Crowdfunding in Canada
Partner, Borden Ladner Gervais LLP.
First Posted: Apr 28 2012 13:39 PMThe JOBS Act opened up excitinginvestment opportunities for middleclass Americans. Should Canada followsuit?The United States recently passed a lawknown as the JOBS Act (an acronym for
the poetic “Jump
-Start Our BusinessStart-
Ups” Act), which signals asignificant change in the country’s
approach to private placements, whichare essentially company financings that are exempt from most securities-relatedregulatory requirements. One interesting feature of the JOBS Act is that it now
makes it possible for “crowdfunding” to assist startup companies with capital
fundraising.Crowdfunding is a phenomenon whereby people use the Web to raise funds forvarious causes by aggregating large numbers of small donations. One successful
example of crowdfunding was the American public’s response to the Hurricane
Katrina disaster. By harnessing the power of the Internet, donors were able to raisesignificant funds for disaster relief. U.S. President Barack Obama used a similarapproach to fundraising in his first-term election campaign.By passing the JOBS Act, the United States has opened the door for startupcompanies to use crowdfunding techniques to raise capital and hopefully cutthrough significant amounts of red tape. Generally, companies looking for
financing from the public at large have been required to comply with complicatedsecurities laws and regulations
–
designed to protect members of the public fromthrowing away their life savings in pursuit of investments
–
that they may not fullycomprehend. These rules mean that a company seeking financing is required to filea boilerplate, often difficult to comprehend qualification-filled prospectus, settingout an excruciating amount of detail about the company and its operations. In bothCanada and the United States, such prospectuses are not required for investments
by “accredited investors” who possess sufficient levels
of financial resources.An unfortunate side effect of the traditional accredited investor exceptions is thatthey often prevent those in the middle class from participating in and profitingfrom new investment opportunities.Some have been wondering whether crowdfunding could remedy this situation inCanada, where our stable, yet conservative, banking system sometimes leaves goodbusiness ideas unfunded because their principles are unwilling or unable to grantbanks the upfront investment, personal guarantees, security, and other protectionscustomarily required in order to obtain bank financing. Crowdfunding may be anovel means of spurring entrepreneurship in Canada by giving average citizens ashot at making investments
–
not unlike the "Dragons’ Den"
-type opportunitiesthey seem to enjoy following on TV.Before jumping right in, however, it is critical to ensure that reasonable safeguardsare in place to protect prospective investors interested in crowdfunding. For
example, in the United States, the JOBS Act limits people’s investments based on
their earnings and net worth. While relying on the wisdom of online crowds has asurface appeal, it is unlikely that Canadian provincial securities regulators wouldbe satisfied leaving public protection to user community-based ratings like thoseafforded to eBay PowerSellers. With a recent Supreme Court of Canada decisionaffirming that the federal government cannot unilaterally create a single federalsecurities regulator, the provincial securities commissions may find an opportunityto take on the task of pre-certifying companies interested in raising capital bycrowdfunding.
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