UPDATE 1-Canada regulators propose rules for crowdfunding of startups

Thu Mar 20, 2014 3:48pm EDT

(Adds industry comment, background)

By Alastair Sharp

TORONTO, March 20 (Reuters) - The power of the crowd may soon be harnessed to help fund business startups in Canada, with several provincial securities regulators publishing proposed rules on Thursday that would allow large numbers of people to invest small amounts in promising projects.

The rule changes could offer a lifeline to the country's technology community, which often turns to U.S. investors and companies to fund early-stage growth.

Crowdfunding has proven a popular way for artists and others to raise money, but in Canada it has not involved equity stakes in projects.

The Ontario Securities Commission, the country's biggest capital markets watchdog, said its new rules would allow registered online portals to collect up to C$2,500 ($2,200) per investment from small-scale investors.

Such investors would be allowed to invest up to a total of C$10,000 a year, while the companies would be limited to raising C$1.5 million per year from crowdfunding.

"Today we have proposed new tools, which will transform Ontario's exempt market by providing greater access to capital for businesses and expanding investment opportunities for investors," OSC Chairman Howard Wetston said in a statement.

And it is not just tech companies that stand to benefit. Real estate, among others, stands ready to accept grass-roots funding.

"It's a new opportunity to raise capital and get others that traditionally aren't involved into the real estate game," said Tim McKillican, the president of Open Avenue, a private real estate developer and manager that owns almost 1,000 apartments, mostly in Ontario's Kitchener-Waterloo region.

Without the new rules Open Avenue must win funding from rich investors judged sophisticated enough to invest wisely or otherwise able to sustain a loss of their capital.

"It's not like your net worth determines your sophistication in investing," McKillican said.

Regulators in Alberta, Quebec, Saskatchewan and New Brunswick published a joint proposal similar to the OSC document. The releases start a 90-day consultation period.

British Columbia, another of Canada's biggest capital market jurisdictions, said it was seeking comment on whether it should adopt rules that less-populated Saskatchewan introduced in December.

Under those rules, single investments would be limited to C$1,500 and businesses would be able to raise only two C$150,000 rounds a year.

Bill Rice, who heads both the Alberta Securities Commission and an umbrella group of Canadian regulators, said serious effort has been put into aligning the proposals.

"Differences in regulatory approach reflect differences in local experience and feedback," he said. "Our intent is to review the submitted comments and achieve as much harmonization as possible before the final rules come into force."

Backers of such grass-roots investments have been waiting for months for these proposals, which if adopted would give the nascent model an injection of credibility.

"This is just the tip of the iceberg. These markets have tremendous amounts of potential and this is step one," said Craig Asano, the founder of the National Crowdfunding Association of Canada, who hopes a secondary market will emerge.

Others, however, are more circumspect.

"My concern is that investors who might try their hand at crowdfunding and get burned will then not buy IPOs when the tech window presents them because they say a pox on the whole technology house," Mark McQueen, the chi3ef executive of Wellington Financial, said ahead of the rule proposals.

($1=$1.12 Canadian) (Editing by Peter Galloway)

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