Two equity crowdfunding models for Canada
On March 20, the Canadian securities landscape radically shifted when seven Canadian securities regulators published requests for comments on two proposed versions of equity crowdfunding models.
The proposed models are from the Ontario Securities Commission and the British Columbia Securities Commission (BCSC). The BCSC proposed adopting the crowdfunding model that was launched on December 6, 2013, by Saskatchewan securities regulator the Financial and Consumer Affairs Authority. The two models highlight two issues.
- The Canadian securities landscape has been altered in a revolutionary manner. For the past two years, the calls have been growing louder for securities regulators to democratize the way that the public accesses private equity deals by purchasing them on the Internet. There have been impassioned and principled debates from both sides of the discussion. The announcements from the regulators have changed the status quo of the past 70+ years of the securities industry and firmly state that the way we do business in Canada is about to change. There are a number of changes to the industry laid out in the proposals; however, the most important change is that private equity deals will potentially be accessible to all individuals and no longer simply reserved for those investors who meet the regulators’ definition of wealthy or sophisticated.
- The two proposals are significantly different. If left as is, the two significantly different proposals will create a bifurcated crowdfunding regime in Canada. Whatever the arguments for and merits of the two proposals, it is the stakeholders—that is, the public, the ventures, the issuers and the securities industry—that will have to bear the increased costs and confusion of a bifurcated system. This may limit the success of crowdfunding in the country.
The purpose of crowdfunding is to enable innovative small- and medium-size enterprises that need startup capital to access a larger number of people and investors. The power of crowdfunding comes from leveraging online technology and social media to spread the word about a worthwhile project, business or idea. Crowdfunding’s success will be based on the access to large numbers of people; therefore, the smaller the crowd created by the bifurcated regimes, the smaller amount of money any prospective issuer will be able to raise. Some of the differences between the two proposals are highlighted below.
| Ontario model | Saskatchewan model | |
| Jurisdictions adopted or proposed | Adopted: None. Proposed: Ontario, Quebec, Manitoba, Nova Scotia, New Brunswick and Saskatchewan | Adopted: Saskatchewan. Proposed: British Columbia, Manitoba, New Brunswick, Nova Scotia and Quebec |
| Offering size | $1.5 million per year | $150,000 up to twice per year |
| Limits on the types of securities | All, except derivatives | All, except derivatives |
| Disclosure | Disclosure document at point of sale | Minimal disclosure |
| Ongoing disclosure obligations | Annual financial statements, along with proper securities registers and documentation on how funds were spent | Not specified, but presumably as required under corporate legislation. |
| Audits | Audited if more than $500,000 is raised and/or expenditure exceeds $150,000 or if issuer is a reporting issuer. Statements reviewed if less than $500,000 is raised. | Optional |
| Investor risk acknowledgement | Yes, signed by each investor | Yes, signed by each investor |
| Cap per investor | $2,500 per issuer by an investor, $10,000 per rolling year | $1,500 per issuer by an investor, unlimited number of investments with different issuers |
| Statutory rights of action | 48-hour right of withdrawal, statutory right of action against issuer if misrepresentation in offering document, or any document or video made available to the investor | None |
| Funding portals must be registered with the regulator | Must be registered as a restricted dealer | Portals provide 30 days notice of intent to act as a portal |
The progress and innovation in Canada’s capital markets is welcome and highlights the regulators’ often-stated desire to be forward-looking 21st-century regulators; however, Canada needs a harmonized approach to equity crowdfunding. Without issuers in one jurisdiction being able to raise funds from investors in another, and vice versa, the power of crowdfunding is compromised. With two proposed equity crowdfunding models on the table, we need now more than ever all of the stakeholders to focus on creating the right solution for the Canadian capital market.
Feature photo credit: Untitled by Duckie Monster, used under CC BY-NC 2.0 / cropped