Companies would be able to raise capital online from widened pool of non-accredited investors, according to proposed rules
The B.C. Securities Commission put forward a proposal that would allow equity-based crowd funding, as Canada’s security regulators propose new exemptions that would change how much and from whom early-stage companies raise capital.
B.C.’s proposal is modelled on changes made by Saskatchewan’s securities regulator last December that allow the general public to buy shares and ownership in small companies. Under the proposed exemption, early-stage private companies could raise up to $150,000 from non-accredited investors without issuing a prospectus.
B.C. joined other members of the Canadian Securities Administrators in publishing the proposed start-up crowd-funding exemption for comment. CSA is an umbrella organization comprising the provincial securities regulators. Regulators in B.C. and Alberta however did not join the other provinces in a second, more extensive proposed exemption.
Under the proposed rules, startups in B.C. would be allowed to distribute securities without a prospectus. A company could raise up to $150,000 per offering, with up to two offerings a year. Each investor would be allowed to up to $1,500 per offering via online portals similar to Kickstarter or Indiegogo.
"We feel that this crowd funding model could address a gap in the financing needs of startup and early-stage companies in B.C.," said Brenda Leong, chair of the BCSC, in a statement. "We think it could fit well within the existing exempt market regime available to small businesses."
Proponents of equity crowd funding, many of whom are still sifting through the changes, see it as a way to raise capital, selling equity in a company to unaccredited investors without engaging in the costly process of going public.
“This is going to move the needle for capitalization,” says Craig Asano, executive director of the Toronto-based National Crowdfunding Association of Canada, which has been pushing for these changes for the last few years. The changes "will fill the early-stage funding gap for companies,” he says.
“I think its’ excellent, particularly for the tech industry,” says Alixe Cormick, a Vancouver securities lawyer at Venture Law Corp. Despite B.C.’s fundraising cap of $150,000, which is low compared to public fundraising, Cormick says that the changes will allow a number of people to get to the early-stage off the ground. With the changes, companies will not need audited financial statements and there will be no net worth or annual income restrictions on who can invest in a private company, according to Cormick.
The widened investor base, and more lax standards on accredidation, has some organizations concerned. Last October, FAIR Canada, the Canadian Foundation for Advancement of Investor Rights, compared equity crowd funding to “the Titanic heading into Iceberg alley.” The organization warned that investors would not be protected by the usual securities regulations when they participate in equity-based crowd funding, and that most Canadians don’t understand the risks involved.
The BCSC, in conjunction with the Canadian Securities Administrators, has put its proposal to public comment until June 18.