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November 19, 2015

Equity crowdfunding in Ontario… finally (almost)

Earlier this month the Ontario Securities Commission (OSC) released its long-awaited equity crowdfunding rules for Ontario firms. As per Multilateral Instrument 45-108if approved by the Province, the new rules will come into effect January 25, 2016. As noted in this document, the point of crowdfunded equity is to “leverage the use of the internet and social media to facilitate capital formation primarily for start-ups and SMEs that foster innovation and to provide new investment opportunities for investors.”

Back in 2013 we published our report on Crowdfunding: Catalyzing Growth, Investment and Access to Capital. In it, we noted that:

crowdfunding seeks to address the long-tail entrepreneurs and small business owners whose needs are currently underserviced by traditional financing models, by tapping the long-tail of potential lenders and investors who increasingly seek to both “do good” by their investments, and play a more active role in the investment selection process.


The resulting Ontario regulations seem to have done a good job of finding a balance between the risks of these new investment mechanisms and the significant upside available to firms and investors alike. In our 2013 work on crowdfunding, while we recognized that several risks were present, we advocated for the introduction of four regulatory fixes that should mitigate those risks sufficiently without dampening the potentially transformative impact of this funding pool.

1. A ceiling on per deal investment by individual investors, as well as, for a trial period, a maximum annual contribution through equity crowdfunding platforms.

2. A maximum of two annual share issuances by applicant companies to ensure valuations remain transparent and accurate.

3. The development of a standardized template for annual corporate reporting for crowdfunded companies to ensure ongoing transparency and shareholder education.

4. The development of a revocable licence for equity crowdfunding platforms, judged on the basis of approval standards for applicant companies.


We`re subsequently pleased to see that the updated Ontario regulations include provisions that touch on each of these. In Particular, MI 45-108 includes these three explicit risk mitigation notices:

1. A limit on the total amount that can be raised will be imposed on issuers and investors will be subject to investment limits as a means of limiting their exposure to a highly risky investment.

2.The registration of the funding portal is a key investor protection measure as registration addresses, among other things, potential integrity concerns that may apply to funding portals and the persons operating them, as well as potential concerns relating to conflicts of interest and self-dealing.

3.Issuers are required to prepare an offering document that contains all of the information about the issuer and its business that an investor should know before purchasing the issuer’s securities.

The above won`t totally negate the risks for investors. They do, however, find the right balance between risk and return that educated non-accredited investors must be willing to accept in order to play in this new space. How transformative will crowdfunding be? That remains to be seen. However the introduction of this medium for raising capital ensures that the option is on the table for interested firms which, given our ongoing capital deficit for early-stage companies, is a problem that requires us to put every option on the table.


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