Until recently, the majority of retail investors were locked out of Canada’s private capital markets – mainly for their own protection.Getty Images/iStockphoto
Several new crowdfunding rules across Canada are opening the door to retail investors looking to put dollars directly into companies that want to raise funds in the private capital market.
Until recently, the majority of retail investors were locked out of Canada's private capital markets – mainly for their own protection. Companies looking to gain access to capital were limited to accredited investors, usually those with a net worth of $5-million or $1-million of investable assets.
Accredited investors make up only about 4 per cent of the Canadian population, according to the Ontario Securities Commission; such a small percentage was limiting the pool for Canadian companies to gain access to capital.
Now, that's changing, as a number of provinces have implemented regulatory changes allowing businesses to have access to a bigger pool of investors for crowdfunding opportunities. These are known as "exemptions" and there are some key differences that retail investors should note.
Investment dealer prospectus exemption
Regulators in British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick finalized an exemption on Jan. 14 that now allows any investor – who has obtained advice about the suitability of the investment from an investment dealer – to participate directly in private placements.
Previously, if a company wanted to raise capital from retail investors, typically the only available exemption was through an offering document – which is any material used by a company to sell its shares. Companies rarely used this kind of exemption, as it was time-consuming and expensive to compile these documents and targeted only a small pool of accredited investors.
"Canadian regulators are allowing more investors to qualify for direct investment into public companies, and that is creating new opportunity for both the public companies raising capital, and investors, says Justin Meiklem, vice-president of sales at Stockhouse.com – one platform for online private placement offerings. "In the next few years, I'd expect the provinces to standardize exemption rules for financings, and to see a big lift in the number of shareholders involved in these [capital] raises."
Offering memorandum prospectus exemption
Ontario was the last province to implement an offering memorandum (OM) exemption, which became effective on Jan. 13. Retail investors can gain access to companies that are at various stages of development once an OM document has been made available. Unlike the investment dealer prospectus exemption, which has no cap on the amount to be invested, the Ontario Securities Commission has imposed limits with this exemption to protect the general public.
Retail investors are able to invest up to $10,000 annually. Individuals earning at least $75,000, or $125,000 a household, can invest up to $30,000 – or $100,000 annually if they receive advice from a portfolio manager, investment dealer or exempt market dealer.
Crowdfunding prospectus exemption
Quebec, Manitoba, New Brunswick and Nova Scotia already had crowdfunding exemptions in place, but last month security regulators added a registration regime around the same time Ontario introduced a new crowdfunding exemption. The changes will allow companies to crowdfund online through registered portals.
The majority of companies using this exemption are in the early stages of development and, unlike with the OM exemption, are now able to raise funds from retail investors publicly online once they register a funding portal with provincial securities regulators – a critical investor protection measure, Huston Loke, director of corporate finance at the OSC, said in an e-mail to The Globe and Mail.
"All funding portals offering securities must be registered and will fulfill specific gatekeeper functions, such as getting background checks on the company and its principals and reviewing disclosure," Mr. Loke said.
Even with companies registered through a portal, the OSC continues to be cautious about investor protection. A retail investor has a much lower limit per investment ($2,500), and cannot invest more than $10,000 in total in the same calendar year.
Both the OM exemption and the crowdfunding regime include similar investor protection measures, such as investment limits, disclosure documents and a risk acknowledgment form.
Note: While these exemptions typically provide higher rates of return, they do come with much higher risk than an average retail investment product. If unfamiliar with these investment products, investors should seek professional advice.
Clare O’Hara