An Angel Investor’s and Founder’s Guide to Securities Regulations: What (and Why) You Need to Understand the Role Securities Regulators Play in the Innovation Ecosystem.

About the Publication

Recently, Mark Lawrence, executive chair of Angel Investors Ontario, penned and today published An Angel Investor’s and Founder’s Guide to Securities Regulations: What (and Why) You Need to Understand the Role Securities Regulators Play in the Innovation Ecosystem. This guide was designed and written for angels, founders, academia, accelerators, incubators and pretty much everyone else in the ecosystem who would benefit from learning more about what security regulators do, how it affects startups raising funds and how it differs from what we see about securities regulations in pop culture (think Suits and Billions). Lawrence (also the managing director of NorthCrest Partners Inc., an exempt market dealer in Ontario, and former top-ranked securities analyst covering tech, biotech and telecom stocks for decades) sat down with us to explain who should read it, what you’ll learn and why AIO believes we need this guide now.

AIO: Tell us about your experience creating the guide for angels and founders to better understand securities regulations in Ontario. Why did you create it?

Mark Lawrence: It was a pleasure to create a guide to assist both Ontario’s angels and founders. As I put it together, I was really trying to level the playing field for both sides by integrating terms and notions of securities regulations that both need to have a basic understanding of. I wanted to untangle the many misconceptions of the rationale behind the need to follow good corporate governance and our provincial securities laws. In my 37 years of experience, I’ve discovered many people have preconceived ideas about securities regulations and laws—there are tremendous misconceptions about why entrepreneurs need to understand how securities regulators work when it comes to raising funds. I’ve met people who believe they can selectively pick the parts of securities and general corporate governance they need to abide by. In creating this guide, I wanted to help reduce the situations where startups raise money and sidestep regulations, which are later discovered by the regulators, who then declares the funding unlawful and mandates the refund of investments to the angels. It’s happened, and it can be a devastating outcome.

There’s a mandated level of disclosure to the public—most security regulators support a transparent marketplace of information. No one wants an unsuspecting buyer to be given wildly incorrect and misleading information. I developed this guide to give back to this community. It is important as investors that we enhance and maintain the integrity and reputation of our capital markets. Ontario has a reputation of being a safe place to invest, and I’d like to see it stay that way.

I’ve heard many investors and entrepreneurs say regulators put up roadblocks for investment. In realty, I believe a main underlying mission of those regulators is to reduce the investment risk for investors. The rules and regulations they create are designed to seek a common set of operating standards for financial market participants and to track their compliance with a goal to deter those who might be trying to take advantage of innocent investors. I believe that a little self-education could be a proactive remedy. That’s what this guide is for.

AIO: Why were you the right person to create this robust guide? And why is it so key for this publication to have AIO’s backing and stamp of approval?

ML: As executive chair of AIO, I have been a participant in many parts of the capital markets in Canada and Ontario, while also working with globally based clients and firms. My quest for knowledge and skills led me to take the three years of the Chartered Financial Analyst curriculum, which greatly expanded my technical skills in capital markets, but it also added a code of ethics to follow, much like that of my professional engineer credential. There are many people who operate in the capital markets without having such codes of conduct, and I try my best to educate both entrepreneurs and investors about the importance of avoiding pitfalls in the capital markets.

I wanted to leverage the AIO platform to impart some gained experience as it relates to the innovation ecosystem. The capital markets sector is a relatively small community of individuals, and all segments operate on due diligence and information transparency to investors. The accredited angel investor market relies on those premises to reduce risk and improve their adjusted reward forecasts. We have visibility into many related parts of the ecosystem that we think could benefit from this publication and guide.

AIO: Who should be reading this guide?

ML: It’s not just for seasoned or serial angel investors or entrepreneurs, but for those who may now qualify as accredited investors and now have time to consider investing and mentoring local innovators. I wanted to target a wider audience beyond angels and entrepreneurs—I’m including incubators and accelerators, economic development personnel, as well as post-secondary institutions that have strong tech transfer departments. Those entities should be guiding their innovation clients with a sprinkling of what the guide discusses. The better entrepreneurs and angels are prepared prior to meeting, the better they’ll work together come due diligence and deal-making.

I also want this publication to be read by accredited investors who have elderly parents who will likely, at some time, be targeted by bad actors as discussed in the guide. My parents were targeted as well. There are certain red flags to cause concern that people in general should be aware of.

AIO: There’s a lot of invaluable information here. What do you believe to be the three biggest takeaways for angel investors?

ML: First, as an angel or entrepreneur, you don’t get to selectively pick and choose what securities regulations to follow when dealing with capital formation. Second, there are serious consequences to your investee company and your angel company portfolios if shortcuts are taken in paperwork. Finally, security regulators work to enhance accessibility, while reducing perceived roadblocks, increasing outreach to aid both angels and entrepreneurs with assistance to understand how to navigate the organization, and providing some innovators potential new rules to test when applying new technology to financial-related platforms.

AIO: Same question as above, but for Ontario’s founders—what should they know?

ML: First, founders don’t want to be in a situation where they made decisions, or followed unregulated advisers, to structure a financing which was proven by the Ontario Securities Commission later to be unlawfully executed. We encourage founders to be proactive and become familiar with the regulatory landscape, even though they might need to institute some enhancements when trying to attract angel investors. Second, entrepreneurs should agree to the request by angels to provide regular post-investment reporting of financials and business metrics. Transparency is key—awkward situations kept secret don’t improve like fine wine.

Finally, I want founders to avoid hiring unregulated advisers who tell them they don’t need to be regulated because they are only selling debentures, and those aren’t stocks. Securities regulations cover trading and selling of stocks, bonds, debentures, derivatives, funds and cryptocurrencies, to name a few.

Visit AIO’s Knowledge Hub: A Resource for New Investors and Entrepreneurs LINK HERE

NOTE: The views and opinions expressed in this Q&A and the mentioned guide are those of Mark Lawrence personally and do not reflect any official opinions of any securities regulators mentioned.