Law Times

Law Times • June 2, 2014 Page 11 www.lawtimesnews.com OSC praised for crowdfunding policy But investor rights group worries monetary limits are 'quite high' By michael mcKiernan For Law Times quity crowdfunding looks set to land in the province with the On- tario Securities Com- mission soliciting responses on a policy that would open up the online securities market to the general investing public. e regulator's proposed policy, released March 20, would allow small- and medium-sized enter- prises to raise up to $1.5 million per year from retail investors through accredited online portals without going through the expensive pro- cedure of issuing a prospectus. In- terested parties have until June 18 to comment on the proposal. Brian Koscak, chairman of the Private Capital Markets Asso- ciation of Canada and co-founder of the recently formed Equity Crowdfunding Alliance of Cana- da, says the prospectus exemption will help ease the "capital-raising crisis" facing Canadian companies, particularly smaller ones without the resources to meet the regula- tory burdens associated with tradi- tional means of fundraising. "It's really exciting to see the OSC so engaged," says Koscak, who's also a partner in the To- ronto offi ce of Cassels Brock and Blackwell LLP. " ey have devoted signifi cant resources to this, and it's wonder- ful to have a regulator that is really listening and trying to help. e more tools we can give companies to raise capital, the better, in my view. . . . If we don't get this right, our best and brightest are going to fl ock south to jurisdictions where they can raise capital." Unlike donation crowdfund- ing platforms such as Kickstarter where users can receive products such as games, music or fi lms in return for their fi nancial contribu- tions, their equity crowdfunding cousins allow individual investors to secure an ownership stake in a business in return for cash. Online investing is currently available to a select few under the OSC's existing accredited-investor exemption for those who can meet a fi nancial income or assets test. However, less than four per cent of Canadians can meet that test as it requires an annual income over $200,000 or fi nancial assets worth more than $1 million. e OSC's policy would open the market up to anyone with an individual investment cap of $2,500 per campaign and $10,000 per year. Investors must also sign a risk ac- knowledgment confi rming they understand they could lose their entire investment. By combining securities law and social media, Koscak says eq- uity crowdfunding could become a fun source of "infotainment" for retail investors. But Marian Passmore, the di- rector of policy at the Canadian Foundation for Advancement of Investor Rights, isn't so sure equity crowdfunding will prove a source of much amusement. e orga- nization, a chief critic of equity crowdfunding, has shi ed its fo- cus in light of the OSC's approach. "Overall, we're still opposed, but recognizing that it looks likely to go forward, we're making sug- gestions we think will help make it less harmful," she says. "We don't think there's enough in the policy to protect investors from harm and we don't think it's going to lead to the economic benefi ts or market effi ciencies its proponents argue it will." Passmore says the investor lim- its are "arbitrary and quite high" when viewed in the context of the median RRSP contribution by Ca- nadians at about $3,000 per year. "And that's for something that is a relatively safe investment and will likely earn a return, rather than equity crowdfunding, which can be much higher risk. It's un- likely to lead to any return, and in fact, you're quite likely to lose your entire investment even if there is no fraud," she says. While Passmore concedes ac- cess to capital is a "real concern" in the economy, she says many retail investors lack the under- standing required to make an informed choice about risky investments. People are likely to view signing an acknowledg- ment more as a formality than a serious caution, she says. " ey're likely to do more to protect sellers than warn inves- tors. rough litigation in other cases, we see investors who don't remember signing this kind of acknowledgment. And if they did, they didn't pay much atten- tion to it. We think that's highly problematic." Ren Bucholz, a commercial litigator with Lenczner Slaght Royce Smith Griffi n LLP, says the OSC's proposed policy is a "great place to start" but warns the regulator to move slowly with its implementation. "It's important that there is a study period because there are still a number of unknowns in this system, including whether the portals are going to be able to eff ectively vet the companies that use its services," he says. Koscak has his own concerns about the OSC proposal as he feels it could have gone further while maintaining investor pro- tection. He says the limits are ac- tually too small for some people and may make it diffi cult for companies to hit the maximum fundraising target of $1.5 mil- lion. To raise that amount would require at least 600 investors making the maximum allowed individual pledge. " at's a hard number to get to," says Koscak, who would rather have seen investment caps set on an individual basis according to a percentage of income. "I under- stand that a fl at amount is more convenient for regulators, but it does not refl ect what's necessarily best for investors." He was also disappointed to see the OSC exclude real estate issuers from the crowdfunding exemption. "To completely prohibit capital raising for this asset class, I would submit doesn't make sense be- cause it treats real estate as a class that does not promote jobs or provide stimulus to the economy," says Koscak. "One of the hottest areas of crowdfunding in the U.S. right now is real estate." Overall, though, Koscak says the crowdfunding policy, in tan- dem with another proposed pro- spectus exemption unveiled the same day for off ering memoran- dums, will help fi ll the "prospec- tus gap" that he says has held back fundraising in Ontario. e off ering memorandum exemption creates what Koscak calls a "baby" accredited investor as it allows individuals to put in up to $30,000 as long as they have a net income over $75,000 per year and $400,000 in assets. e policy would place no limit on the amount an issuer can raise. "It's going to really move the meter because right now we have nothing between the pri- vate investor exemption and the accredited investor exemp- tion," he says. "We're looking at a whole new ecosystem with a gentle, graduated upward slope of capital raising instead of the big jump we have now." LT FOCUS To order your copy visit www.lawtimesnews.com or call 416.609.3800 or 1.800.387.5164 How the legal community in Ontario gets its news SubScribe to Law Times today! cutting-edge legal affairs, news and commentary for just 48 cents a day! Make time for Law Times and keep up with all the developments in ontario's legal scene. SubScribe today aNd receiVe: • 40 issues a year covering Ontario's legal landscape • FREE Unlimited access to Law Times digital editions and digital edition archives • FREE Canadian Legal Newswire, a weekly e-newsletter from the editors of Law Times and Canadian Lawyer FRee Digital edition included! According to Miller, highly descriptive domain names, such as the ones at issue in this case, can be even more valuable to a business than any trademarks it has registered. "When people search a descriptive term online and it happens to be the same as a domain name, you're going to get a lot of hits," he says. "It's diffi cult to get a trademark that is clearly descriptive because it's not allowed unless it has acquired a secondary meaning." Miller says the decision could also help business owners conceal the true ownership of particular domain names by taking advantage of the property law concept of equitable interest. "If you don't want people to know who owns the domain name, you can have someone on title as the registered owner but the equitable inter- est is unknown," he says. LT While the proposed policy is a 'great place to start,' the OSC should move slowly with its implementation, says Ren Bucholz. Descriptive names valuable Continued from page 10 E

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