DIVERSIFYING WORKS

New rules finally open up an alternative asset class for retail investors to access

For a long time, private equity in Canada was reserved for the wealthiest of investors — either institutional investors or accredited investors. Unfortunately, those designations are beyond the reach of the overwhelming majority of investors. In Ontario, an accredited investor must have financial assets (either alone or with a spouse) worth more than $1 million before taxes but net of liabilities, or have net assets of at least $5 million (again, alone or with a spouse).

Historically, these rules were designed to protect retail investors. That’s a good thing, but it also means that most Canadians have almost zero access to the private-equity market, which is detrimental. Private equity falls into the alternative assets category, has a low correlation to the broader market and is another form of diversification. And, as any fund manager will tell you, diversification is a good thing. The rules also mean that if a business wants to raise funds from the public, they have to do an IPO and meet a whole host of (often expensive) regulatory requirements — again, not ideal.

Equity crowdfunding solves both of those issues. An equity crowdfunding exemption was introduced in January by six provincial securities commissions to bring private equity to the masses, with a set of rules and regulations that helps protect them at the same time. The provinces adopted a harmonized set of equity crowdfunding rules, which will allow companies, using registered online portals, to raise money from all investors. Accredited investors can invest up to $25,000 per company, up to a total of $50,000 yearly. For retail investors, the maximum will be $2,500 per investment. Other provinces have different rules, with British Columbia restricting individual investments to $1,500 and Ontario having a total cap for all equity crowdfunding investments of $10,000.

But the big takeaway is the new rule helps close the gap in choices that average retail investors have compared to their richer brethren. And that’s always a good thing.