ITBusiness.ca | Gerard Buckley @jaguarcapital | April 17, 2014

Yesterday I had the distinct pleasure of being invited by the National Crowdfunding Association of Canada to be a panelist at their breakfast briefing “Igniting Entrepreneurship and Capital Flow in Ontario.”

The other distinguished panelists that I spoke alongside of were James Turner, vice chair of the Ontario Securities Commission, who gave an overview of the Ontario Securities Commission regulatory framework; John Wires of Wires Law who gave the legal overview; Jos Schmitt of Aequitas who spoke of structuring a portal and building an exchange for private securities and how that may be affected by crowdfunding; and yours truly, sharing my views as an investor. We spoke to a sold out audience led by Craig Asano, founder of NCFA and Murray McKercher, NCFA board advisor.

The timing of this briefing coincided to the “Introduction of Proposed Prospectus Exemptions and Proposed Reports of Exempt Distribution in Ontario” on March 20, 2014 and is open for comments for 90 days. This release of proposed amendments to ‘Prospectus and Registration Exemptions” include an Offering Memorandum (OM) Prospectus Exemption, a Family, Friends, and Business Associates Prospective Exemption (FFBA), a prospectus exemption for distributions by a reporting issuer to it’s existing shareholders and the Crowdfunding Prospectus Exemption and regulatory requirements applicable to a Crowdfunding Portal which we addressed in the presentation.

Related:

• CSA Equity Crowdfunding Draft Regulation 45-108 -- Request for Comments

• Two Equity Crowdfunding Specific Exemptions Taking Hold in Canada

I would be the first to admit that two years ago I was skeptical of crowdfunding and did not feel that that it would provide a viable alternative for capital formation. Today I believe it is required for me and others to be part of the discussion so that entrepreneurs are well informed on crowdfunding and if they take advantage of this Prospectus Exemption they will continue to be positioned for future capital fundraising for their company. It is my view that crowdfunding will be introduced in most provincial jurisdictions in Canada later this year or early next year as both regulators and government would like to ensure the environment for capital formation for seed and early stage innovation is robust and the introduction of crowdfunding will have low budgetary impact for provincial governments.

My comments here within are divided among three distinct groups of investors, some concerns of regulators , the unintended consequences of crowdfunding and my attempt to be futuristic about how crowdfunding may be viewed several years after implementation.

The general market or ordinary investor perspective

Everyone is speaking of the democratization of investment opportunity in early and growth stage private companies. I see no evidence that most investors that currently invest in mutual funds, ETFs, GIC’s etc. are lining up to invest monies in equities of seed and early stage companies. These changes in prospectus exemptions will be no panacea for the investee companies. Currently less that 10% of Canadians hold equities on a direct basis. As a result of the introduction of crowdfunding I don’t see that number rising substantially in the coming years. Most investors that I speak to are concerned that the gestation period for an ROI (Return on Investment) from crowdfunded Investments will be long and they will take a wait and see approach.

Like it or not investment in early stage companies is a high risk investment. I commented in Money Sense Magazine in May of last year that this asset class should be considered part of an investor’s total portfolio where alternative investments including commodities, speculative ventures, derivatives, early stage companies, etc. should be no more that 5 to 10% of the investor’s portfolio. Any prudent financial adviser or portfolio manager would follow this theory.

During the Q&A I was specifically asked if RSP’s and Registered Savings Plan assets could be used to invest via the crowdfunding exemption in early stage companies. The legislative intention is that these savings plans be used for the longer term liabilities of retirement and therefore from a asset management perspective be matched with longer term assets. A equity investment  in a high risk seed or early stage company does not align with the longer term nature of the assets of a registered savings plan.

The accredited investor perspective

Accredited investors who include our members at Maple Leaf Angels don’t require legislative change to invest in seed or early stage companies. This is the group that is most blase about crowdfunding as they already have the opportunity to invest in private companies. However, I believe it is this group that in the fullness of time will adopt to investing through portals such as Funders Club or Angel List.

It is accredited investors that will be investing the largest amounts as they adopt the technology and become comfortable with the investee companies. I believe in the early evolution of crowdfunding, cannibalization of investment from this group through private placement or offering memorandum will be disguised as crowdfunding to demonstrate the success and adoption rate of crowdfunding.  It is generally understood that currently a Crowdfunding Campaign requires 30 per cent or more of the raise to be pre sold and with equity crowdfunding I don’t see that number changing substantially. It will be through traditional methods of pitch and present to accredited investors where this pre selling will occur.

Tech entrepreneur, business owner, knowledgeable individual etc. who is not an accredited investor

This investor currently is not permitted to invest due to not being an Accredited Investor. When referring to the democratization of investment opportunity it is this investor that is being most referred to. They will be the early adopters investing via a portal for both Offering Memorandum and Crowdfunding Exemptions. They are the friends and associates of the founders of the seed and early stage companies we speak of. They will most likely have exited their own startups and will have investable capital of between 200k and 1mm and come from the millennial generation. They understand the space, participate in the ecosystem, went to school with the founders and I believe will be the most active new investors under the Crowdfunding Exemption. However as a result of the Crowdfunding limits the Offering Memorandum Exemption may become the exemption of choice for this investor.

Investors from the perspective of the regulators

You can not expect that in this day and age that the regulators will give cause for a condition to exist where individual investors are not being protected. It is also highly unlikely that they will discharge this responsibility to a third party such as a SRO (self regulated Organization). Selling unsuitable investments to seniors is a significant concern for regulators as selling unsuitable investments represented >40% of IIROC’s disciplinary actions last year and too many of these actions had seniors as victims.

I feel that credit must be given to the OSC for the pace in which they brought these four Prospectus Exemptions to the marketplace. Having just attended the Angel Capital Association’s Annual Summit in Washington the buzz is, Canada is further advanced than the USA on it’s initiatives for capital formation for seed and early stage companies siteing such programs as Start-Up Visa, FEDDEV’s IBI program and Province of Ontario’s ANP (Angel Network Program) as examples.

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