There are two major drawbacks to the Ontario Crowdfunding proposal:
- resale of Crowdfunding shares are restricted;
- 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.
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.
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:
- Incentives in addition to shares;
- $1,500,000 annual fund raising limit for Crowdfunding companies;
- both non-reporting start-ups and reporting issuers can use Crowdfunding.
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.
[email protected] or 540-464-5333 for comments and questions about Crowdfunding for shares and security trading.Contact Russell Martel at