businesses.
Ontario’s Fintech startups, small business innovators and entrepreneurs operate in a highly prescriptive, complex and costly regulatory environment:
“The Crowdfunding Exemption introduced by the [OSC] in January 2016 turned out to be much too onerous for young companies… Ontarians are locked out of equity crowdfunding and Canadian companies are restricted from accessing capital. … Unfortunately, we had to disappoint over 100 start-ups in Canada that wanted to raise capital from their supporters in Ontario.” – FrontFundr, Ontario Exempt Market Dealer
“It's extremely complex and it can be very discouraging for a lot of small entrepreneurs. There are numerous examples where in Ontario we [are] really pushing talent away or setting them up for failure because of the red tape, and the burden is huge. It is hard [enough] to start a business. You know the wages are very expensive, the rents... The regulation and the burden [is] just the complete killer.” – Anonymous NCFA member
“As a small firm, we have very tight budgets. Our compliance team has asked that we dig up very detailed and ‘historic’ information on emails, social media ads, and related campaigns. We had to devote 2 full time individuals over several months. Check-ins and site visits to confirm the material presented in the compliance report and to assist registrants in fulfilling their obligations would be far more productive. The former (exhaustive reviews) take an incredible amount of resources for both regulator and registrant and are not cost-effective.” – Anonymous NCFA member
Without a streamlined, flexible, nimble, and principles-based regulatory system – one that allows new rules to be formulated, while expelling old, outdated rules – Ontario’s regulatory climate will continue to stifle innovation and drive business costs up and productivity down. Ontario’s economy, businesses and consumers at all levels suffer, however, small businesses, innovators and entrepreneurs are the hardest hit.
“Ontario’s crowdfunding requirements have choked off access to capital for SME's across a multitude of sectors – they have also shut out retail investor opportunities. Our members are completely stifled by OSC requirements and this is contributing significantly to Ontario's weak economic performance. “- Anonymous NCFA member
On behalf of the burden reduction committee at NCFA, we look forward to contributing ongoing input into Ontario’s burden reduction initiatives. Please contact us at any time to discuss further.
CEO & Founder
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org