Proposed new securities rules would help Canadian tech startups, insiders say

Consultations on new securities rules from the Ontario Securities Commission (OSC) and the Canadian Securities Administrators (CSA) would help Canadian startups find additional capital through crowdfunding and give them more power to stop hostile takeovers, tech industry insiders say. In December, the OSC launched a consultation on allowing privately owned startups to collect funds from retail investors, or the general public, which would support crowdfunding websites. The CSA, an organization that works towards common securities regulations across the provinces, is also consulting on new shareholder rights plans to give publicly traded companies the ability to stop hostile takeovers. Andrea Johnson, a partner at Fraser Milner Casgrain LLP in Ottawa, said in a phone interview that the OSC consultation follows significant changes in the United States though the U.S. Jobs Act, which allows for crowdfunding. The bill passed last year and awaits final regulations. “The first is the ability to raise funds through the sale of securities over the Internet, which is quite restricted right now, and the second element is to be able to raise funds more broadly, not just from high net worth individuals, but also from what are called retail investors, which is basically the general public,” Johnson said, adding that the crowdfunding exemption proposed by the OSC would be completely new in Canada. The OSC is proposing to allow the use of social media to direct investors to a funding portal or crowdfunding website. According to the proposed rules, it would not impose restrictions on the nationality of the investor and would implement minimal, mandated disclosure requirements. Johnson said that, if for no other reason, crowdfunding should be implemented in Canada to follow the rules in the U.S. and help Canada’s startups compete. “They are our competitors for startup companies, which particularly in the technology sector are highly mobile. If companies are going to have access to crowdfunding as a fundraising tool in the United States, and the industry is developing very quickly there, then I think it’s a competitive matter,” she said. The Wire Report reported in January that access to capital remains a key challenge for Canada’s startups. Experts said owners of small tech companies often turn to family members for funding or take out second mortgages on their homes. Jason Flick, founder and chief executive of Flick Software Inc. and CEO and co-founder of YOUi Labs, which builds device interfaces, said in a phone interview that the OSC’s consultation on crowdfunding is necessary for Canadian startups to compete. The regulator is stepping up, Flick said. “I think opening this up to allow non-sophisticated investors, people who want to get involved in these companies and then put some regulation around it, it’s a good thing,” he said, adding that the regulations should prevent people from abusing crowdfunding platforms. “I think this is a way where we can really allow them to have access to capital faster and to more of it.” Flick said investors would also benefit from government education programs about venture capital and crowdfunding in an effort to build a stronger venture capital community in Canada. Investors need to know that it may be risky and that the necessary capital is small, he said. “This is risk capital, but it’s a relatively small amount,” he said. “There will be winners, and Canada needs to become competitive on a worldwide scale.” For startups, Flick said it takes about a year to obtain funding from venture capitalists given that an entrepreneur must create a product and demonstrate a consumer demand for it. “This gap is an enormous chasm, and this has an opportunity to fill that,” Flick said. “This is an almost real time ability to raise funding, and it’s awesome.” Paul Dombowsky, founder and chief executive of Ottawa crowdfunding company Ideavibes, said in a phone interview that crowdfunding could help Canada’s startups though it could take a while to catch on because Canadians have a more “conservative nature” than Americans when it comes to risk capital. Dombowsky said that when he led Fundchange.com, a crowd engagement platform run by Ideavibes and Telus Corp.—which was shut down Jan. 1, 2013—he found Canadian investors did not tend to trust projects listed on the website by entrepreneurs. “They didn’t trust people having a project on the site, so they weren’t as likely to want to put money down,” he said. “Anything relating to money on the Internet, or money in general, I think we are just so much more conservative .” Dombowsky said an exemption for retail investing in private companies is the right move but that online funding would still be conservative, and would mostly come from other entrepreneurs, not the wider Canadian public. “I think that community is kind of funding itself,” he said. Ideavibes and Telus decided to shut down the Fundchange project because they found people were not big supporters of online giving or crowdfunding in Canada, he said. That's one reason why American crowdfunding sites like Kickstarter have not moved into Canada, Dombowsky said, and entrepreneurs looking for funding are more willing to use riskier methods to obtain it. “You will see that a lot of the people funding things on Kickstarter are actually other entrepreneurs, other people that are risk takers themselves,” he said. The CSA’s consultation on shareholder rights plans would give publicly traded startups and other Canadian companies' boards more power to use “poison pill” share dilution tactics to kill hostile takeover bids. The Wire Report reported in January that 165 Canadian companies were bought out between 2004 and the end of 2012, mostly by foreign-owned companies. Ralph Shay, a partner at Fraser Milner Casgrain LLP in Toronto, said in a phone interview that, under current policy, provincial securities regulators can order the company to give up its poison pill, letting the takeover go ahead. A release on the OSC website on March 14 said the CSA is proposing that regulators not intervene in trade rights plans. “Therefore, if the Proposed Rule was in force, the principle that ‘there comes a time when the pill has got to go’ would generally no longer be applicable to the review of Rights Plans by securities regulators,” the consultation document said. Through the consultation, the CSA is moving towards the existing policy in the United States, which allows poison pills to stay in place, Shay said. The comment period for the CSA consultation is open until June 12, 2013, and the deadline for comments on the OSC consultation passed Feb. 12. Johnson said she believes the OSC could introduce new rules to support crowdfunding by the end of 2013. —With reporting by Danika Grenier at dgrenier@thewirereport.ca and editing by Simon Doyle at sdoyle@thewirereport.ca

Proposed new securities rules would help Canadian tech startups, insiders say

News | 04/02/2013 8:47 pm EDT

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