Focus on Financial Planning

Keith Costello

Keith Costello is president and CEO of the Canadian Institute of Financial Planners (CIFPs) and the Canadian Institute of Financial Planning (CIFP). Over the past 15 years, Costello has led the creation of educational solutions, practitioner support services and advocacy support for financial planners.

Financial planners and financial advisors can help clients understand the investment and regulatory rules of equity crowdfunding

By Keith Costello |

Financial planners and financial advisors need to be aware of the new regulations and evolving trends for equity crowdfunding in Canada as their clients may consider adding this to their investment strategies.

Many financial planners and financial advisors may have had inquires from their clients about rewards-based or donation-based crowdfunding, but the growth of equity-based crowdfunding globally has resulted in new regulatory rules to allow equity crowdfunding through funding portals in Canada.

See: New rules to tame the crowd

The growth of crowfunding is dramatic. A research report from Massolution, a crowdfunding research organization out of Los Angeles, released last spring confirms that the global volume of crowdfunding in 2014 had reached US$16.2 billion, with  annual growth of 167%. Crowdfunding volume in North America, specifically, reached US$9.46 billion that year.

At that time, the Massolution report forecasted that global crowdfunding would reach US$34.4 billion in 2015, with North America capturing the largest market share, at US$17.24 billion. More specifically, equity crowdfunding globally continues to grow as a model of choice from a volume of US$1.11 billion in 2014 to a projected volume of US$2.56 billion, with the North American market leading the way.

Although the regulatory framework across Canada for equity crowdfunding is evolving and not yet consistent, Multilateral Instrument 45-108 (MI 45-108) — Crowdfunding came into effect on Jan. 25 in the participating jurisdictions, which include Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia.

Effectively, MI 45-108 will allow startup and early-stage companies to raise capital through a registered Internet funding portal acting as an intermediary. The issuer (company) can offer a variety of non-complex securities in exchange for the investment such as:

  • Common shares
  • Non-convertible preference shares
  • Securities convertible into common shares
  • Non-convertible debt securities
  • Units of a limited partnership
  • Flow-through shares under the Income Tax Act
     

The funding portal must perform due diligence on issuers using the portal, and issuers are not permitted to raise more than $1.5 million within a 12-month period. In addition, MI 45-108 prescribes an appropriate level of investor protection and regulatory oversight to regulate the conduct of investors, Internet funding portals and issuers involved in equity crowdfunding transactions.

So, how can you help your clients participate in equity crowdfunding? A non-accredited investor in participating jurisdictions is allowed to invest up to $2,500 per distribution. In Ontario, a non-accredited investor is also subject to an annual investment limit of $10,000 for all distributions in the same calendar year. An accredited investor in participating jurisdictions is allowed $25,000 per distribution. In Ontario, an accredited investor is also subject to an annual investment limit of $50,000 for all distributions in the same calendar year.

It is evident from the trend data showing the growth in equity crowdfunding in North America, and if this trend correlates to Canada, that investors may use this investment option in great numbers to fulfil the risk portion in their overall investment strategy.

Moreover, with MI 45-108 now providing an effective and regulated way to participate in equity crowdfunding, financial planners and advisors need to understand equity crowdfunding to help their clients.

Financial planners and advisors can add value for their clients by helping them understand the investment and regulatory rules of equity crowdfunding and assist them with the risk assessment and appropriateness of such investments within the context of their clients' overall investment strategy.

Although the investment limits are small in the introduction of MI 45-108, financial planners and advisors can help shape the financial behaviour of their clients in anticipation of larger investor investment limits for equity crowdfunding in the future.

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