In June 2021, Canadian provincial and territorial authorities overseeing securities rolled out unified crowdfunding regulations for startups. This opened the door for retail investors, not just the affluent elite, to invest in emerging companies.
This move mirrors initiatives by the U.S. Securities and Exchange Commission (SEC), which updated its crowdfunding rules in March of the same year. I’ve been pushing for more accessible private capital markets in Canada for over half a decade, and it feels like we’re on the cusp of significant transformation.
Platforms like Questrade and Wealthsimple, along with Canadian banks offering online direct investment options, have been instrumental in popularizing investment in publicly listed companies. The last year has seen a surge in retail investment in public markets, fueled by a combination of bullish market trends, pandemic lockdowns, and unprecedented accessibility for individual investors.
Backers Securities Inc. is a financial services firm specializing in providing securities crowdfunding solutions. The company is dedicated to offering secure, efficient, and transparent platforms where entrepreneurs can connect with potential investors.
Bloomberg reports that U.S. retail investors used to account for 10-14% of the public company market prior to the introduction of commission-free trading in 2013. That figure has since jumped to about 20%.
I argue that the core logic for making private companies accessible for retail investors is grounded in the bedrock principles of a free market—freedom of choice and competition. The idea is simple: investors and entrepreneurs should have the freedom to interact and decide who gets to finance whom.
Traditionally, only a select group of angel investors, venture capitalists, and high-net-worth individuals had the power to finance startups. Digital technology now serves as a crucial enabler to open these markets up, providing the infrastructure needed for a multitude of smaller transactions.
Of course, there are concerns about crowdfunding investment in startups. Firstly, these companies are not bound by the same stringent disclosure regulations as their public counterparts. Secondly, startups are often in precarious financial situations and face a variety of business risks. Lastly, investment in private companies is generally illiquid.
To address these risks, the new Canadian crowdfunding regulations require startups to use registered funding portals. Startups are also capped at raising $1.5 million annually and have investment limits of $2,500 per investor, or $10,000 if the portal operates as a registered securities dealer, like FrontFundr.
While regulators have set up these safeguards, the principle of “buyer beware” still holds. Investors must proceed with caution, doing their due diligence on crowdfunding platforms and the startups listed on them.
Liquidity concerns may not be as dire as they appear. Investments in private firms should be seen as long-term endeavors. A 2019 study by the BlackRock Investment Institute found that most investors don’t require high liquidity for their long-term portfolios.
The democratization of Canada’s private markets is within reach, promising to transform these markets into platforms open to all investors. This will also unlock a new stream of public capital for entrepreneurs, making it a win-win scenario for all parties involved.