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Ontario joins joint effort to loosen crowdfunding rules for small businesses

TORONTO – Ontario is joining four other provinces in regulatory changes that will allow the average Canadian to buy a stake in startups and small businesses through crowdfunding.

The Ontario Securities Commission’s new rules will allow businesses to offer equity stakes through registered crowdfunding platforms, including online services, when they come into effect Jan. 28.

Websites like Kickstarter, Indiegogo and Patreon already operate in Canada, but funders on those websites don’t get any ownership in the business.

Since 2013, accredited investors — those with financial assets of more than $1 million, net assets north of $5 million or who earn more then $300,000 a year — have been allowed to participate in crowdfunding.

The new policy opens up this option to regular investors.

It also means that companies seeking funding will no longer have to issue a 38-point prospectus detailing every aspect of their business, instead using what the OSC calls a streamlined 11-point disclosure document meant to be easier for the companies to prepare and for investors to read.

Crowdfunding platforms will have to meet certain criteria in order to register as a funding portal, and will be responsible for background checks and other due diligence on companies and investors.

Companies that raise money using this method will be limited to offering non-complex securities, must offer those securities through a single funding portal and are prohibited from advertising the investment opportunity.

OSC chairwoman Monica Kowal said the regulator wanted to give startups and smaller businesses a new way of raising money while still protecting the interests of investors.

“It’s specifically geared toward helping small- and medium-sized enterprises … leverage the Internet and social media to connect with investors who have an appetite to invest in startups and other companies that are hungry for capital,” she said.

Crowdfunding includes risks for average Canadians who don’t have the legal expertise and deep pockets of professional investors, she said.

Under the rules, individual investors will be limited in how much they can invest relative to their income and net worth.

Non-accredited investors will be limited to $2,500 per investment and $10,000 per year, with higher limits for accredited investors and no limit for permitted clients who meet more stringent criteria.

On Friday, the U.S. Securities and Exchange Commission issued its own similar rules for equity crowdfunding, which will come into effect in mid-2016 and also mandate registration for crowdfunding outlets and make those platforms responsible for vetting companies and investors.

Ontario joins Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia in the deal, subject to approval from each provincial government. Five of those provinces, save Ontario, reached an agreement on similar crowdfunding exemptions in May 2015.

Saskatchewan is delaying its implementation of the latest deal pending a 60-day comment period.

The patchwork approach is necessary because Canada is the only country in the G20 without a national securities regulator, and provincial jurisdiction over financial securities is written into the Constitution.

There is an effort underway to build a national regulator, with former insurance executive William Black at the helm. Provinces that support the initiative are hoping the agency will be fully operational by the fall of 2016.