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Overregulation in crowdfunding will hurt Canadian startups, small businesses: TD

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TORONTO - Canadian startups are in a prime position to cash in on the growing popularity of crowdfunding, but regulators need to ensure that incoming rules do not hinder that potential, TD Economics warned Wednesday.

According to the 13-page report, the global crowdfunding market is estimated to be worth $3.25 billion, with the majority of the funds coming from North America and Europe.

But as other jurisdictions, mainly the United States, move to set rules on how crowdfunding can operate, Canada has only taken tentative steps towards a regulatory framework. In doing so, it runs the risk of losing investments for startups and small businesses.

"Due diligence and getting it right is likely the prudent course of action — there is an advantage to letting others go first and refine the best practices. However, Canadian regulators cannot drag their feet too long," wrote senior economist Sonya Gulati.

"If they do, there is the potential for entrepreneurs and enterprise owners to shift to jurisdictions which embrace crowdfunding. This leads to the potential loss of economic opportunities here in Canada. It also reduces the scope for startups and entrepreneurs."

For instance, the report noted that the U.S. has already loosened the rules over equity funding, as have other countries such as Australia, the United Kingdom, France, Belgium, Germany and the Netherlands. Currently, in Canada, crowdfunding is used only to solicit one-time donations whereas elsewhwere ongoing equity funding is possible.

Although crowdfunding accounts for a small fraction of overall business funding, Canada needs to act quickly on rules to govern the growing industry, TD says.

Crowdfunding has gained momentum in recent years with the popularity of websites like Kickstarter, which arrived in Canada in September 2013.

Since its founding in 2009, more than 5.5 million people have made $960 million in donations on the Kickstarter site to 55,000 projects ranging from a human-powered helicopter to the upcoming Veronica Mars movie by the creators of the now defunct cult TV hit.

According to the National Crowdfunding Association of Canada (NCAC), there were 45 crowdfunding platforms in Canada as of Jan. 2013, said the report.

Gulati noted that rules are needed to address a variety of concerns related to the industry, such as the potential for fraud, patent infringement and copyright concerns. But in doing so, regulators need to ensure they do not overregulate the crowdfunding industry.

"While effective and enforceable regulation is required, there is a risk of overregulation, especially given the innovative nature associated with crowdfunding," she said.

"Nevertheless, fraud, information asymmetry and crowd due diligence are structural barriers and risks that must be addressed if crowdfunding is to reach its utmost potential."

The report said this is particularly important for Canada, where venture capital funds have been declining, making it more difficult for startups and small businesses to raise funds in the $1 million to $2 million range, according to NCAC.

"Online crowdfunding could potentially be on the precipice of something great. Many believe it has the potential to improve the financing environment for entrepreneurs and business owners of micro-enterprises and startups," said Gulati.

"Some proponents go even a step further, saying that crowdfunding will fundamentally change how business will be conducted. An awareness of what crowdfunding is and comfort behind the transaction will be key for the market to realize its potential."

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