Regulators should consider crowdfunding to support startups, experts say

Securities regulators and legislators should review possible changes to support Canadian startups through “crowdfunding” models if a new U.S. crowd funding bill moves ahead in the U.S. Senate, experts say. On Nov. 3, 2011, the U.S. House of Representatives passed H.R. 2930, the Entrepreneur Access to Capital Act. The legislation is a crowdfunding bill that will allow startups to sell securities through online campaigns and social media platforms like Facebook, Twitter, or crowdfunding site Kickstarter. Andrea Johnson, a partner at Fraser Milner Casgrain LLP in Ottawa, said in an interview that if the crowdfunding bill, now before the U.S. Senate, passes as expected, American startups will leave Canadian startups behind because Canada’s securities laws prohibit crowd funding. She said Canadian private companies tended to be restricted to raising funds from limited numbers of investors who have relationships with the founders, or “accredited investors” like high net-worth individuals or institutional investors. Raising funds from the public, even in small amounts, is not permitted for private companies, she said. “We’re falling out of step with what is going on in the United States,” Johnson said. “It’s a concern from the point of view of the competitiveness of our companies and the ability, in particular, of the small entrepreneurial companies to access capital.” She said Canada generally tries to align itself with securities laws in the U.S. because it allows for the same type of capital raising activities in both countries. “That’s a natural thing to want to do since the U.S. is our largest trading partner. Particularly for highly mobile technology companies, we want Canadian companies to be competitive in terms of access to capital,” she said. The White House says it supports the legislation. If it passes in the U.S. Congress, startups could pitch their projects online and collect funds from individual investors in the “faceless crowd,” Johnson said. Crowdfunding site Kickstarter, based in New York, N.Y., works on a similar model by giving artists and creative entrepreneurs access to capital. Project creators retain 100 per cent ownership and control over their works and if a project does not reach its funding goal by a set deadline, “no money changes hands,” the website says. The Kickstarter site says it is “the world's largest funding platform for creative projects,” and in one week, “tens of thousands of amazing people pledge millions of dollars to projects from the worlds of music, film, art, technology, design, food, publishing and other creative fields.” Paul Dombowsky, founder and CEO at Ottawa company Ideavibes, which offers a “crowd engagement platform” to charities and nonprofit organizations, said in an interview that it will be important for Canada to “catch up” if the U.S. proposals pass. Due to a lack of available funding in Canada, startups may be tempted to launch south of the border if they can tap into crowdfunding mechanisms and request funds for a specific project, experts said. Eleven months ago, Ideavibes launched Fundchange, a crowdfunding platform for charities and nonprofits sponsored by Telus Communications Co. Fundchange has supported 53 community projects so far, Ideavibes said on its website, and has raised $55,006. Shannon Gorman, director of community affairs at Telus, said Ideavibes’ crowdfunding platform has allowed charities to extend their reach to a new generation of donors who are more familiar with and trusting of technology. Through the platform Ottawa charity called LiveWorkPlay raised $5,000 in eight days. Lots of people are interested in crowdfunding, Dombowsky said, “but they’re kind of handicapped by it because they don’t want to run counter to the law.” Johnson said there is discussion in the U.S. about how crowdfunding legislation should work. Legislators are looking at how investors can be protected from the use of crowdfunding as a vehicle for fraud. If the U.S. allows crowdfunding, Canadian regulators should consider models for Canada and what protections or safeguards should be in place, Johnson suggested. Those protections should be “properly tailored to concerns that are unique to Canada and distinct from those in the States,” she said. As a first step, the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators, should to look at the U.S. proposal and start a review process, she said. “The review would see whether a similar change could be made in Canada and what kind of investor protections would be appropriate for the Canadian marketplace,” she said. A CSA spokesperson could not be reached for comment Tuesday afternoon. Lauren Hébert, a spokeswoman for Industry Canada, said by email the issue is the responsibility of provincial securities regulators. Dombowsky said that, from his experience, people who participate in crowdfunding aren’t interested in it for the money. “They’re interested in it to participate in something that is different or has a potential to make an impact,” he said. “That’s why crowdfunding is something that’s worthwhile to foster and to make sure that it works.” dgrenier@thewirereport.ca

Regulators should consider crowdfunding to support startups, experts say

News | February 7, 2012

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