As a light snow blanketed Toronto, more than 400 people converged for the second annual Canadian Crowdfunding Summit March 2-3 in Toronto. Attendees had much to talk about: since the last time they gathered, Canada had enacted three new securities exemptions and begun harmonizing rules across the country.
The new rules coincide with a spike of new equity and debt platforms looking to jumpstart the country’s young crowdfunding industry. There are currently 120 crowdfinance platforms across Canada, including rewards, equity and lending—up significantly from a year ago.
“This is the industry’s startup year in Canada,” said Tabitha Creighton, CEO and cofounder of InvestNextDoor, a crowdlending platform active in the U.S. that is expanding to Canada. Creighton, a native of British Columbia, said the improving regulatory environment in Canada had prompted the move.
Canada faces unique challenges. In contrast to the U.S., which since the Securities Act of 1933 has operated under a federal securities framework, Canadian securities laws are set by its ten provinces and three territories. That has led to a patchwork of regulations (akin to the state “blue sky” laws in the U.S.)
As Canada’s largest province and its financial center, Ontario holds much sway. It attracts the bulk of the country’s venture capital investments, and half of Canada’s crowdfinance platforms are based there. The Ontario Securities Commission (OSC) has a reputation as a strict regulator, and its moves are closely watched—and often adopted—by other provinces.
That’s why Ontario’s embrace of the Integrated Crowdfunding Exemption, which went into effect on January 25, was so eagerly awaited. “We are committed to fostering a vibrant capital raising ecosystem and reducing regulatory burdens,” Monica Kowal, vice chair of the OSC told the assembled crowd. (Interestingly, more than half of the OSC commissioners, including the chair and vice chair, are women).
Canada’s current securities exemptions include the following:
Integrated Crowdfunding Exemption
Canada’s newest law is the Integrated Crowdfunding Exemption, which went into effect in Ontario, Manitoba, Quebec and New Brunswick on January 25. (Saskatchewan intends to implement the exemption as well).
Companies to raise up to $1.5 million from the public in a 12-month period under the law, and must provide investors with a crowdfunding offering document.
Retail investors are capped at $2,500 per deal and an aggregate of $10,000 per year, while accredited investors can invest $25,000 per deal and $50,000 in aggregate per year.
The first deal under Ontario’s exemption— an $800,000 raise by Lux Wind Turbines on the crowdfunding site FrontFundr—went live on March 3. Funding portals must register with the OSC or appropriate provincial authority.
Start-up Crowdfunding Exemption
In June 2015, six provinces— British Columbia, Saskatchewan, Manitoba, Québec, Nova Scotia and New Brunswick, adopted the Start-up Crowdfunding Exemption. Under that law, issuers can raise up to $250,000 from the public, up to two times per year. They must provide a crowdfunding offering document, but financial statements are not required. Investors are limited to $1,500 per deal.
Offering Memorandum Exemption
Another exemption, called the Offering Memorandum, allows issuers to raise money from the general public, with some limits. The OM, part of something called the National Instrument 45-106 Prospectus Exemption that preceded crowdfunding exemptions, has been available in most provinces, with slight differences. Several provinces impose limits on investors who do not meet the threshold of an “eligible” investor—defined as having an annual income of $75,000 (or $125,000 with a spouse), or net assets of $400,000, or being a close friend, family or business associate.
On January 13, Ontario became the last province to adopt the OM exemption, but with stricter terms. Retail investors can invest $2,500 per company, up to a maximum $10,000 total in the same calendar year.
Eligible investors, meanwhile, are capped at $30,000 per 12-month period, unless they receive professional financial advice. In addition, issuers must provide ongoing disclosure, including audited financial statements and annual updates on how the funds raised were spent.
At least five other provinces are adopting Ontario’s more stringent OM rules.
Two remaining provinces, Alberta and Nunavut, have proposed a Prospectus Exemption for Start-Up Businesses and are expected to finalize that rule in the coming months.
In addition to the crowdfunding exemptions, Canada also has an Accredited Investor Exemption and one for friends, family and business associates.
Widening the Pool
Investment crowdfunding opens up new opportunities for investors as well as entrepreneurs. As in the U.S., most Canadian investors were cut off from private investment opportunities before the new laws. Accredited investors make up just 4% of Canadians, according to the OSC.
Conference attendees expressed optimism for Canada’s crowdfunding industry, which raised an estimated $247 across all types of crowdfunding platforms last year. “The early stage funding ecosystem has reached a tipping point with the adoption of crowdfunding across the majority of provinces and sectors,” said Craig Asano, Executive Director of the National Crowdfunding Association of Canada, which organized the conference. “We hope regulations will keep pace with the markets and remain competitive with leading countries such as the U.S. and U.K., and look forward to future treatments that help democratize peer-to-peer lending in Canada.”