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Earlier this year, several new crowdfunding rules were announced that allow retail investors the ability to participate in the raising of capital for small businesses.Getty Images/iStockphoto

New entrants are arriving to Canada's crowdfunding scene now that regulators have provided further clarity on rules for the burgeoning industry, opening up fresh opportunities for both investors and small businesses.

Earlier this year, several new crowdfunding rules were announced that allow retail investors the ability to participate in the raising of capital for small businesses. Marketplace lenders, also known as peer-to-peer lenders, typically link up borrowers who are looking for capital with investors that are looking for higher-than-average returns.

In Ontario, a new offering memorandum exemption was implemented allowing retail investors to be able to invest up to $10,000 into the private capital markets annually. (Some higher-earning individuals earning could invest more if they received professional advice.) At the same time, Ontario has introduced a crowdfunding exemption where companies are now able to raise funds from retail investors publicly online once they register a funding portal with provincial securities regulators. Investors can invest $2,500 per company – up to a maximum $10,000 total in the same calendar year.

Regulators in British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick finalized an investment dealer prospectus exemption that allows any investor who has obtained advice about the suitability of the investment from an investment dealer to participate directly in private placements.

With the new regulations, some U.S. lenders are now looking to set up shop north of the border.

U.S. player InvestNextDoor is in the process of registering in Canada as an exempt market dealer – a firm that is able to sell investment securities that haven't been qualified by a prospectus due to regulatory exemptions. Its Canadian site – – will become the next online marketplace lender for Canadian small businesses looking to raise funds, as well as for investors looking for alternative investment options.

The U.S. platform launched two years ago in Washington by Canadian co-founders Tabitha Creighton and Lisa Ohman. The two female co-chief executive officers originally planned to start their company in Canada. But due to the regulatory environment at the time – and the lack of lenders in the Canadian industry space – Ms. Creighton says they decided to enter the more mature U.S market.

"At the time, there were far too many things left unclear in the Canadian market, so we looked at what was happening from a regulatory perspective at the U.S. peer-to-peer lending space," Ms. Creighton says. "We were waiting for the Canadian industry to catch up to the U.S one."

The peer-to-peer lending market has been a difficult industry to navigate for new entrants. Up until now, many providers would fund loans exclusively from accredited investors – those who typically have a net worth of $5-million or $1-million of investable assets – or from institutions.

Online lender Lending Loop, which launched last fall prior to the new crowdfunding rules, was the first Canadian provider to allow retail investors access to the private capital market. But it has since temporarily halted any new loan requests on its online marketplace. In a company blog post dated on Tuesday, the company wrote it is "currently engaging in discussions with the appropriate securities regulatory authorities." Company officials would not comment further when contacted by The Globe and Mail.

Now, with the regulatory landscape changing in Canada, new entrants won't be testing the waters before launching. InvestNextDoor is opening a separate platform for Canadian small business and retail investors that will allow them to either invest directly to a particular company listed on an online marketplace or they can join a community fund. The community fund will allow investors to select a region or city that they want to participate in and includes 50 to 100 local businesses who seek funding.

"Investors really do want to invest locally – when we conducted our early stage research we found that investors wanted to invest in markets they were comfortable with and ones they associate with– such as their own community," says Ms. Creighton. "That aspect was often more important for investors than what their return would look like."

Canadians will be able to invest a minimum of $500 and select investment terms of six months to five years. Interest rates for the investors anywhere from 6 per cent to 25 per cent, although the average return on investment hovers around 12 per cent to 13.5 per cent, Ms. Creighton says. The return doesn't come without risk, and investors should be aware of the higher risk involved with private capital investments.

It's not the first U.S online lender to enter the industry. New York-based OnDeck entered the Canadian market in 2014 offering small businesses loans through an online platform. The company has yet to open its doors to retail investors but that could change as the industry continues to mature in Canada, says Gary Fearnall, country manager for OnDeck in Canada.

"The small-business market continues to be underserved in Canada with over 1.1 million businesses in the market, and almost half of those are looking for capital," Mr. Fearnall says.

Marketplace lending in Canada is still in its infancy compared to other jurisdictions, but new competitors could start to drive acceleration in the market, says Steven Uster, CEO of Fundthrough, a marketplace lender for small business loans.

"There are way fewer platforms in Canada than in other countries, so it is very exciting to welcome new competitors to the industry," Mr. Uster says. "Seeing new players in the fintech lending arena not only validates our business model but it also has the potential of lowering interest rates for small businesses in Canada."

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