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Crowdfunding in Canada: Legal or Illegal?

posted Oct 5, 2014, 12:46 AM by J Shaw   [ updated Oct 5, 2014, 12:46 AM ]

Cambridge House held its Canadian Investor Conference event in Toronto, Ontario on 26 September 2014. The event was geared toward investors by bringing top thought leaders and companies who are interested in accessing investors.  BoardSuite Founder, CEO Oscar A Jofre was invited to participate in a panel along with John McCoach President TSX-V, Richard W. Carleton CEO, CSE, Cromwell Coulson CEO of OTC Market Groups, David Franklin Managing Director of WoodsWater Capital LP to discuss where is the money.  Full disclosure, I work with Oscar but this is a message and topic that are important for a wider audience to hear.

Canada Equity CrowdfundingThe panel began by discussing the state of Risk Capital in Canada and what needs to be done. The discussion began to get very interesting to the crowd listening when, John McCoach TSX-V President said “equity crowdfunding is illegal in Canada”. Oscar jumped right in to correct this comment by saying “that in fact it is legal and that currently Canada has equity crowdfunding portals operating”.

Oscar further clarified that there are two exemptions that the securities regulators provide to allow companies to raise capital from Canadians using crowdfunding. The Accredited Investor exemption is available across Canada, and the Offering Memorandum (“OM”) exemption which is available across Canada except for Ontario (although Ontario has proposed an OM model).

During the Q&A period, someone from the crowd asked a question why, based on his research, only the 1% of Canadians is being given access to investing in private deals.  This gentleman stated that he and others would also like to be given access to invest. This is the question being asked around the world by investors who are tired of being left out of investment opportunities. In some respects, equity crowdfunding is the result of those complaints.

Richard Carleton CEO of CSE commented that “equity crowdfunding should not be allowed as it will result in fraud”. The panel further commented that private companies should go public to access capital and equity crowdfunding is ok for small rewards based campaigns. Oscar Jofre stepped in to provide some facts stating;

assob“ASSOB [Australian Small Scale Offerings Board] the worlds first equity crowdfunding portal from Australia has had Zero fraud in almost 10 years of operation, with $145 million in capital raised and 85% of funded companies still in business”.

Not all companies want to go public (nor in my opinion should they if they are not ready or able to afford the high cost of maintaining a listing) and now there are secondary markets proposing to launch that would allow private company shareholders to sell their shares (Aequitas and the TMX are launching private company exchanges).

Fraud Enron MCI Worldcom Bre-xWith respect to equity crowdfunding leading to fraud, yes it will happen but it is not because of equity crowdfunding. Where there are dishonest people there will be fraud, it is unavoidable. But this is not a crowdfunding problem, but a general market reality. In fact, the implication that equity crowdfunding will create fraud and companies should go public is a fallacy. Public companies carry the risk of fraud as does any other type of investment. All you have to do is look at Bre-X, WorldCom and Enron, all companies that were publicly listed. Regulations are in place to minimize and mitigate the risks as much as possible but there will always be those that find a way to commit frauds. The crowdfunding rules are designed to help mitigate fraud with such requirements as annual audits, background checks on officers, directors, and larger shareholders. Similar due diligence that is done on private deals is also done in crowdfunding. Do not discount the fact that the crowd itself polices deals. You will find that social media and other forums are being used by investors to discuss deals and whistle blow on potential frauds.

Crowdfunding also has requirements for disclosure and reporting.

Regulations dictate a certain level of reporting which generally forms the minimum standard. Crowdfunding portals themselves usually have their own standards above and beyond those required by regulators. Why would the portals have extra standards? Because they realize to be successful they need to protect their investors.

Canada LoonieA regulatory blunder, in my opinion, was the naming of one exemption as an “Equity Crowdfunding Exemption”. By naming one exemption Equity Crowdfunding the regulators have confused the public. The Accredited Investor and Offering Memorandum exemptions are equity crowdfunding if they are done through a website or online portal. If you compare this to the U.S. where in September 2013 they launched Title II, which is only available to Accredited Investors much like the similar exemption in Canada, it is widely accepted as equity crowdfunding. Thus Canada has two exemptions (or methods) in which to equity crowdfund with the third one being the poorly named “Equity Crowdfunding Exemption” coming shortly. Having two options is better than most jurisdictions around the world. Unfortunately people are wrongly being told equity crowdfunding doesn’t exist in Canada and there are not many portals launching.

In summary, Equity Crowdfunding is LEGAL in Canada under the Accredited Investor and OM exemptions and the rules are in place and will constantly be revisited to protect investors. But regulation only goes so far, so caution to all investors is to be diligent and do your homework to investigate an opportunity you invest in, whether public or private.

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