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The Canadian Advanced Technology Alliance (CATA) has just
launched a new campaign in support of changing Canadian securities
laws to permit crowdfunding. See the news release here.
Crowdfunding is the use of technology and social media to raise
small amounts of money from large numbers of investors, usually
on-line. It has already been effectively deployed in the
not-for-profit sector. However, crowdfunding to finance a business
is not permitted under Canada's existing securities laws. At
the risk of over-simplifying, startups are generally only permitted
to raise financing from 50 or fewer investors who have certain
relationships with the principals of the company, or else from
"accredited investors" (such as high net worth
individuals or institutional investors). We describe the existing
fundraising exemptions in our previous post "Are You Complying with Securities
Laws?".
Crowdfunding does not fit within existing financing exemptions,
since ideally a company using this model wants to raise funds from
more than 50 investors, who may or may not have the requisite
relationship (or any relationship) with the principals, and who may
not be "accredited investors". CATA wants to see
changes to existing Canadian securities laws that would allow
Canadian startups to offer and sell securities through
crowdfunding.
The U.S. Congress has recently introduced crowdfunding legislation,
which has already been passed by the House of Representatives with
very strong bipartisan support, but which will not become law
until, among other things, a bill is passed by the U.S. Senate.
CATA's campaign promotes similar changes in Canada, so that
Canadian technology companies will have the same fundraising tools
as U.S. startups would have upon enactment of the U.S
legislation. Any proposed changes to Canadian securities law
to permit crowdfunding will have to contain reasonable investor
protection mechanisms in order to gain the support of provincial
securities regulators. In the U.S., a vigorous debate over the
means and extent of investor protection is evidenced in two
crowdfunding bills that have been introduced in the U.S. Senate.
The two Senate bills share some common principles with the House of
Representatives bill, including:
a requirement to warn investors of the risks associated with an
investment via crowdfunding,
limits on the amount that can be raised by the company through
crowdfunding,
limits on the amount an individual can invest in any company
through crowdfunding, and
restrictions on the resale of securities purchased through
crowdfunding.
However, the three bills differ in many respects, including the
actual amount that an individual will be permitted to invest and
the amount that can be raised by the company. Also of note is that
the House of Representatives bill is the only one of the three
bills that would allow a startup to raise money through social
networking sites like Facebook or Twitter; the Senate bills would
require a company to use a third party intermediary to issue its
securities to investors.
Canadian securities regulators will undoubtedly be influenced by
the ongoing debate in the United States on what constitutes
reasonable investor protection mechanisms in the crowdfunding
arena.
About Fraser Milner Casgrain LLP (FMC)
FMC is one of Canada's leading business and litigation law
firms with more than 500 lawyers in six full-service offices
located in the country's key business centres. We focus on
providing outstanding service and value to our clients, and we
strive to excel as a workplace of choice for our people. Regardless
of where you choose to do business in Canada, our strong team of
professionals possess knowledge and expertise on regional, national
and cross-border matters. FMC's well-earned reputation for
consistently delivering the highest quality legal services and
counsel to our clients is complemented by an ongoing commitment to
diversity and inclusion to broaden our insight and perspective on
our clients' needs. Visit:
www.fmc-law.com
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