In a previous post (see: http://deepcentre.com/blog/crowdsourced-equity-navigating-rough-regulatory-waters) I noted the turtle-paced progress of American legislative reform on equity crowdfunding.
Here in Canada, where it is currently illegal for a company to sell equity through a crowdfunding-type mechanism, progress is starting to bear fruit. In late 2012 the Ontario Securities Commission (OSC) opened a consultation on the topic with the aim of considering exemptions to current securities regulation that would allow the legalization of crowdfunding in Ontario (OSC 2012).
In June 2013 the OSC approved a limited term exemption to MaRS, a Toronto-based not-for-profit, for the establishment a crowdfunding platform for accredited investors. The MaRS Social Venture Connexion (SVX), while not the fully public platform that advocates have sought, will allow investors to crowdfund investments that show a “demonstrable social and/or environmental impact and less than $25 million in revenues” (Sellers and Oliver 2013). While certainly a move in the right direction, limited participation to accredited investors once again puts significant limits on the pool of potential participants and thus the ability to scale the platform to an efficient size.
Across the country in Saskatchewan, the Saskatchewan Financial and Consumer Affairs Authority (FCAA) released a concept proposal on July 9, 2013 that would see equity crowdfunding for start-ups legalized. Under the prairie-province’s plan, equity issuers will be able to raise no more than $100,000 (CDN) twice a year. Investors will be limited to investing no more than $1,000 per deal, however there is no ceiling on the aggregate amount an investor can make over the course of a year (FCAA 2013). As of the time of writing, similar consultations have been launched in British Columbia, Alberta and Quebec.
These consultations and pilots come as pan-Canadian support for this alternative financing mechanism grows. Chief amongst supporters is Canadian Advanced Technology Alliance (CATA). In an open letter to Federal Minister of Industry Christian Paradis, CATA notes that “There is every reason to suggest that frustrated Canadian entrepreneurs will see the advantages offered by the crowdfunding provisions for raising capital when those provisions are implemented in the United States, and they will take their best ideas to the U.S. to develop and commercialize.”
CATA President John Reid adds, “Innovation is declining in Canada; we need to change more rapidly to become a more intelligent nation. Crowdfunding investing can help make that transformation happen.” Owing to the rejection of a proposed national securities regulator by the Supreme Court of Canada in 2011, CATA is focusing its lobbying efforts on a province-by-province approach to amendments in securities legislation.
As in the U.S., opposition to the introduction of equity crowdfunding does exist. The OSC notes that through its consultation process, “almost all” of the 26 comments received on the proposed exemption to securities regulation were opposed to crowdfunding on the basis of a lack of data. This opposition notwithstanding, the OSC has committed to further study crowdfunding, having acknowledged that it represents a potentially effective means of delivering capital to SMEs (OSC 2013).
This notion that the Canadian innovation and economic ecosystem is at risk of falling behind is furthered by data on which jurisdictions have been the most aggressive in establishing regulatory regimes to enable crowdfunding. While Canada is in line with its European peers vis-à-vis the number of crowdfunding platforms established (2012 data), it lags the US significantly. Moreover, when it comes to equity crowdfunding, European countries such as Germany, Spain and Italy have each established national regulations that permit this form of equity investment (ECN 2012).
The experience to date across these jurisdictions makes it clear that the current period represents a learning process. No single model of regulation has emerged. Nor is there consensus on how best to protect the interests of investors.
This uncertainty, however, cannot be used as an excuse not to move forward with experimentation in the field. Given the funding challenges that exist for Canadian start-ups and SMEs, and given the economic and employment implications that accompany underperformance in firm creation, it is imperative that policy makers open all appropriate avenues for firm growth. Equity crowdfunding, if framed with appropriate limits on investor exposure and appropriate requirements regarding firm disclosures, is part of the solution.