The crowdfunding ice melted in the Great White North last month when a group of six Canadian provinces adopted a common set of rules for equity and debt crowdfunding.
The Startup Crowdfunding Exemption, as the rules are called, allow non-public companies in participating provinces to raise up to CAD $250,000 per offering, with two offerings per year permitted. Individuals may invest a maximum of CAD $1,500 per offering into companies. The offerings must take place on a crowdfunding portal, although portals are not required to be broker-dealers.
The rules were released on May 14 and effective immediately.
The securities commissions of the six provinces—British Columbia, Saskatchewan, Manitoba, Québec, Nova Scotia and New Brunswick— cited the importance of investment crowdfunding as a new online method of raising capital, especially for startups and small businesses with limited access to funding.
As in the U.S., Canadian securities laws have barred private companies from soliciting investments from non-accredited investors. The new law creates an exemption for small private companies, allowing them to raise money publicly on crowdfunding portals.
Before then, only Saskatchewan allowed investment crowdfunding. It will now adopt the new harmonized rules.
While the new rules are a significant step forward for Canada, two large provinces, Ontario and Alberta, have yet to act.
Still, the move by Group of Six puts Canada closer to a national crowdfunding framework, while a similar law in the U.S. (Title III of the JOBS Act) is stalled in rulemaking at the Securities & Exchange Commission.
The Canadian rules come ring-fenced with constraints that apply to the issuers and the funding portals along with considerable investor protection measures:
- An issuing company must have its head office located in a participating provincial jurisdiction
- Issuer cannot be a public company or an investment fund
- Must provide an offering document using a standard form
- Issuers can raise up to $250,000 CAD per offering (with two offerings per year permitted)
- Offerings may be open up to a maximum of 90 days
- No ongoing reporting requirements
- May not invest more than $1,500 per offering
- Must live in a participating province
- May withdraw their offer within 48 hours of their subscription to the offering or notification that the offering document has been amended
- Securities are subject to an indefinite hold period and are not immediately tradable
- Head office must be located in Canada, and the majority of the portal’s directors must be Canadian citizens
- Funding portals must supply certain information on the portal and each of its principals to regulators 30 days prior to its first crowdfunding campaign
- Portals relying on the exemption do not need to register as broker-dealers, but they cannot provide advice or recommendations to investors, or collect a fee or commission from investors
- Must make offering documents and risk warning available to investors
- Portal must hold investor funds apart from its own, and must release funds to the issuing company once the minimum offering amount has been reached (if minimum is not reached, funds are returned to investors)
The rules are in force for five years, up to May 13, 2020 at which time, presumably, the experience of the preceding five-year period will be assessed and a decision made to continue, continue but modify or discontinue the initiative.
Why Now and What’s Next?
Why have these provincial securities regulators acted? Partly, it’s the dearth of capital from other sources of supply of early stage company financing particularly in those areas of the country that are relatively underserved.
93% of Canadian venture capital went to companies in just three provinces
For instance, in the first quarter of 2015, venture capitalists invested CAD $362 million in Canadian companies. But 93% of that went to just three provinces, according to the Canadian Venture Capital and Private Equity Association. Ontario alone captured $237 million, or 65% of the total, while Nova Scotia firms managed to attract only $14 million, or 2.2% in the same period.
Crowdfunding has already elicited huge interest in Canada, as evidenced by the overflow crowds attending introductory conferences and seminars put on by the National Crowdfunding Association of Canada.
In the short time since the six regulators acted, companies and investors are already moving to take advantage of the new freedom. A number of crowdfunding portals have launched. Frontfundr, based in Vancouver, has three active offerings, with one company reaching 33% of its funding goal.
It’s still early, but funding activity in the six provinces will likely jump over the next six to nine months. Canadian public policy has put a premium on spurring new company formation as incubators and accelerators have sprung up like mushrooms across the country.
All attention is now focused on Alberta and Ontario and what their crowdfunding plans might be going forward. Alberta has recently had a provincial election that resulted in the longstanding party in power being unceremoniously tossed out. One of the new government’s early decisions will be to name a new head of the Alberta Securities Commission (ASC). So, it’s not surprising that Alberta has lagged.
In Ontario, it’s likely that the actions of the six provincial regulators will prompt the Ontario Securities Commission (OSC) to speed up its own deliberations. Prior to May 14, officials had said that the OSC would release its own amended proposals in the fall of 2015.
The OSC’s previously proposed rules would require funding portals to be registered. In addition, it is in favor of raising investor and issuer limits to, respectively, CAD $2,500 per investor per investment with a CAD $10,000 per year maximum, and an annual maximum raise for companies of CAD $1.5 million.
Interestingly, the six provinces that have already moved to permit securities crowdfunding have committed to working on an ‘integrated crowdfunding exemption’ together with the OSC. And the higher investing and offering limits as envisioned by the OSC could co-exist with, and complement, those announced in mid-May.
What Crowdfunding Means for Politics and for Capital Providers
As elsewhere, crowdfunding has provoked debate in Canada. Despite the protections built in by the six securities regulators, there are those who don’t believe that people can be trusted with their money and who will still try to rob crowdfunding of its potential. They will continue to push regulators to tighten the rules in the name of investor protection. However, these naysayers will likely lose out to a coalition of financial libertarians, for whom people should be free to decide what to do with their money, and entrepreneurs and investors.
Securities crowdfunding has also stoked the fires of debate around where it fits in relation to angels and venture capitalists. Is crowdfunding the new competitor on the block? Or, will it become a venue for collaboration wherein angels and venture capitalists partner with successfully-crowdfunded enterprises to taken them to the next stages of growth? In short, is crowdfunding a potentially disruptive threat or a massive opportunity for the established suppliers of capital? Time will tell but there are already indications of crowdfunding organizations partnering with these capital providers to the mutual benefit of one another.
The reality is that early-stage company financing needs are large enough to accommodate all.
Richard Rémillard is President of Rémillard Consulting Group, an Ottawa-based consulting firm focused on the Canadian financial services industry. Richard has served as Executive Director of the Canadian Venture Capital and Private Equity Association, as Vice-President of the Canadian Bankers Association and as a Special Assistant to the federal Minister of Finance. He serves on the Board of Directors of the National Crowdfunding Association of Canada, the Private Capital Markets Association of Canada and is an Advisor to Start Up Canada, Venture for Canada and The Funding Portal. He can be contacted at firstname.lastname@example.org.