Ontario shorts Crowdfunding shares!!

By Russell MartelCrowdfunding for Shares

There are two major drawbacks to the Ontario Crowdfunding proposal:

  1. resale of Crowdfunding shares are restricted;
  2. there is no marketplace for trading Crowdfunding shares of non-reporting issuers.

Would you buy shares that are almost impossible to sell because they have an indefinite hold period?

A third restriction is the $2,500 limit in a single Crowdfunding investment and $10,000 annual Crowdfunding limit. The unintended consequences of the indefinite hold resale constraints are discussed below.

Resale restrictions on Crowdfunding shares: The resale restrictions are a significant disincentive to purchase Crowdfunding shares.

The Ontario proposal states: “Securities of a non-reporting issuer are subject to an indefinite hold period and can only be resold under another prospectus exemption or under a prospectus.”

Reporting issuers can use Crowdfunding to sell shares. There is only a four month hold period for most purchases of Crowdfunding shares issued by a reporting issuer.

An ongoing harmful constraint of the “indefinite hold period” is Crowdfunding investors will prefer to buy shares of reporting issuers rather than non-reporting issuers. We predict that over time most of the Crowdfunding money would go to reporting issuers because shares of reporting issuers have a four month hold and shares of non-reporting issuers have an indefinite hold.

The resale restrictions of Crowdfunding shares for non-reporting Crowdfunding companies are found in Appendix D of the March 20, 2014 Ontario 54-106 proposal.

No market for trading Crowdfunding shares: The Ontario proposal fails to offer any comments about where or how investors can sell Crowdfunding shares of non-reporting issuers. Lack of a market would discourage investor buying shares of non-reporting issuers.

A solution to illiquidity of Crowdfunded shares is an extended hours trading market for the shares of non-reporting issuers ­which is unlikely to occur in Ontario.

The Ontario Crowdfunding proposal does have three positive features:

  1. Incentives in addition to shares;
  2. $1,500,000 annual fund raising limit for Crowdfunding companies;
  3. both non-reporting start-ups and reporting issuers can use Crowdfunding.

Incentives in addition to shares: One positive aspect of the Ontario proposal is “An issuer can combine securities and non-securities rewards and perks in a crowdfunding offering.” Offering creative incentives would help non-reporting Crowdfunding issuers sell shares.

Questions & Comments: Contact Russell Martel at russellmartel@eCrowdex.com or 540-464-5333 for comments and questions about Crowdfunding for shares and security trading.