OSC probes crowdfunding investment model

The Ontario Securities Commission is inviting discussion on the growing trend of crowdfunding and whether it should change the rules to let small companies raise capital from online investors.

The market regulator put out a discussion paper Friday that asks for public comment on whether it should allow a crowdfunding exemption to let companies raise capital online from smaller retail investors without having to provide a formal prospectus or limit their capital raising to so-called "sophisticated" investors who are wealthy.

Crowdfunding sites, like KickStarter and Indiegogo, have already helped to launch thousands of projects and ventures worldwide. 

Sometimes the funding involves donating to a cause. Sometimes contributors are given some kind of reward or early access to a product in development. Sometimes, it’s more of an unsecured personal loan to a business.

But it’s the equity crowdfunding model that the OSC is soliciting feedback on — when people are asked to invest in a startup in return for securities. Currently, that is not allowed in any jurisdiction in Canada unless an exemption is in place.

Risks vs. benefits

The OSC notes that crowdfunding could offer small retail investors the chance to put money into promising startups or small businesses they’d normally have no access to.

But there are obvious concerns that emerge from such arrangements – including fraud and abuse, risk disclosure, difficulties in re-selling investments, and valuation difficulties.

There are also questions about whether equity crowdfunding would be suitable for some companies.

"Crowdfunding may result in an issuer having a large number of potentially unsophisticated shareholders with relatively small interests in the issuer and thereby limit the issuer’s future financing options," the OSC notes in its discussion paper.

"That may make it more difficult to attract angel investors and venture capital financing at later stages of development."

'Concept idea'

To explore the possibility of bringing in a crowdfunding exemption, the OSC has developed a "concept idea" that it points out is just for discussion purposes.

It includes some of the elements of the crowdfunding exemption in the U.S. JOBS (Jumpstart Our Business Startups) Act, which is awaiting U.S. regulatory approval. 

Under the OSC’s concept model, issuers would face limits on how much they could raise in a 12-month period and where they could advertise. Investor protection measures would include investments limits of $2,500 in a single investment and no more than $10,000 overall in a calendar year.

Investors would also have to sign a risk acknowledgement  and would have a two-business day "cooling off"period to back out of their investment decision.

Investments would also have to be made through a registered funding portal.  

But that’s all just a concept for now. The OSC says there’s no assurance it will agree to allow an equity crowdfunding exemption at all.