Canada’s securities regulators are opening up an entirely new route for small companies to raise money using the Internet. The cautious new regime unveiled on Thursday will allow companies for the first time to raise capital and issue shares through crowdfunding websites, but under a slew of restrictive conditions aimed at trying to prevent crowdfunding from becoming the new stock-fraud vehicle of choice.
Crowdfunding has become a surprisingly popular option for individuals and small companies to raise tiny donations – as little as $1 each – from thousands of people over the Internet, to finance projects such as documentary films or the development of new technologies. Until now, all such financing in Canada has been in the form of a donation, sometimes in exchange for a small gift of a company’s product, because companies are barred from issuing shares to give investors an ownership stake in the firm, except under narrow conditions outlined by provincial securities commissions.
Those conditions are about to be broadened considerably. On Thursday, most of Canada’s provincial securities commissions said they will proceed with new rules – with variations in details among the provinces – to allow crowdfunding of equity offerings under limited conditions. Under proposals issued for public comment, investors will be able to invest a maximum of $2,500 to take an ownership stake in a single equity investment in Ontario, and companies will be allowed to raise a total of $1.5-million a year. Even with tight limits on the sums, the rules have the potential to revolutionize how start-ups can raise funds in Canada.
Investor advocates have raised concerns that crowdfunding sites can be abused by unscrupulous people to commit frauds. Regulators have responded with an array of protections, including a requirement that crowdfunding websites register with regulators, do background checks on people using their sites to raise equity, and review the adequacy of their disclosures.
It is a reasonable compromise, given that securities officials cannot keep the crowdfunding door closed forever. With over 70 crowdfunding portals now existing online raising $3-billion to $5-billion each year, it is increasingly clear that crowdfunding represents the future of fundraising for small enterprises. Canada’s new rules are a good starting point to try to protect investors from fraud while adapting to a new investment reality.