Emerging Opportunities and Challenges
The coming year promises to be an important one for securities
crowdfunding in Canada. As interest in this space grows, several
crowdfunding models have emerged both in anticipation of the
pending crowdfunding rules proposed by Canadian regulators and
as a result of leveraging existing prospectus exemptions such as
accredited investor and offering memorandum exemptions. The
major challenges faced by regulators and crowdfunding portals
are to ensure that investors are protected and to provide an
efficient, cost effective method for issuers to raise capital. Portals
that successfully address these challenges, while providing
attractive investment opportunities and complying with regulatory
restrictions, will be the ones that rise to the top.
Investor protection is a key concern for regulators. In
particular, regulators focus on the ability for portals to perform
investment due diligence to prevent fraud, offer fair terms and
provide regular investment reporting. Addressing these concerns
is critical to the success of crowdfunding as a viable investment
option for individual investors.
Issuers, particularly private SME’s, are constantly looking
for alternative financing methods. For crowdfunding to be a
viable option, portals must provide issuers access to capital
in an efficient and cost effective manner. Most private SME
companies looking to raise capital do not have time or
resources to create detailed offering documents, provide
audited financial statements or have employees dedicated to
investor relations. For crowdfunding portals to attract quality
issuers, these challenges must be addressed.
The manner in which the industry responds to these challenges
will shape how investors, portals and regulators participate in a
market that shows no signs of slowing down.
Crowdfunding Regulations In Canada
In 2014, the Ontario Securities Commission released proposed
rules to permit and regulate crowdfunding through prospectus
exemptions that allow the sale of securities for capital raising
purposes through online crowdfunding portals. Similar rules are
being considered by other jurisdictions in Canada.
The crowdfunding prospectus exemption that has been
initially proposed would permit both public companies (reporting
issuers) and private companies (non-reporting issuers) to raise up
to $1.5 million in capital over a 12 month period through a private
placement financing on a registered online crowdfunding portal.
Under the exemption, investors would be restricted to $2,500 per
investment and no more than $10,000 in a calendar year.
Proponents of the proposed crowdfunding exemption tout
the benefits of having a larger investor base for companies
and more diverse investment opportunities for retail investors.
However, these benefits are accompanied by significant risks as
crowdfunding portals that focus on unsophisticated retail investors
THURSDAY, APRIL 3, 2014 • MAPLE LEAF SQUARE, 15 YORK STREET, 2ND FLOOR, TORONTO
The opinions expressed here are those of the author and do not necessarily reflect those of Introduction Capital, Inc.
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