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Equity Crowdfunding?

Apr 23rd, 2013

Part 2 of a Series on Crowdfunding

Start-ups and established businesses alike may soon be able to access new source of capital from a worldwide audience as the Autoritie du Marché Financiere (“AMF”) is considering authorizing equity crowdfunding.

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As I mentioned in my last article,  equity crowdfunding occurs when capital stock in a company is issued and sold in small amounts to large numbers of people.

Equity crowdfunding is considered an investment since a contribution is made to a corporation in return for participation in the profits at some future date. As such, it is governed by the Québec Securities Act which is enforced by the AMF.

If the company issuing securities does not follow the Québec Securities Act, then the crowdfunding campaign is illegal. Currently, equity crowdfunding is essentially unlawful in Canada.

If a corporation wants to issue shares to the public at large it must navigate complicated and extensive (and therefore expensive) securities regulations. This includes publishing a prospectus and having yearly audited financial statements prepared.

It is for these reasons that a corporation cannot simply issue stock over the internet for anyone with internet access to purchase.

One of the ideas being explored by the AMF is to expand the “accredited investor” exemption or create a new exemption with respect to crowdfunding. This will allow businesses to utilize equity crowdfunding to raise money thus giving them access to capital on a worldwide scale without the current high costs of a public offering.

Over the coming months businesses looking for new ways of raising capital should keep an eye out for the AMF’s actions on equity crowdfunding and check back here for updates.

Seth B. Abbey, a corporate lawyer at Spiegel Sohmer with a focus on mergers and acquisitions, private equity financing and tax-driven reorganizations, is available to answer your questions about this and other topics.

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