A few weeks back Crowdfund Insider published an article on the regulatory environment in Canada that labeled new crowdfunding securities exemptions as “Dead in the Water“. In brief, regulators in multiple provinces have enacted rules that were ostensibly created to foster entrepreneurship and access to capital. But in the short time these rules have been available – not one company has used them to raise capital. Zero. I would call that a regulatory failure. The article received both supportive, and not so positive, responses but overall there has been a sense that policy shortcomings must be addressed. And the best way to do so is to bring them to the forefront. Things can be fixed, but there remains a question as to whether or not the right people are in positions of leadership to right the ship.
Last week, Crowdfund Insider spoke to Sandi Gilbert, a prominent member of the crowdfunding industry and CEO and co-founder of SeedUps – a funding platform that is operating now. Gilbert is a champion of innovative startups and an advocate for Canadian entrepreneurs. Her opinion on the Dead in the Water article? She thought it was “fantastic.” Not one to mince words, Gilbert bluntly described the current Canadian crowdfunding exemptions as “a mess”.
“What we set out to do was lower the cost and improve access to capital [for SMEs],” stated Gilbert. “Crowdfunding was gaining traction globally and regulators here said they would do something so we all jumped on board.”
Encumbered by overly restrictive requirements, perhaps driven by timid policymakers fearful of the unknown, and lacking experience in business, the rules fell short of the mark.
Canada already had the OM Exemption – similar to Reg A+ in the US. This exemption has been around “forever” and very successful. The OM is better than Reg A+ in one respect as you may raise as much as you want – but it does require audited statements and reporting.
“What we advocated was for was smaller raises with disclosure but not audited statements. What we got was a disparate set of regulations with costly ongoing disclosures. The regulator model is such you must do full accountability and assessments. To make it even worse they came out with non-regulated portals,” said Gilbert.
She explained that if you were a small company and were seeking a raise of $500,000, there are insufficient due diligence requirements. “We would review an offer and not approve it. They would just go to another portal and post the deal.”
In the US, portals must be approved by FINRA and the SEC – a similar process apparently does not exist up north. There is also no obligation for due diligence. You just post them. Non-accredited investors can invest $2500 without any obstacles. Gilbert said there remains much confusion around which provinces allow for crowdfunded offers. “It has not been adopted like we had hoped,” lamented Gilbert.
Gilbert is of the opinion that regulators do understand things are screwed up but, at the same time, are hesitant to work together. The provincial process is simply too convoluted. Canada does have a degree of harmonization with the OM Exemption. Gilbert explained what Canada truly needs is an OM without excessive disclosure and reporting within funding limits. That makes more sense.
“We [Canada] are working on version 1.0 when other jurisdictions are working on 2.0. The regulators do not want to learn from other markets … Our 2 countries [the US and Canada] tried to regulate before there was an industry. In the UK the FCA [Financial Conduct Authority] said we will regulate it once it evolves. The people who wrote these regulations have never run a business or raised capital in their lives. They are so disconnected from the real world. We are leaving the crowd behind for now.”
The bottom line is that adoption will be very slow, if at all, unless changes are made.
The good news from the perspective of SeedUps, is they are altering their approach. For now, they are going to focus on creating a marketplace where an established angel or VC can lead an investment round and then be topped off by a wider audience. This can happen online – or off. This has been a highly effective approach on platforms like SyndicateRoom, OurCrowd, and AngelList – to name a few.
“This is the model we are embracing and moving forward with,” explained Gilber. “We are NOT operating under the crowdfunding regulations we are really operating as a digital angel network. It is the way deals have been done all along. What the technology allows you to do is reach those investors. You can also execute it online.”
Gilbert would rather not give up on the crowdfunding process, but the economic reality is a pretty high card.
“Until we can watch how the environment develops. We do not want to abandon it entirely but I am smart enough to know how the industry is evolving.”
Gilbert very much wants to work with regulators to help them improve, but this is an uphill battle.
“Regulators do not understand that half of the benefits of the online world is transparency … Better online than in a dark steakhouse having glass of wine.”
In speaking with others engaged with the Canadian alternative finance sector, there is a sentiment that traditional finance does not want to share with the emerging world of Fintech innovation. As happens in much of the world, a certain amount of lobbying may be occurring to slow down change at the regulatory level and stymie progress. For Gilbert and her team at SeedUps they will continue to push ahead and innovate where there is less resistance to progress. Let’s hope policymakers eventually embrace their mission of improving access to capital so Fintech entrepreneurs, like Gilbert, can help drive economic growth to all of Canada.