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Canadian Small Businesses Eagerly Await Crowdfunding Regulation


Canadian Small Businesses Eagerly Await Crowdfunding Regulation

For cash-strapped small businesses, a new funding option in the works could mean a substantial and dramatic improvement for their access to capital.

Crowdfunding, more typically a platform for raising donations, is now letting business owners offer investors a stake in their companies in exchange for capital.

The contentious solution is being hotly debated between small business owners, industry advocates, and securities regulators.

Equity crowdfunding is a boon for new startups that don’t have the size or structure to raise money by going public with an initial public offering, advocates argue. Critics warn of the risks: Investors may end up with illiquid assets, negative returns or unsuitable investments for their risk profile.

The Ontario Securities Commission is getting ready to expand equity crowdfunding in the province. Currently, only accredited investors can buy shares of new companies, in what’s called an exemption under the OSC regulations. In a move first hinted at in August, the Commission said in early December that it plans to enact a new rule to allow more investors interested in startups to get in on the ground floor via a crowdfunding portal. The new exemption will be subject to a 90-day comment period and include a registration framework for crowdfunding websites. Once enshrined, it will give more investors first crack at stakes in startups.

That could be a dramatic shift. Under the current exemption, only 3 per cent of the Canadian population qualifies as an accredited investor — high-net worth individuals deemed to be sufficiently knowledgeable of investment matters and don’t need the protection of securities legislation.

Industry stakeholders agree that it all comes down to the creation of a regulatory framework that makes equity crowdfunding possible for entrepreneurs, while minimizing the attendant risks for investors.

Expanding the scope of Canadian crowdfunding will help businesses get off the ground by allowing access to a new source of capital to fill a critical funding gap in an efficient, transparent and cost effective way, says Myles Harding, an advisor of  the National Crowdfunding Association of Canada (NCFA Canada), a cross-Canada crowdfunding advocacy group based in Toronto.

Canadian Crowdfunding“Small business owners seeking early stage seed capital or growth capital recognize that there is a limited availability of investment capital for those purposes,” he says.

Some of the existing alternatives to crowdfunding include debt financing, provided by banks and asset-based lenders; angel investors, who are affluent individuals or groups who provide financial backing for startups in exchange for part-ownership; and venture capital, a form of private equity that usually comes when a business has proven its potential for exponential growth. However, these options may not be available to a fledgling business unable to offer compelling proof of growth penitential or assets that lenders can use as collaterals.

“As a result, they are generally in favour of crowdfunding as a potential source of capital,” Harding says.

According to NCFA Canada’s Crowdfunding Directory, there are over 65 crowdfunding portals and 14 providers across Canada as of December 2013.

Most of these portals are based on donation or on reward, where people might receive the product down the road in return for money upfront. However, there are a few equity-crowdfunding-based portals such as SeedUps Canada, Optimize Capital Markets and the Social Venture Exchange that currently operate under existing prospectus exemptions and target accredited investors.

One of the most vocal proponents of crowdfunding in Canada is Sandi Gilbert, founder and CEO of SeedUps Canada, a platform that facilitates equity investments from accredited, eligible and ordinary investors into small to emerging businesses.

“Equity crowdfunding is needed in Canada,” says Gilbert. “By tapping the mass affluent — those investors outside the 3 per cent of high-net-worth individuals — small business will be able to thrive and prosper.”

The regulators, she adds, should look at a balanced approach, tailored to the three players involved: Companies that need to raise money without the burden of onerous disclosure documents; ordinary investors interested in early-stage companies; and the investment platform or portal that needs to facilitate the sale of securities.

However, Harding cautions that creating a regulatory framework that is fair to all participants could be tricky and the process slow.

“The crowdfunding opportunity represents a real challenge for regulators who are charged not only with creating a positive environment for investment but with the protection of investors as well,” he says. “In most cases, a company must prepare a prospectus or full disclosure document. Regulators recognize preparing such a document can represent a significant financial burden on small companies.”

And while a crowdfunding exemption will reduce issuer cost, it does not relieve regulators’ concerns about potential fraud perpetrated by so-called “bad actors,” Harding warns.

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