July 2, 2015— Canada has recently become another nation to pursue the viability of equity crowdfunding as a tool to finance small businesses. This past year nations from the United States to New Zealand to the European Union, enacting regulations and exemptions for equity crowdfunding. In a previous blog post we talked about how crowdfunding is set to overtake venture capital investment over the next year, doubling from $16 billion to $34.4 billion. This showcases the potential impact equity crowdfunding can have on the future of private company fund raising.
In various provinces in Canada, securities regulators have enacted rules and guidance on exemptions for companies fundraising through equity crowdfunding. British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia will participate in the new crowdfunding regulations, opening up the realm of private placement investment to the everyday person, even the unaccredited investor. Before, private companies could not solicit investments to the general public, meaning they could only advertise equity offerings from accredited investors and institutions like an investment bank or venture capital firm.
Under Canada’s previous securities law, the only way the general public could invest into a company is after the business went public through an IPO and thereby purchasing shares on the open public market. Now, this is no longer the case. Unaccredited investors can simply log on to a site and view an array of investment opportunities and select one that matches their investment objective.
In a 2011 report from the Venture Law Corporation, figures show that today there should be at least 1 million accredited investors in Canada among the total population of over 34 million. Looking at the demographics of the 25-65 age group, around 25 million Canadian residents could be eligible to participate in private placements. This is a potential 25x increase in the investor pool. Canadian Equity Crowdfunding platforms such as SeedUps and Cloudfund offer investors and companies the opportunity to meet on a common ground and find the most attractive opportunity. This previously excluded population, can now invest side-by-side with accredited and angel investors.
The regulation is called the “Crowdfunding Prospectus Exemption,” which does not require an issuer of securities to include a prospectus. And funding platforms are not required to register as a broker dealer, which follows the same general structuring in U.S. crowdfunding legalize. What this does is make the process cheaper, more efficient, and most likely faster. By allowing unaccredited investors to participate, limiting the amount of documents required for entering into a funding round, a ripe environment is established for crowdfunding platforms to operate in.
Some of the law’s provisions include:
- Companies can enter into up to 2 funding rounds in a year
- The maximum reusable amount is $2250, 000
- The maximum days the round can be open is 90
- Investors may only invest up to $1,500 per company distribution
- Crowdfunding portals may not offer investors advice or charge fees and commissions.
Equity Crowdfunding also presents a better option to reward and donation based crowdfunding as the latter gives an investor an actual stake in the business, which is ideally sold for at a greater value in the future. Donation based crowdfunding is not permitted to offer equity stakes. Equity gives investors a bigger incentive to support the company and also creates a mutual interest between company founders because their goal is to maximize shareholder value.
The ability to simply log on to an online platform to look for an investment opportunity among a pool of opportunities is what makes the equity crowdfunding realm a disrupting factor in the private placement space. For Canada, who has experienced a stagnating economy including a stretched out housing market and has felt the impact of the over 50% drop in oil prices over last summer, this can be the catalyst that spurs private business growth it so desperately needs.