As noted in earlier blog posts here and here, the Ontario Securities Commission (“OSC”) initiated a consultation process in March 2014 on a proposed capital raising prospectus exemption aimed specifically at crowdfunded equity offerings (the “Crowdfunding Exemption”). This proposed exemption may allow businesses in Ontario to access capital (up to a maximum of $1.5 million in equity in any 12-month period) from a potentially large number of investors using an online “portal” platform that would be registered with the securities regulators. Currently, the OSC is in the process of reviewing public comments relating to the proposed Crowdfunding Exemption that were submitted as of June 18, 2014.
Crowdfunding has been lauded as a new and essential tool for start-ups and early stage businesses – facilitating access by small-cap entrepreneurs to a seamless, less cumbersome capital raising platform.
One aspect of the proposed Crowdfunding Exemption that has not been highly publicized, however, is the potential for existing Canadian reporting issuers (i.e., public companies) and larger private enterprises to potentially leverage this new proposed Crowdfunding Exemption for both equity raising and business development purposes.
The business case (and the legal case) for larger enterprises to leverage the proposed Crowdfunding Exemption seems to be clear.
First, larger enterprises could potentially lever off of the Crowdfunding Exemption as a method for identifying (and even replicating) ideas and trends among innovative start-ups that have successfully raised (or are seeking to raise) capital through a crowdfunding portal. One example of this strategic interplay between larger enterprises and smaller crowdfunded start-ups is General Mills and Proctor & Gamble, which, according to a recent Wall Street Journal article, appear to have partnered with a U.S.-based crowdfunding site in order to identify potential strategic partners or acquisition targets.
Second, by offering a streamlined exchange between “issuer” and a large pool of potential investors, larger enterprises can use this exchange to obtain critical data and insight from a new (potentially younger and more dynamic) audience of potential shareholders (who may not currently be active capital market participants). Given the popularity of crowdfunding among younger consumers, it is also possible that a successful crowdfunding campaign by a large enterprise will engage these new shareholders and in turn build both brand awareness and brand loyalty.
Finally, the proposed Crowdfunding Exemption may be a great way for larger enterprises to test new products and concepts on the open market – unhindered by the time and cost commitments associated with traditional marketing or capital raising efforts.
With crowdfunding still in its infancy, now may be the time for larger enterprises to explore the advantages of crowdfunding. With the new crowdfunding rules in Ontario under review, we would be pleased to discuss a compliance strategy that makes sense for your enterprise.