Overview of the Regulations
After several months of anticipation, securities regulators in five provinces (Ontario, Quebec, Manitoba, New Brunswick and Nova Scotia) announced new equity crowdfunding rules. Beginning in early 2016, the rules will allow businesses to offer equity stakes to a large number of investors using an online portal.
- Companies are permitted to raise up to $1.5MM over a 12-month period
- Accredited investors can invest up to $25K per investment, limited to $50K annually
- Non-accredited investors can invest up to $2.5K per investment, limited to $10K annually in Ontario
- Companies looking to raise capital can now use a streamlined 11-point disclosure document as opposed to a 38-point prospectus
- To qualify, platforms must perform specific due-diligence on companies raising capital
- Securities are limited to simple, non-complex securities
Benefits and Potential Pitfalls
- The tight investment limits on both issuers and investors have the potential to create a significant administrative burden on issuers, who prefer to focus on building their business. Companies will have to manage hundreds of smaller investors, if they intend to raise the maximum amount.
- The streamlined capital-raising process may expedite the process for issuers; but for investors there are fewer protections to guard against fraudulent company pitches.
- Most securities issued in private markets are not “simple” – they are typically issued in the form of convertible debentures or preferred shares with specific terms and conditions. By requiring securities to be, “simple,” companies are limited in how they structure deals, which could adversely affect future fundraising rounds. This limitation would suggest that companies looking to raise larger sums of capital and investors looking to invest larger sums in private deals will continue to operate under existing exempt market rules.
- The rules may be very effective for small local businesses that are looking for support from their community who will not only invest in the business, but also use their services. The rules are a win-win for this niche as both the business and investor rely on each other to ensure success for the other.
No matter how you look at it, crowdfunding is breaking down barriers and providing a fresh and forward-thinking way to invest and raise capital. One thing is clear, these new regulations signal that equity crowdfunding is not a passing fad – it is here to stay and it’s time to start paying attention.