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OSC warns ‘crowdfunding’ trend raises fraud worries

Lobby of the Ontario Securities Commission.

Philip Cheung/philip cheung The Globe and Mail

Ontario regulators are considering new rules to allow small companies to raise money from the public over the Internet, but warn the "crowdfunding" trend raises significant concerns about the potential for fraud.

The Ontario Securities Commission issued a report Friday seeking public comment on possible rule changes to permit companies to raise funds over the Internet, but said there is no guarantee any rule will be approved and the idea is still in the exploratory stage.

"Based on the feedback received from stakeholders and further consideration of investor protection and other regulatory concerns, we may decide not to introduce a crowdfunding exemption in this or any other form," the OSC report says.

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Crowdfunding is an emerging trend that sees individuals and small firms to solicit small donations or investments from many people over the Internet to fund a cause or project.

U.S. legislators have laid the groundwork for approval of crowdfunding in the JOBS Act passed in April, although the U.S. Securities and Exchange Commission has not yet developed the detailed rules to permit its use by businesses seeking to raise capital.

Proponents say crowdfunding is a new and inexpensive source of capital for start-up businesses that cannot easily access other traditional funding.

The OSC comment paper, however, warns it may not be an ideal source of funds for many companies who will potentially have a large number of unsophisticated investors. And it may be dangerous for investors who may fall prey to fraudulent pitches and who may not understand the risks.

"Allowing investments to be made through the Internet may raise heightened concerns regarding the potential risk of fraud and abuse," the report says.

Among possible policy options outlined in the paper, the OSC said it could impose a limit of $2,500 on the total amount an investor can make in a single investment, could require investors to sign a form acknowledging they can bear to lose the entire investment, and could require a two-day cooling off period to let people change their minds and get their money back.

The comment paper notes that permitting firms to raise capital from ordinary retail investors over the Internet "would represent a significant change to the current exempt market regulatory regime."

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Currently companies that raise capital from the public must either issue a formal prospectus, which is reviewed by securities regulators, or must only sell to investors who qualify to purchase investments in the so-called "exempt market." That typically means wealthy investors or those who can make a large minimum investment.

The OSC comment paper also asks for feedback on other possible changes for investing in the exempt market.

The commission said it is considering introducing a "family, friends and business associates" category of permitted exempt market investments. The exemption was approved in 2004 in all other provinces, but was not adopted in Ontario.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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