to stop cross-border activity, such as requiring investment
crowdfunding platforms to block IP Canadian addresses. If so,
is Canada keeping abreast of capital raising developments to
remain competitive and relevant in the world capital markets or is
it further marginalizing itself?
Little or no mandatory disclosure
Professor MacIntosh states that investment crowdfunding
will have little or no mandatory disclosure. This is incorrect.
Investment crowdfunding will likely involve a mandatory
disclosure document, a video presentation about the offering and
responses from management to comments from investors on
blogs hosted on the portal’s website. Just look at Crowdcube, a
United Kingdom funding portal, and see how it works. The OSC
concept proposal suggests that the required amount of disclosure
is that set out in the summary pages of a prospectus subjecting
an issuer to a claim of misrepresentation if they get it wrong.
Professor MacIntosh is welcome to comment on the right amount
of disclosure that sufficiently protects investors while fostering
fair and efficiently capital markets. However, does that 200 page
prospectus really protect investors as Professor MacIntosh
suggests? Or is it unintelligible to investors, their advisers, and,
perhaps, even the people who wrote and reviewed it? Over the
years, prospectuses have grown much longer and much less
useful to actual investors while at the same time our collective
attention span has diminished. Perhaps we should be striving
for disclosure that is more useful and understandable (perhaps
along the lines of ‘Fund Facts] disclosure for mutual funds), not
just more detailed and exhaustive. In other words, in the case of
disclosure, ‘less’ may actually be ‘more’, and too much may be
the same as not enough. Perhaps the simpler disclosure model
facilitated by investment crowdfunding platforms is not so bad.
Can investors protect themselves?
Selling securities over the Internet or otherwise can only be
done by registered securities dealers and advisors. Registered
dealers and advisors need to carry out know-your-product,
know-your-client and suitability reviews when they sell securities
to Canadian investors. These reviews are designed to protect
investors by preventing dealers and advisors from selling investors
unsuitable products. Unfortunately, jurisdictions around the world
are still trying to figure out how to carry out these reviews for an
investment crowdfunding platform without completely losing the
efficiencies that make on-line investment crowdfunding attractive.
All this begs the question: what do Canadians expect of
securities dealers and advisors? Should you rely on someone
who is selling you a product to safeguard your interests? The CSA
has posed this question in a concept proposal and is considering
whether securities dealers and advisors should have a ‘best
interest’ duty to investors. Perhaps this needs to be examined
more closely in the context of investment crowdfunding,
especially when low dollar amounts are involved (see reference
to investment caps above) and arguably investors can fend for
themselves and have the ability to withstand the loss of their entire
investment. Moreover, certain existing investment crowdfunding
portals educate investors about how investment crowdfuding
works, the risks of investing and that investors can lose all of their
money through videos, tests and self certification. Surely, with
available education, the “hoi polloi”, as the crowd is called by
Professor MacIntosh, can make their own informed decisions to
some extent. Perhaps even more informed than investors through
the traditional investment structures. Either way, there is always
the option not to invest!
What level of regulation facilitates capital formation?
In theory, a tightly regulated market reduces investment risk,
which in turn leads to market confidence, attracts capital and
results in capital markets growth – in other words, a virtuous circle.
Conversely, you can have a vicious circle. A loosely regulated
market can result in the funding of weaker companies, reducing
confidence in the markets and ultimately reducing available
capital. No one proposes the latter, but one needs to acknowledge
that ‘over regulation’ stifles innovation and risk-taking. Achieving
a correct regulatory balance requires constant recalibration.
Investment crowdfunding does not mean less regulation.
It means different and proportionate regulation based on new
technological capabilities and methods of communication. True,
this is a less exciting and a more complex message than simple
fear-mongering around ‘fraud funding’, ‘widows and orphans’
losing all their money or, to quote Professor MacIntosh, “the
madness of crowdfunding”. However, it is time we look beyond the
easy and salacious headlines and examine the issues ourselves
as an industry, as professionals and as investors.
Is there a need for defibrillators for our wheezy old securities
lawyer? Probably not, but there is a need for serious intellectual
inquiry into investment crowdfunding and its related issues. For
that, Professor MacIntosh is commended and everyone else for
contributing to this debate.
For more information contact:
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The contents of this article do not constitute legal advice and is provided for
information purposes only. This article does not necessarily reflect the opinions
of Cassels Brock & Blackwell LLP or any of its lawyers or clients or those of the
Exempt Market Dealers Association of Canada. The content of this article is not
intended to be used as a substitute for specific legal advice or opinions.