OTTAWA — The Canadian Advanced Technology Alliance is sounding alarm bells over newly proposed American legislation that could allow early-stage U.S. firms to raise funds through social networks.
Unless Canada enacts similar measures, the Canadian tech industry lobby group cautions, the U.S. provision could spark an exodus of promising companies and lure even more Canadian startup investment south of the border.
“Many Canadian startups have great ideas, but they never get funded,” said John Reid, chief executive of CATA. “Now the U.S. will add new legislation that will make it easier for small investors to invest in early-stage companies. Technology entrepreneurs are highly mobile and may simply decide to start their new businesses in the U.S. if that is where they have access to startup capital.
“We are being left behind.”
Difficulty in finding small, early rounds of funding is a problem that all startups face. Invest Ottawa, formerly the Ottawa Centre for Regional Innovation, has announced plans for a specialized fund aimed at getting early-stage businesses the money they need to expand. Industry observers say access to such funds is the only way for firms to grow, perhaps into the next tech icon like Nortel Networks, Google Inc. or Research In Motion Ltd.
In the U.S., federal lawmakers are proposing that technology help to alleviate the cash crunch. They believe that a company that needs $100,000 to expand should be able to reach out on the Internet and collect $1,000 from 100 people to quickly raise its goal.
The model is already being used by charitable websites such as DonorsChoose.org, which allow donors to specify where their money is going and how it will be spent.
The Entrepreneur Access to Capital Act, which has already passed through the U.S. House of Representatives and now is before the Senate, will rewrite national securities laws almost 100 years old.
U.S. Senator Scott Brown, one of the bill’s key backers, said changes to investment laws are long overdue.
“Investment capital is … the grease that keeps the gears of the economy turning. (This) has the potential to be a powerful new venture capital model for the Facebook and Twitter age and its potential to create jobs is enormous,” Brown said during a congressional hearing in December. “But crowd funding is currently illegal because of obsolete regulations, some dating back to the 1930s. Imagine that. The next Steve Jobs is being held back by rules written during the age of the typewriter.”
With the U.S. economy on the mend, many businesses have decried the lack of funds available for early-stage businesses so they can expand and create new jobs. Under the new act, those businesses would be able to sell up to $1 million U.S. in shares to small individual investor.
Currently, in both Canada and the U.S. it is illegal for a startup to sell equity in its business to a group of small outside investors. Only “accredited investors,” typically family members, angel investment firms or venture capitalists, are allowed to pour money into the companies. Should a company want to raise funds from individual investors, the company must seek a stock listing on a publicly traded exchange.
Crowd-sourced funding, or “crowd funding” as its being called, would be overseen by the Securities and Exchange Commission (SEC). the U.S. national securities regulator, to protect investors.
CATA warns that Canadian securities laws need an immediate overhaul to allow for similar investment opportunities, otherwise Canadian investments, as well as early-stage companies, will head south.
Andrew Johnson, a partner with Fraser Milner Casgrain LLP who specializes in securities law, said because Canada does not have a national regulator, each province’s securities regulators would need to rewrite their investment and securities laws for this country to adopt a similar investment mechanism.
Calls for comment about the new American legislation to the office of Christian Paradis, Canadian Minister of Industry, were deferred to the various provincial securities and exchange commissions across the country.
CATA urged Canadian regulators to work quickly to keep up with the proposed U.S. legislation.
“If we adopted a similar approach … this new avenue for capital could significantly change the fundraising atmosphere in Canada, making investments in startup ventures accessible to the general public,” said CATA’s Reid. “Thousands of new jobs will be created and retained in the process.”