The past decade has seen the birth of peer-to-peer lending in Canada, especially among small businesses. This online financial practice, which rapidly gained popularity in the United States prior to its introduction in Toronto and Montreal, is an interaction between lenders and borrowers that does not involve a bank. The intermediary normally arranges loan agreements with low interest rates for applicants with good credit records. Often the amount borrowed is not large enough to appeal to a major financial institution.
Since each Canadian province administers its own regulations pertaining to Equity Crowdfunding, the participation in P2P lending varies with location. The lenders are considered to be investors, so each operating organization is recognized under the law as a “security”. In order to conduct business legally, the internet agent needs an exemption from the prospectus and registration requirements of several distinct regulatory authorities. Proposals for new rules have been drafted, but some social lenders choose to operate under the offering memorandum exemption which has been in existence for years in every province except Ontario. Regulators in British Columbia have been inclined to accept the OM exemption as an appropriate classification for P2P lending. Administrators in Ontario and Saskatchewan, on the other hand, have recommended more specific legislation.
Currently each provincial regulatory organization is requesting feedback from constituents about the new microcredit proposals. Two general ideas have been suggested: a start-up exemption and a crowd funding exemption. The Saskatchewan Financial and Consumer Affairs Authority was the first to recommend the start-up exemption and has already implemented the plan. Regulators in British Columbia are considering it as well. The plan is geared toward early-stage businesses and offers relaxed government controls when less than $300,000 per year is borrowed or raised. The crowdfunding exemption concept originated in Ontario and requires strict registration and reporting procedures. Companies under this plan can raise up to $1.5 million each year. Both proposals are being considered in Manitoba, Quebec, New Brunswick, and Nova Scotia,
The start-up exemption strategy pertains only to Canadian residents with businesses controlled in a province that has adopted the law. Therefore, Saskatchewan and British Columbia are appealing locations for entrepreneurs who wish to start a new venture using P2P lending for small transactions. More established industrialists, particularly those with companies listed on the stock exchange, may choose to incorporate and head their enterprises in Ontario so they can participate in crowdfunding activities.
Some critics of online lending and borrowing systems warn that large institutions are gradually gaining control of the portals, thus diminishing the peer-to-peer ideology. They claim that small business owners will eventually lose the ability to compete in the practice. Nevertheless, Canadians foresee a bright future for P2P lending in their homeland. Although crowdfunding is conducted on a smaller scale in the Great White North than in the United States, it is a viable option to many investors north of the border.