Push on to relax rules around crowdfunding
grant buckler
,
Mar. 16, 2012
The push is on south of the border to relax therules around crowdfunding
–
a new way of raising smaller individual amounts of moneyfrom a larger pool of investors through theInternet and social media.A second vote by the U.S. House of Representatives on legislation supporting theconcept that has helped many charitable organizations and some startupbusinesses find cash has already taken place, and the Senate is the nextstop. In Canada, a national industry group has taken up the cause topromote the concept.Just over a week ago, the House passed the Jumpstart Our BusinessStartups (JOBS) Act, a merger of six bills. It included one of four thatCongress had previously passed, the Entrepreneur Access to Capital Act,which would allow businesses to solicit investments throughcrowdfunding. The Senate must pass some version of the bill before itcan become law.In Canada, theCanadian Advanced Technology Alliance(CATAAlliance), a technology industry lobby group, is pushing forsimilar changes here.CATA has called on provincial legislators and securities regulators toexamine the crowdfunding model and is encouraging its members tocontact politicians to press the issue.
No other Canadian groups appear to havetaken up the issue, and, so far, Canadian
securities regulators and legislators haven’t
acted either.Through crowdfunding sites likeVancouver-basedSoKapand New York-basedKickstarter,people contribute a few,
or a few hundred, dollars to a business,project or a good cause.
The problem is, until laws change, it’s a
legal grey area. Asking for donations to acharitable project is fine. Seeking moneyfor a business may be, but not if it runs
afoul of securities legislation. That’s why
many businesses that use crowdfundingoffer a product or other incentive tocontributors, rather than an ownershipstake.
Crowdfunding is “another resource t
hat can be used to really grow and
foster business growth,” says John Reid, CATAAlliance president. If theUnited States makes crowdfunding easier while Canada doesn’t, Mr.
Reid believes more entrepreneurs may head south looking for cash.In Canada, as in the United States, selling stock publicly involvesextensive documentation and regulatory requirements.
This is out of reach for many startups, so founders either fund thebusinesses themselves or turn to limited numbers of investors underexemptions to securities laws.One exemption under Canadian law permits up to 50 investors who haveexisting relationships with principals in the business.They can be family, close friends or business associates, or officers oremployers of the company, explains Andrea Johnson, a partner at lawfirmFraser Milner Casgrain LLP in Ottawa. The U.S. has a similar
provision but the limit is 35 investors.
Another exemption in both countries allows “accredited investors” –
which includes most venture capitalists and angel investors
–
to finance
companies with which they don’t have personal connections.
Most small businesses rely on those sources, unless they can pay theirown way from personal funds or bootstrap their operations.The problem is that venture capital has been significantly harder to find
in Canada in the past decade. “There has been a long downhill slide…or the past 11 years,” says Richard Remillard, executive director of Canada’s Venture Capital & Private Equity Associat
That’s one reason crowdfunding’s time has come. Another is the rise of
the Internet and social media, providing an efficient vehicle for reachingsmall investors, says Peter Andrews, a CATAAlliance director andOttawa-based regional director for Canada at Bothell, Wash.-basedCorum Group Inc., which handles mergers and acquisitions fortechnology firms.
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