Is Ontario next? American Crowdfunding Rules Under Attack

By Russell MartelCrowdfunding for Shares

In response to delays and onerous rules proposed by the Securities and Exchange Commission, “SEC”, Congressman Patrick McHenry has proposed to repeal the Crowdfund Act, Title III of the Jobs Act. McHenry proposes to replace it with the Equity Crowdfunding Improvement Act of 2014, the “Improvement Act”.

The Ontario Crowdfunding proposal is similar and just as unworkable as what the SEC has proposed. We support Congressman McHenry, and hope that common sense will prevail for this important potential milestone in enabling small investors and small companies.

On May 1, before a House Financial Services Subcommittee, Jeff Lynn, Chief Executive Officer of Seedrs Limited, testified about the Crowdfund Act, and its proposed replacement. Lynn believes that the principle of caps on the amount an investor can invest has an unnecessarily paternalistic element to it, especially when other safeguards are in place.

In addition, Lynn contended that the financial statement requirements for issuers, in particular the audit requirement, are the most burdensome aspects of Title II and one of the main reasons it is unworkable.

McHenry’s “Improvement Act” closely mirrors the Crowdfunding bill that the House of Representatives originally passed before the Senate additions and the SEC rules. McHenry’s Improvement Act includes the following changes:

Size of Crowdfunding offerings: $3-million within a 12 month period or $5-million within a 12 month period if audited financial statements provided; both amounts are adjusted for inflation. This is a favorable increase to the $1-million of the existing Crowdfund Act.

Maximum Investor purchase of new Crowdfunding issuers: for non-accredited investors, an amount, if relying on the crowdfunding exemption, within a 12 month period of $5,000 or 10-percent of the investors income or 10-percent of the investors net worth; all amounts are adjusted for inflation.

This is more favourable than the greater of $2,000 or 5-percent of income or net worth of investors with net income or assets of less than $100,000 in the existing Crowdfund Act. For accredited investors, there is no maximum investment; in the existing Crowdfund Act, the maximum investment is $100,000.

Primary sale of Crowdfunding shares: In McHenry’s bill, Equity Crowdfunding issuers may sell shares directly to the public without using a broker or other agent. If a broker or portal are used the terms are similar to the Crowdfund Act.

Audit & financial statements: In McHenry’s bill, an audit is required for Equity Crowdfunding issuers that raises more than $3-million within a 12 month period. In the Crowdfund Act, raising $500,000 in the previous 12 month period triggers an audit.

In McHenry’s bill, an independent account review is required for Equity Crowdfunding issuers that raises more than $500,000 in the previous 12 month period. In the Crowdfund Act, $100,000 in the previous 12 month period triggers an independent account review of financial statements.

One year hold: In McHenry’s bill, there is a one year resale restrictions. In the Crowdfund Act, there is a one year transfer restriction which would not preclude a sale. Both McHenry’s proposal and the Crowdfund Act, provide for sales to the issuer and accredited investors and to some related parties. The one year hold is more realistic than the indefinite hold proposed in Ontario.

Please see document, Equity Crowdfunding Improvement Act of 2014