Small companies in Ontario and four other provinces will be able to raise money from investors through crowdfunding websites starting early next year.
Securities regulators said Thursday they have completed the final version of crowdfunding rules that will allow companies to raise up to $1.5-million in a 12-month period from people willing to invest through Internet sites.
The legislation is expected to come into force Jan. 25, which means crowdfunding could begin early next year. The new rules are being adopted by Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia, while Saskatchewan is publishing the same rules for public comment.
Other provinces have been adopting their own crowdfunding standards with different rules and investment thresholds.
Crowdfunding has become a growing source of financing for companies, but until now has been limited to donations and product purchases because companies have not been allowed to issue shares to investors. Regulators around the world have faced growing pressure to allow equity to be issued through crowdfunding sites as a way for small startup companies to find a bigger source of initial financing.
Howard Wetston, chair of the Ontario Securities Commission, said young people are comfortable investing through Internet options like crowdfunding sites, and small companies need more sources of startup financing.
"I think that's what we need, and we're in a different environment today," he said in an interview. "Our regulatory environment needs to recognize how society is evolving."
Because of concerns that fraudsters could target unsophisticated investors through crowdfunding schemes, the new rules include protections to try to weed out fraudulent companies, and to limit investors from risking too much money on a single opportunity.
For example, companies will only be allowed to raise equity from investors through web sites -- known as portals -- that are operated by registered dealers. That means companies cannot issue shares to investors through other general crowdfunding web sites that are not registered with securities regulators.
Registered portals will be required to review disclosure documents from companies seeking to raise funds and do background checks on companies' directors, executives and promoters.
Individuals who are accredited investors -- which means they are wealthier with more investment holdings -- will be able to invest up to $25,000 per crowdfunding investment, although Ontario will also impose a total annual limit of $50,000 for an individual's crowdfunding investments. However, Ontario will impose no investment limits for so-called "permitted" clients who have net financial assets above $5-million.
Non-accredited investors will be limited to a maximum of $2,500 per investment. In Ontario, they will face an annual limit of $10,000 on crowdfunding investments.
Investors will also have to sign a risk-acknowledgment form that will highlight the risks associated with the crowdfunding investment. Companies will have to give investors annual financial statements and annual notice about how they use money raised from crowdfunding.
Mr. Wetston said the protections were crafted to protect against abuse of the new system.
"I think what we've done here is ensure ourselves we've put into place enough investor protection to assure ourselves this is not a runaway train. We would not do it otherwise."