Equity crowdfunding in Ontario

Three types of crowdfunding

Crowdfunding is a way for start-ups or early stage businesses to raise amounts of money from a large number of people, typically through the internet. Examples of different crowdfunding models include:

1. Donation-based crowdfunding is strictly charitable, allowing people to give money to fundraise for a cause or assist someone in need with no expectation of receiving anything in return.
2. Reward-based crowdfunding sees individuals or organizations providing rewards in exchange for people contributing to their projects. These projects can range from creating a new type of kitchen gadget to publishing a cookbook, and successfully-funded campaigns may provide backers with exclusive products, such as an early edition of the gadget or a first-run copy of the book.
3. Equity crowdfundingEquity crowdfunding Equity crowdfunding allows new business or start-ups to raise capital by selling many small stakes, usually in the form of shares, to a large number of investors over the internet. In return for their money, investors are given a small stake in a business.+ read full definition allows people to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in a business. In return for their money, investors are given a small stake in the company.

About equity crowdfunding

EquityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition crowdfunding is where a new business or start-up raises money by selling many small stakes, usually in the form of shares, to a large number of investors. Instead of making a donation or funding a specific project in exchange for a reward, you’re investing in a business and essentially becoming one of its owners.

Equity crowdfunding is an option available to everyday (retail) investors in Ontario as of January 25, 2016.

Warning

Participating as an investor in equity crowdfunding is extremely risky but it can also be a way to support innovation and become part of a community of entrepreneurs.

Rules, regulations and limited protections

A new prospectus exemptionProspectus exemption An exemption that allows a company lawfully to sell securities without providing a prospectus.+ read full definition in Ontario allows equity crowdfunding. Where investors buy stakes in businesses through equity crowdfunding, the businesses are raising money using a prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition exemption. Since the businesses are using a prospectus exemption, there are fewer requirements imposed upon the businesses offering these investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition opportunities – and with that comes less protections offered to investors. But some rules and restrictions are in place:

Registered funding portals only

These transactions are conducted over the internet through a funding portal. A funding portal must be registered with the Ontario Securities CommissionOntario Securities Commission An independent Crown corporation that is responsible for regulating the capital markets in Ontario. Its mandate is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic…+ read full definition if it is operating in Ontario or if it is selling to investors in Ontario. You can confirm this by contacting the Ontario Securities Commission or by going to CheckBeforeYouInvest.ca.

Funding portals have duties to perform, including:

• Conducting background checks on the companies and their executive officers.
• Collecting an offering document from the companies and ensuring that information is available to people before they invest. This document includes information about who controls and runs the company, what the company does, why it is raising money, how much money it needs to raise, and how it plans to use the money raised. This is not as detailed as a prospectus would be.
• Notifying you of any changes to the offering document, if you had previously purchased under the original offering document.
• Providing you with a Risk Acknowledgement Form that lists the principalPrincipal The total amount of money that you invest, or the total amount of money you owe on a debt.+ read full definition risks associated with equity crowdfunding. You must complete this form and confirm you understand the information in the crowdfunding offering document before you are allowed to make an investment.

Crowdfunding offering documents vs. prospectuses

A prospectus is a comprehensive disclosure document that sets out detailed information about the company and its business and describes the securities being issued and the risks associated with purchasing those securities.

A crowdfunding offering document includes information about who controls and runs the company, what the company does, why it is raising money, how much money it needs to raise and how it plans to use the money raised. This is not as detailed as a prospectus would be, but it does provide investors with information in order to make an investment decision.

Crowdfunding issuer obligations in Ontario

• Businesses that raise money through crowdfunding are called crowdfunding issuers
• After someone has invested in a crowdfunding issuerIssuer An organization that offers securities for sale to investors. Examples: corporations, investment trusts and government bodies.+ read full definition, the crowdfunding issuer must make available certain information to investors, including:
  • annual financial statementsFinancial statements Reports that sum up a company’s financial data and tell you how it is doing. The four basic statements are: the statement of financial position (balance sheet, statement of profit or loss (income statement), cash flow statement, and statement of changes in equity.+ read full definition and an annual notice detailing how the money raised has been spent
  • notice of specified key events, such as changes in control of the business

Investor protections

• Everyday investors in Ontario can only invest up to $2,500 per investment and cannot invest more than $10,000 in total per year
• Investors with high net worthNet worth The value of all your assets, less what you owe.+ read full definition and income are able to invest more because they have certain characteristics, such as the ability to withstand financial loss and have the financial resources to obtain expert advice
• If you change your mind after you invest, you have 48 hours to cancel the deal, starting from the date you agree to make the investment

These limits are in place because of the high risk nature of equity crowdfunding, but they won’t protect you from all risks associated with equity crowdfunding. So before you consider any equity crowdfunding offering, know and understand the risks.

Key point

With equity crowdfunding, the goal is to raise money by selling stakes in a business to investors, usually in the form of shares.

Warning

Participating as an investor in equity crowdfunding is extremely risky but it can also be a way to support innovation and become part of a community of entrepreneurs.