Market regulator unveils crowdfunding rules

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The Toronto Star | By: | March 21, 2014

Howard WetstonProposed rules would protect investors by putting caps on how much equity companies could raise through online sites that raise capital.

Canada’s premier stock market watchdog has proposed a set of new rules that would lay the groundwork for small companies in Ontario to be able to raise capital online via the Internet.

The new proposals, released by the Ontario Securities Commission on Thursday, would also protect investors by putting caps on how much equity companies could raise through so-called crowdfunding, and requiring these online sites to be registered with securities regulators.

More broadly, the guidelines are meant to give start-ups and small and medium-sized companies – firms that may find it difficult, costly and time consuming to go through the process of issuing a prospectus – access to a broader pool of potential investors.

“We have done so in a balanced and responsible manner that is intended to facilitate capital raising while maintaining an appropriate level of investor protection,” Howard Wetston, chair and chief executive officer of the Ontario Securities Commission said in a release.

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The conditions would allow companies to raise up to $1.5 million in a 12-month period through an online portal that is registered with the securities commission.

Investors would be able to put up no more than $2,500 in a single investment and $10,000 in a calendar year. In return, they would receive a form that highlights key risks associated with the investment and receive ongoing disclosure from the company.

“We’re cognizant of the challenges associated with investing. We also recognize that no matter what level of investing, we want to ensure investors have some appreciation of the risk,” Wetston said in an interview.

Since the portal, or crowdfunding site, would be registered with the OSC as a “restricted dealer,” it would be required to perform background checks on companies and criminal record checks on directors and officers. It would also be required to carry insurance and deny access to an issuer “that appears to be false, deceptive, misleading or contains a misrepresentation,” according to the proposal.

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The OSC would have oversight of the portal through its registration, Wetston said.

Those requirements are meant to balance the issues of capital raising with investor protection, he said. “It’s also important for the issuer that’s raising money. They want to raise capital and if they are going to do it this way, they need to be in a system that has the appropriate opportunities but also the appropriate protection.”

Crowdfunding is relatively new territory for the Ontario Securities Commission. In September, 2013, the OSC registered MaRS VX, a not-for-profit online portal for “impact investing” as a restricted dealer in Ontario. The site aims to connect accredited investors, those deemed to have a certain level of net assets, income and knowledge, with ventures that address social or environmental challenges.

The other guidelines would allow “a wide range of businesses at different stages of development” would be able to raise capital based on an offering memorandum, rather than a prospectus.

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