Startups navigate regulatory patchwork amid new equity crowdfunding rules

Six provinces introduced new regulations in January for online fundraising tools after other provinces brought in rules in 2015 

FrontFundr CEO Peter-Paul Van Hoeken | Photo: Rob Kruyt

Many of Peter-Paul Van Hoeken’s biggest headaches faded away overnight when regulators introduced new equity crowdfunding rules in May 2015, allowing startups to raise capital online by offering company shares to non-accredited investors.

The founder and CEO of Vancouver-based FrontFundr had been dealing with a patchwork of regulators from different provinces as he prepared to launch an online crowdfunding portal for startups.

Suddenly the new startup exemption wiped away regulatory problems in six provinces, including B.C.

But in January, Ontario — along with five other provinces, not including B.C. — introduced an entirely new set of rules known as the integrated exemption.

FrontFundr’s portal now juggles regulatory differences created through the startup exemption, the integrated exemption and the older offering memorandum exemption.

“It’s really a problem,” Van Hoeken said.

“In Canada we have three crowdfunding rules today and Alberta is contemplating other rules.”

Alixe Cormick, a corporate securities lawyer and founder of Venture Law Corporation, said the fact provinces are introducing different exemptions is a sign of the industry’s potential.

“You should expect that there’s going to be more portals coming on board in the next year. Part of the issue to date has been the regulations weren’t clear,” she said.

It’s still “extremely early days” for crowdfunding portals in Canada, Cormick said, which is why regulations haven’t been harmonized across all provinces.

“The equity portals, it’s going to take a little while for them to develop their feet in part because there’s no clear exit mechanism for [the startups],” she said.

“It’s not like they’re going to be listed on a stock exchange, it’s not like they’re going to be able to provide dividends.”

The startup exemption in B.C. allows issuers to raise $250,000 per campaign.

Startups can complete two campaigns a year and they’re not required to file financial documents or a prospectus. Investors are limited to $1,500 investments per campaign.

The integrated exemption in Ontario allows issuers to raise $1.5 million in one year, while investors are capped at $2,500 per issuer and $10,000 annually.

The offering memorandum exemption has no financial limits but the issuer must provide financial statements.

Investors must abide by the exemption offered by the province in which they live.

FrontFundr was the first online portal to close a deal in Canada under the startup exemption, helping Vancouver-based Guusto raise $50,000 for its gifting app in September.

It’s also the first portal to facilitate a campaign under the integrated exemption as Nova Scotia’s Lux Wind Turbines seeks to raise $800,000.

“While there’s definitely opportunity to raise funds through this mechanism, I would caution against setting out to raise too much money,” said Guusto co-founder Joe Facciolo.

“There just may not be the eyeballs on the platform yet that would allow a company to raise $1 million.”

Despite his caution, Facciolo added Guusto would probably set a higher target the next time it ran a campaign after discovering the market demand was there. His company double its crowdfunding goal of $25,000 and Facciolo said he’d considering using an equity crowdfunding portal again in the future.

Van Hoeken said FrontFundr now has its eyes the U.S. market, where the Securities and Exchange Commission (SEC) oversees regulations on a federal level. In May, the SEC introduces new crowdfunding regulations across the country.

“It is easier because you have harmonized rules but the flipside is you still have to go through regulatory hurdles,” Van Hoeken said.

“It’s not doing Canadian companies, or the economy as a whole, a favour because you’re making it more difficult and more expensive to raise capital for those companies who you want to make it easier.”