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Two Equity Crowdfunding Models for Canada

On Thursday, March 20, 2014, the Canadian securities landscape radically shifted when seven Canadian securities regulators, published requests for comments for two versions of equity crowdfunding models.

The two proposed models (see highlights below) are from the Ontario Securities Commission (OSC) and British Columbia Securities Commission (BCSC). The BCSC proposed adopting the crowdfunding model launched on December 6, 2013 by the Saskatchewan securities regulator, the Financial & Consumers Affair Authority (FCAA). These two models highlight two issues:

  1. The Canadian securities landscape has been altered in a revolutionary manner.  
    For the past two years, calls for securities regulators to democratize the way the public access private equity deals by purchasing them on the Internet have been growing louder. There have been impassioned and principled debates from both sides of the discussion. The announcements from the regulators changed the status quo of the past 70+ years of the securities industry and firmly stated the way we do business in Canada, is about to change. There are a number of changes to the industry in the proposals; however, the most important is that the ability to access private equity deals will be available to potentially every individual and no longer be reserved for those investors who meet the regulators’ definition of wealthy or sophisticated.
  2. The two proposals are significantly different.
    The two significantly different proposals, if left as is, will create a bifurcated crowdfunding regime in Canada. Whatever the arguments for and merits of the two proposals, it is the stakeholders: the public, ventures, issuers and the securities industry that will have to bear the increased costs and confusion of a bifurcated system. This may limit the success of crowdfunding in the country.

The purpose of crowdfunding is to allow innovative small and medium sized enterprises that need start up capital to access a larger number of people and investors access to these ideas.  The power of crowdfunding comes from leveraging online technology and social media to spread the word about a worthwhile project, business, or idea. Crowdfunding’s success will be based on the access to large numbers of people; therefore, the smaller the crowd, created by the bifurcated regimes means the smaller amount any prospective issuer will be able to raise. Some of the differences between the two proposals are highlighted below:

Table

The progress and innovation in Canada’s capital markets is welcome and highlights the regulators’ often-stated desire to be a forward looking, 21st century regulators; however, Canada needs a harmonized approach to equity crowdfunding. Without issuers in one jurisdiction being able to raise funds from investors in another, and vice-versa, the power of crowdfunding is compromised. With two proposed equity crowdfunding models on the table, now more than ever, we need all the stakeholders to focus on creating the right solution for the Canadian capital market.

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