Canada's provincial securities regulators are tough to push around.
For three years, the provinces, with the exception of Ontario, dug in as Finance Minister Jim Flaherty mounted a full frontal assault on their domain over securities, taking the matter to the Supreme Court of Canada. The judges sided with the provinces, forcing Mr. Flaherty to back off.
Now, the provincial regulators are about to be tested again, but by a vastly different foe: the Facebook generation.
Canadian Internet and technology entrepreneurs are gathering a volunteer army of lobbyists to force provinces to loosen restrictions on purchasing shares in closely held companies.
The battle is over crowdfunding, a money raising strategy that uses social media to round up relatively small contributions from multiple people. At stake is access to hundreds of millions of dollars in financing for Canadian start-ups.
In only a few years, tech-savvy entrepreneurs have carved out a niche in the finance industry. Globally, more than 450 crowdfunding platforms generated funds of about $1.5-billion (U.S.) in 2011, a 63 per cent increase in three years, according to Massolution, a research firm. This year, Massolution projects the money raised on crowdfunding sites will double, to more than $2.8-billion.
Frustrated by Canada's notoriously shallow venture capital pool, Canadian entrepreneurs see crowdfunding as a way to get good ideas out of the garage and into the marketplace. But crowdfunding's potential will be limited until provincial regulators loosen their investor-protection regimes.
Raising equity through crowdfunding is essentially illegal in Canada because of strict limits on the number of investors companies can take on without listing on a stock exchange, and provisions that demand that private companies can sell stakes only to "accredited" investors.
"Fraud funding" is a legitimate concern, but other jurisdictions are showing less concern than Canada's provincial authorities. Lawmakers in the United States eased similar restrictions earlier this year, deciding that the economic benefits of crowdfunding outweighed the threat from fraudsters.
"This is a new wave in entrepreneurship," said Kris Roberts, a Vancouver real estate agent who recently started GIVE Group, through which she hopes to both earn a living and satisfy a benevolent streak by creating a network of real estate agents who pledge to donate a percentage of their commissions to charity. "I'd love to see the rules change in Canada. Why is Canada dragging its heels when the U.S., the U.K. and France are all forging ahead?"
Exhibit A for crowdfunding's potential is Vancouver native Eric Migicovsky and his California-based company Pebble Technology Corp Mr. Migicovsky was struggling to win backing from venture capitalists to finish a high-tech watch that connects to smartphones, so he turned to a crowdfunding site called Kickstarter, hoping to raise $100,000. He ended up with more than $10.2-million through contributions from nearly 69,000 people.
"This is game changing," said Cindy Gordon, founder of social media company Helix Commerce International Inc. and chairwoman of Invest Crowdfund Canada, a group of technology entrepreneurs assembled by the Canadian Advanced Technology Association.
Ms. Gordon and other advocates talk about crowdfunding as a disruptive innovation that will democratize investing by allowing someone with a few thousand dollars to get in a game that is currently controlled by angel investors and venture capital funds.
Mr. Migicovsky's Pebble got around the rules by offering his contributors watches instead of shares. But Ms. Roberts doesn't have anything tangible to trade for contributions. It's legal to use crowdfunding to raise money for charitable causes, but Ms. Roberts says the paperwork and expense to register as a charity are too onerous.
Ms. Roberts's best short-term hope may lie south of the border.
Earlier this year, President Barack Obama signed a law that clears the way for equity crowdfunding, albeit under some constraints. (For example, an investor who makes less than $100,000 a year will be permitted to contribute no more than five per cent of his or her income.) The Securities and Exchange Commission is working on more detailed guidelines that will determine how the government's directive is enforced. That work is expected to be completed by early next year at the latest.
For now, Canada's provincial regulators are mostly content to see what happens in the U.S. before proceeding with any rule changes.
"We are interested in the phenomenon of crowdfunding and we are following developments," said Cathy Beauséjour, a spokeswoman for Quebec's securities regulator. "This practice presents public policy issues, particularly with regard to investor protection, that we need to thoroughly analyze."
In New Brunswick, Premier David Alward has directed officials to study crowdfunding, but Mr. Alward's spokesman, Jesse Robichaud, said no legislative changes were imminent. The Ontario Securities Commission is studying whether to expand the list of exemptions it allows under its investor-protection regime, a review that will include an examination of crowfunding. The British Columbia Securities Commission plans to make crowdfunding a specific agenda item at a conference later this year.
The crowdfunding lobby in the U.S. faced similar skepticism. But within a year, a group of entrepreneurs with little knowledge of the ways of Washington managed to change the rules. They used social media to their advantage and pushed an argument that resonated in Congress: Crowdfunding will create jobs.
Canada's provincial securities regulators, and the politicians who ultimately oversee them, are about to face a similar barrage.
"This is no longer a new thing," Ms. Gordon said of crowdfunding. "It won't cost governments any money, and it creates jobs. These are good messages."
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