Overregulation of Crowdfunding Could Hurt Canadian Startups, TD Report Says

Crowdfunding’s growth—and, consequentially, the growth of some Canadian startups—could be hindered by over-regulation, suggests a new report from TD Economics.

Following an indication from the Ontario Securities Commission that it will introduce a proposed framework for equity crowdfunding in March, TD Economics release a report that states there is a risk of overregulation, “especially given the innovative nature associated with crowdfunding.” Some regulation is needed, according to the report, but only that which is “effective and enforceable.”

Senior TD economist Sonya Gulati says that regulators could hamper crowdfunding in Canada if compliance costs reach a point where they outstrip the administrative costs of traditional financing channels. Another concern, according to Gulati, is that investors “may not be inclined to exert the effort” to conduct due diligence of their own if they feel the regulators have taken care of the risks through their rules.

Possible regulations include a cap of the amount that can be raised by a single entity in a one-year period ($1.5 million has been rumoured), as well as a cap on the amount an individual backer can pledge.

Once the framework is proposed in May, there will follow a three-month period for discussions to spur tweaks of the rules.