Crowdfunding: Add to the Blog Conversation at the Tech Startup Centre: Andrea Johnson, Partner, FMC
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 exemptions, since ideally a company 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".
The U.S. Congress has recently introduced crowdfunding legislation, which has already been passed by the House of Representatives with very strong bipartisan support. CATA's campaign promotes similar changes in Canada, so that Canadian technology companies will have the same fundraising tools as U.S. startups. 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.
More on investor protections to come in Part 2.
Andrea Johnson is a partner in FMC's Ottawa office. Her practice focuses on corporate and securities law, with an emphasis on technology and emerging growth companies.
February 2, 2012
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