Securities administrators in six provinces have agreed to a common set of regulations allowing small companies to raise money through crowdfunding.
The provinces that have agreed on rules that will allow startups and early stage businesses to raise up to $500,000 a year from investors through an internet funding portal are:
- British Columbia.
- New Brunswick.
- Nova Scotia.
One holdout is Ontario, which has said it is drafting its own regulations.
Ontario securities regulators were involved in discussions of the new rules.
It's the equity crowdfunding model that has been under review — when people are asked to invest in a startup in return for securities. Until now, that has not been allowed in any jurisdiction in Canada
Crowdfunding has become an attractive way for startups to raise capital, but the lack of rules around the issue meant Canadian companies could not offer securities to investors who fund them this way.
The new rules pave the way for startups to offer some incentives to early investors.
Individuals will be able to invest up to $1,500 at a time in any one crowdfunding effort, and have the right to think twice about the investment and withdraw within the first 48 hours.
Companies can only raise $250,000 in one campaign and are permitted just two campaigns a year. A crowdfunding campaign can last up to 90 days.
The securities regulators have been working on the new rules for more than a year. The $250,000 limit has been raised from the $150,000 first suggested after several commenters on the process said $150,000 would be too small a figure.
Companies are exempt from a full prospectus, but required to create an offering document with basic information about the issuer, its management and the distribution, including how the issuer intends to use the funds raised through crowdfunding.
Ontario prefers registration process
The regulations state that owners of the crowdfunding internet portal must have no connection with owners of the business trying to raise money.
Businesses must use a crowdfunding portal owned and operated by Canadians, with a head office in Canada, but there is no formal registration process for crowdfunding sites.
This was one area where Ontario disagreed with the rules adopted by the other six provinces – it would prefer a registration process. It also has proposed higher fund-raising limits.
Saskatchewan securities regulators have had rules about crowdfunding since December 2013, but plan to adopt the harmonized rules.
The agreement about harmonized rules across Canada will help businesses reach investors in several provinces.