Equity crowdfunding first launched in Saskatchewan, but with investor risks
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Saskatchewan has become the first province to green light equity crowdfunding, though the jury is out on whether the new regulations strike the right balance between accessibility and investor protection.
Earlier this month, the Saskatchewan government's Financial and Consumer Affairs Authority (FCAA) announced the creation of an exemption to provincial regulations that would allow start-up enterprises and small businesses to raise capital through crowdfunding by issuing securities, such as shares.
While the exemption — which lifts some traditional disclosure regulations for securities — provides enticing new opportunities for entrepreneurs, it also presents tangible risks, according to one expert.
“This mechanism is allowing Saskatchewan investors to invest in Saskatchewan start-ups,” said Brian Koscak, a Toronto-based securities lawyer and chairman of the Exempt Market Dealers Association of Canada.
He points out that the exemption applies only to investors and companies based in Saskatchewan, calling it the "democratization of investment and loss."
Crowdfunding is touted as a steadily growing alternative financing model, in which numerous investors contribute small sums to a project — usually through an online portal such as the popular U.S. website Kickstarter.
Unlike projects on Kickstarter, however, equity crowdfunding investments involve sales of securities — complex and risky financial tools that typically only certified professionals are allowed to sell and issue.
The province’s new rules limit prospective businesses to two six-month offerings of $150,000 each during the course of a year, as well as prohibiting any individual from investing more than $1,500 in an offering.
Koscak says the limits are an attempt by the FCAA to find a balance between encouraging entrepreneurs to tap into an innovate financing tool, and minimizing the risk taken on by investors.