Quebec startups, start your equity crowdfunding engines. On Friday securities administrators for five provinces in Canada agreed to a new set of rules that will allow small startups to equity crowdfund up to $500,000 a year from individuals.
CBC News reported that administrators in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia agreed to the stipulations that must be completed through Internet funding portals – but not through traditional crowdfunding sites like Kickstarter and Indiegogo.
Before, startups and other small businesses could crowdfunding cash through various websites, but they couldn’t offer a piece of their company to those who helped them out.
Individuals will now have the opportunity to invest up to $1,500 at a time on a crowdfunding campaign. Those individuals will also be given the right to rescind on their offer within 48 hours of making the pledge. Companies can only raise up to $250,000 in any one campaign, and are limited to two campaigns in one year. Each campaign will be available for a maximum of 90 days. Currently there are no portals that are ready to accommodate equity crowdfunding.
The securities regulators have been working on the new set of rules for a year, and raised the investment cap from $150,000 to $250,000 after commenters said that $150,000 would be too small a figure for a startup. Saskatchewan securities regulators have had their own equity crowdfunding rules since December 2013, and can be credited as the first province to adopt such rules. The province does plan to adopt the new harmonized rules.
Ontario, meanwhile, is drafting up its own regulations. The province is expected to create a system that would force the online portals to register with the securities commission, something the other provinces aren’t enforcing. It’ll also likely offer a higher offering limit and investment limit.
Businesses who wanted to sell securities such as stocks, options or bonds had to register with the FCNB, or file a prospectus, subject to a number of conditions. But now the new start-up crowdfunding exemptions allow a company to sell securities without preparing and filing a full prospectus, or a document that describes the investment and the associated risks to the investor. However, they still do need to create a document with basic information about the issuer, its management and the distribution, including how the issuer intends to use the funds raised through crowdfunding.
Complete requirements and more details are available online.
Not everyone is happy with the new rules though. As BNN reported, investor advocacy group FAIR Canada is worried crowdfunding will become a ‘magnet for scams’ as fraud becomes easier.
“Under the best of circumstances, startups are very risky and the vast majority fail,” Neil Gross, executive director of FAIR Canada said to BNN in an email. “But crowdfunding will probably bring us the worst of circumstances: low barriers to entry will allow vast numbers of bad business ideas to compete with good ones for funding.
Perhaps most importantly, BNN posed the question of “will equity crowdfunding help spark venture capital, or turn it on its head?”
“I would argue that the better financing for companies to grow is venture capital for a number of reasons…VC backed companies grow three times as fast,” responded Mike Woollatt, the CEO of the Canadian Venture Capital and Private Equity Association (CVCA). “But this is a nice bridge. It’s almost a friends-and-family round if you will.”