considering similar laws. It is true that, except for the state-level
laws, the sale of unregistered securities to the general public is still
illegal in the US, pending implementation of Title III of the JOBS Act.
There is much more detail to the background and legal
evolution underway in the implementation of the JOBS Act in the
USA, and I won’t propose to cover that in this article. But suffice it
to say, the new Crowdfunding regulations are intended to reduce
the disclosure requirements for startups and small/medium issuers,
and enable registered portals to sell securities to the general public
with minimal suitability obligations could dramatically increase the
current level of Equity Crowdfunding activity.
Regardless of the outcome of these new Crowdfunding
frameworks, the Offering Memorandum (OM) Exemption, which
is available in all jurisdictions across Canada except in Ontario
already provides a national framework to offer, and sell private
securities, over the Internet, to both accredited and non-accredited
investors. In other words, Equity Crowdfunding is a legal, fully
regulated method of capital raising in Canada, provided its through
an EMD operated portal, while relying on the OM exemption.
Indeed, with the existing OM Exemption and the anticipated
implementation of Title III of the JOBS Act in the US, as well as
with anticipated Crowdfunding Exemptions in Canada - online
private offerings, with participation by the general public is poised
to grow dramatically in North America.
Eliminating the prohibition on general advertising and
soliciting in the USA
In September 2013, as part of the implementation of Title
II of the JOBS Act, the SEC removed the 80-year-old general
prohibition on public advertising and soliciting of private offerings.
The specific regulation, referred to as Rule 506(c) of Regulation
D eliminated the public advertising and solicitation restrictions,
provided that; a) ultimately only Accredited Investors (AIs)
participate in the funding round; b) the issuer takes reasonable
steps to verify the AI status, and c) the issuer declares in a SEC
filing (Form D, Notice of Exempt Offering of Securities) that they
have publicly advertised the private offering.
This amendment to Regulation D was viewed as a
monumental, positive change for issuers and their broker-dealers
seeking to market and distribute private offerings. According to
information released by the SEC in February 2014, during the first
four months following its availability, nearly 700 private offerings
relied on Rule 506(c), raising a total of $38.7 Billion. While this
currently represents a small percentage of the total exempt market
in the US, the immediate and significant use of Rule 506(c) is
evidence of pent up demand and a shift in behavior by issuers.
Size of the private capital markets in the USA and Canada
According to the SEC, nearly $1 trillion was raised in private
offerings of unregistered securities (under Regulation D exemptions)
but it was raised from only 234,000 individual investors (primarily
AIs). In Canada, the equivalent information is not readily available
but an estimate of the exempt market size (2011) was $142.9
billion. To date, virtually none of this fund raising activity in either
country was conducted online, and only a small fraction of the
investment came from non-accredited investors.
However, the sheer size of this market and the anticipation of
“new rules” has caused a flurry of interest and activity involving startup
companies and established registered dealers, focused on developing
and launching equity and debt-based Crowdfunding portals.
The rise of the Equity Crowdfunding portals
Primary research for this article identified nearly fifty ( 50) equity
or debt-based Crowdfunding portals that have been launched in the
US and Canada, since 2007. Portals are either seeking registered
dealer status in their own right, or forming associations with existing
registrants. To date, nearly $900 million has been invested by venture
capital and angel investors in equity or debt-based crowdfunding
platforms and related startup businesses. Many of the portals in the
US that are actively marketing private offerings to AIs have started
to rely on Rule 506(c) or, in the case of some debt-based portals,
which are marketing registered securities. In Canada, the handful of
portals that are actively marketing online private offerings generally
rely on the AI or OM Exemptions to undertake their trades.
Advantages of online private offerings
From an issuer perspective, Equity Crowdfunding provides:
1) an easier, efficient and less expensive alternative to the
traditional offline methods and related manual “roadshow”
processes, 2) access to a broader, well-informed, geographically
diverse investor community, which includes the general public,
and 3) an easy, consistent way to inform prospective investors
about the existence and merits of an investment and the terms and
risks associated with that investment. Innovative capital markets
participants might be well served to explore and embrace this new
paradigm, as a means to improve the quality of their service and
inherent value proposition, to issuers and investors alike.
In Canada, we should assume that all types of issuers,
including; individual companies, pooled investment funds,
mortgage investment corporations (MICs), as well as venture
capital (VC), private equity (PE) and hedge funds alike, would be
interested in this emerging model for distributing exempt market
securities. In other parts of the world, which are much further
along in embracing Equity Crowdfunding, we are already seeing
VC, PE and hedge funds use online offerings and platforms, often
in syndication with dealers, to reach beyond the traditional pool of
institutional and individual AIs for funding.
Imagine a future where easy, public, and transparent access
to online offerings; from reputable, well-diligenced issuers actually
stimulates interest and demand from the general public. With anticipated
availability of new Crowdfunding Exemptions and the OM Exemption in
Ontario, the theoretical size of the private capital investor pool in Canada
could increase from approximately 1.25% of the Canadian population,
to millions of investors (according to Statistics Canada the number of
AIs, based on individual, as opposed to family income, is under 440,000).
EMDs should be exploring online offerings, supported by
automated back office compliancy processes as a way to scale their
businesses and to access a large pool of potential new investors.
Social media, marketing and selling
In a very short period of time, the Internet and social media
have fundamentally changed the world of sales, marketing and
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