Just a day after I wrote about Crowdfunding becoming the new VSE, the BC Securities Commission issued a notice requesting comment on the idea of a new crowdfunding exemption that would allow companies to raise a small amount of capital (max $150K) from investors in small amounts (max $1500).
In Canada, Saskatchewan was first to offer an exemption such as this. Do I think it’s a good idea? Of course I do – anything that makes it easier for an entrepreneur to access capital from willing (and hopefully wise) investors is good.
The exemption would also require that the issuer (regulators call companies “issuers”) raise the money through a portal (isn’t that a bit like a stock exchange?) and provide some kind of streamlined offering document to investors.
So, how much easier is that than using an Offering Memorandum – in which you don’t need a portal and there are no restrictions on total amounts or per-investor amounts?
In their Notice, the Commission mentions the Offering Memorandum but notes that many issuers don’t use it because of the expense associated with producing the required audited financial statements (even if the firm is brand new and has only zeros on its statements).
I’ve always advocated for an easing of this one requirement in an O.M. especially in cases where the company is a startup and has no statements to audit.The implication is that the crowdfunding exemption won’t have this strict requirement.
Aside from the audited financial statement issue, I actually believe that when companies raise money from investors – be they “sophisticated” angel investors or from anyone for that matter, they have an obligation to produce something like a business plan (I’m being old-fashioned here as the current rage is to use a “deck” instead) that explains what the company is going to do with the money and who’s going to do it. The latter bit – the “who” – that’s what’s important. On that point, I believe that companies of any size should have a proper independent board of directors that provides stewardship and keeps an eye out for the shareholders. The directors should sign the O.M. or whatever. And, the shareholders should be able to hold them accountable. That still won’t protect against failure, but it may make it harder for true fraudsters.
If a company can’t pull together a good board and a good offering document, it should be denied investment (preferably by the investors, not the regulators).
It is prudent investors who should demand a business plan. Documents such as a prospectus and even an O.M. tend to be written in a somewhat laborious legalistic style with lots of cover-your-butt boiler plate (e.g. “forward-looking statements”, “safe harbour”, etc). As such, many investors don’t even read them. The document should simply explain what the business is all about, who is going to make it happen (and their qualifications), and who is going to keep an eye on it (the directors). Investors should also sign not just a risk acknowledgement as part of their subscription agreement but confirm that they are writing down their investment to zero, If they can’t mentally write off the investment when they make it, they shouldn’t make it. Most businesses fail. It would be nice if CRA permitted an immediate write-off (nice tax break), because the odds are that it will be a write-off someday.
Why not have a standard form of O.M. that would apply to any exemption? Of course, if you did, it would trump the need for the specific crowdfunding exemption that’s being proposed. Nice and simple.
The O.M. gives B.C. the distinction that it is the only jurisdiction in North America where crowdfunding has actually been in place for over a decade already. Why do so few people seem to know this? I think the BCSC deserves a lot of credit for it and it’s a pity it’s not better known.
Now, if the O.M. could just be slightly improved, i.e. remove the audit requirement for startups and more emphasis on the directors, wouldn’t that be in everyone’s best interest? And the regulators could take credit for a good value-add.