in the context of the public stock market. Whether public
stock markets are fundamentally efficient (i.e. all information is
available to everyone at the same time) does not even need to be
questioned—they are not, and that is why they are regulated.
Regardless how efficient the market truly is, the objective
is right; the more information is made available to all market
participants, the more likely the price will be close to the ‘true’ or
fair market price. For young companies looking to raise capital
and investors looking to invest in these companies, this is no
different. In the case of equity crowdfunding, money is exchanged
for shares in a company. The price per share represents how much
ownership an investor gets for their investment.
From the perspective of how competitive markets function,
equity crowdfunding makes perfect sense and, supported
by the Internet and other technologies, is an inevitable and
Equity Crowdfunding is creating a competitive online market
where companies compete for investment dollars and investors
compete for promising investment opportunities.
Since equity crowdfunding essentially involves selling securities
over the Internet, it is part of the regulated financial industry. This
is the big differentiator from non-financial crowdfunding (think
Kickstarter or Indiegogo), where people make rewards-based
donations to companies without expectations of any financial
return. This means it’s in the interest of the equity crowdfunding
industry in general that all participants, particularly investors and
companies raising money through crowdfunding, understand risks
and potential returns or losses as best as possible.
Equity crowdfunding platforms must take responsibility for
creating transparency and educating both investors and capital
raising companies. Since the financial industry operates based
on the capitalism model, it will inevitably go sideways without a
third party setting the rules and overseeing the industry. This is
no different for equity crowdfunding and that is why Canadian
securities regulators, like many other regulators in the world, have
introduced rules around equity crowdfunding.
Regulators introduced equity crowdfunding rules
Public capital markets are not efficient (i.e. they typically do
not reflect all available information to all participants at the same
time), and neither are private capital markets, of which equity
crowdfunding is a part. Investors, particularly individual investors,
in any market are often at an informational disadvantage with
respect to the companies offering securities.
In the last few years, regulators across the globe have been
under pressure from the market to introduce new regulation
facilitating equity crowdfunding. Under the U.S. JOBS (Jumpstart
Our Business Startups) Act, U.S. federal and state governments
adopted rules to permit companies to offer and sell securities
online through crowdfunding. Last October, the U.S. federal
government completed the major rulemaking mandated under the
JOBS Act, with Regulation Crowdfunding. These rules, effective
as of January 29th of 2016, will allow a company to raise capital
in the U.S. subject to certain limits, and allows investors to invest
under certain investment limits. In addition, companies raisings
capital are required to disclose certain information about their
businesses and securities offerings.
New rules were also adopted in Canada to facilitate equity
crowdfunding, albeit not harmonized across the country. In May
2015, six provinces adopted rules allowing companies to raise
an aggregate of CAD $500,000 per 12 month period and set a
maximum of $1,500 per investor. In November 2015, five provinces
announced further rules facilitating equity crowdfunding to raise a
lifetime amount of CAD $1.5 million, with an individual investor
limit of $2,500 and subject to other investment limits dependent
on the investors’ financial assets.
While I welcome the introduction of equity crowdfunding
rules by the securities regulators in Canada, the reality today
is that we have three different equity crowdfunding rules in
Canada (and a fourth one currently contemplated by the Alberta
Securities Commission). Given that equity crowdfunding is a new
phenomenon altogether, not attached to existing securities rules,
the Canadian securities regulators had an opportunity to deliver
on their initiative to harmonize securities markets and develop
Particularly for equity crowdfunding, national rules are highly
desirable to maximize potential for young companies to raise
capital across Canada at affordable capital raising cost. These
multiple rules make it unnecessarily complex and more costly for
young companies who are typically in bootstrap mode and cannot
afford such costs. In order to tap the full potential of crowdfunding
and in the interest of Canada’s startup ecosystem, crowdfunding
rules should be harmonized across Canada sooner rather than later.
2016 – A defining year for equity crowdfunding in Canada
This year may turn out to be a defining year for the
phenomenon of equity crowfunding in Canada. The regulators
introduced the rules to get started with equity crowdfunding and
the first equity crowdfunding platforms have launched in Canada.
FrontFundr completed the first two transactions in November of
last year, demonstrating that it can be done—investing in young
companies online from investment pitch to deal closing.
Equity crowdfunding offers a new and complementary
way for young and promising companies to raise capital while
supporting innovation, economic growth and new jobs. It will be
an interesting year for equity crowdfunding and we should give it
a warm welcome.
For more information contact:
Peter-Paul Van Hoeken
About the Author
Peter-Paul Van Hoeken is founder and CEO of FrontFundr, an online
funding and investment platform operating across Canada, and he is a
member of the national Board of Directors of the Private Capital Markets
Association of Canada (PCMA).