Financial Post | Barbara Shecter | March 20, 2014

The Ontario Securities Commission unveiled much-anticipated rules Thursday to allow equity crowdfunding, a style of investing where investors pool their money in exchange for securities in a small start-up company or venture.

The rules limit companies from raising more than $1.5-million during a 12-month period and restrict investors to a maximum of $10,000 invested through crowdfunding over a calendar year.

“We think that crowdfunding through an appropriately regulated crowdfunding portal can be a viable method for start-ups …to raise capital,” the OSC said Thursday.

Canada’s largest capital markets watchdog has held extensive consultations to try to balance the needs of firms hungry for funding with concerns that the largely online crowdfunding investing forums will provide a new venue for fraudsters.

Under the proposed new rules, which won’t come into force until after a 90-day comment period to allow for feedback and possibly revisions, investors can withdraw their investment up to 48 hours before any offering closes. Investors will be limited to a $2,500 investment in any single venture, and must sign a “risk-acknowledgement form” that says the investor could lose all the money invested.

Related:

• Equity Crowdfunding Regulations in Canada - FAQ

• Equity Crowdfunding & Global Trends Webinar

There are also tight restrictions to ensure that the company raising money and its board of directors have strong Canadian connections.

Howard Wetston, chair of the OSC, said the new rules “will transform Ontario’s exempt market” by providing greater access to capital for businesses and expanding investment opportunities.

“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,” he said.

In December, about a year after the OSC began mulling crowdfunding in the wake of new legislation in the United States, Canadian market participants were informed that the regulator would propose a prospectus exemption to allow crowdfunding this year, along with an accompanying registration framework for online funding portals.

A consultation paper circulated by the OSC last year suggested capping the amount raised by a single entity at $1.5-million in any 12-month period, and also limiting the amount that could be pledged by individual investors.

Crowdfunding will be part of the roughly $100-billion exempt market, which has historically been subject to less regulatory scrutiny because it does not require companies to file expensive and detailed prospectus documents before selling securities to investors.

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