On November 5, 2015 securities regulatory authorities in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia (Participating Jurisdictions) published in final form the long awaited crowdfunding regime: Multilateral Instrument 45-108 Crowdfunding (Crowdfunding Regime) which includes a crowdfunding prospectus exemption (Crowdfunding Exemption) and a registration framework for funding portals. The Crowdfunding Regime is set to come into force in the Participating Jurisdictions on January 25, 2016.

Purpose of the Crowdfunding Regime

For many small and medium sized business enterprises (SMEs), selling securities over the internet to a large number of investors has emerged recently in some jurisdictions as the new way of accessing capital.  Through the Crowdfunding Regime, the Participating Jurisdictions intend to leverage the use of the internet and social media to facilitate online capital raises for start-ups and SMEs and provide new investment opportunities through a single funding portal. The Crowdfunding Regime maintains certain investor protections and regulatory oversight in line with the Participating Jurisdictions’ mandate to protect investors.

Background

As previously discussed in Timely Disclosure, in December 2013 the Ontario Securities Commission (OSC) initiated a consultation process to consider various prospectus exemptions to facilitate capital raising for SMEs. On March 20, 2014 the OSC published a notice and request for comment proposing four new capital raising prospectus exemptions in Ontario, including the proposed crowdfunding regime. The OSC received 70 written submissions during the four month comment period, and the Crowdfunding Regime was published in final form on November 5, 2015.

The Crowdfunding Exemption

The Crowdfunding Exemption permits both non-reporting and reporting issuers to issue securities to investors subject to certain conditions designed to protect investors. Some key conditions are:

Issuer Limits: Issuers may use the Crowdfunding Exemption to raise no more than $1.5 million during the 12 month period prior to the end of the current offering.  Other capital raising prospectus exemptions remain available to an issuer during this period.

Investor Limits: Non-accredited investors are limited to investing up to $2,500 per investment and $10,000 per calendar year; accredited investors are limited to investing $25,000 per investment and $50,000 per calendar year. There are no investment limits for permitted clients (being individuals with net financial assets of at least $5 million or corporations with net assets of at least $25 million).

Simple Securities: Issuers can offer only non-complex securities, including common shares and preference shares (and securities convertible into such shares), limited partnership units and flow-through shares.

Disclosure Document: Issuers must prepare an offering document that contains all of the information about the issuer and its business that an investor should know before purchasing the issuer’s securities. The disclosure will take the form of 45-108F1 Crowdfunding Offering Document (Crowdfunding Offering Document).

Canadian Issuer: The issuer must be incorporated or organized under the laws of a Canadian jurisdiction and must have its head office in Canada, and a majority of its directors must be resident in Canada.

Financial Statements: Non-reporting issuers that distribute securities in reliance of the Crowdfunding Exemption must have their financial statements: (i) audited or reviewed by a public accounting firm if the cumulative amount raised under the Crowdfunding Exemption is between $250,000 and $750,000; and (ii) audited if the cumulative amount raised under the Crowdfunding Exemption is over $750,000.

Funding Portal: Issuers may distribute securities only through a funding portal that is registered as an investment dealer, exempt market dealer or restricted dealer. The Crowdfunding Offering Document and other permitted materials must be posted solely on the funding portal’s online platform.  Funding portals are restricted from offering securities of a related issuer and must fulfill certain gatekeeping responsibilities including reviewing the issuer’s Crowdfunding Offering Document prior to allowing an issuer access to the portal. In addition, the funding portal must obtain background checks on the issuer and its directors, executive officers and promoters.

Advertising and Solicitation: all relevant information about the issuer’s crowdfunding offering must be made available on the funding portal’s online platform and not on any other website. An issuer may, however, inform potential investors of its proposal to offer its securities under the Crowdfunding Exemption and refer potential investors to its online platform.

Hold Period: securities issued in reliance of the Crowdfunding Exemption will be subject to a four-month hold period if the issuer is a reporting issuer and to an indefinite hold period in the case of a non-reporting issuer.

Other North American Crowdfunding Developments

Canada

Following a consultation period held early last year, the securities regulators of British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec and Saskatchewan announced on May 14, 2015 that they have implemented changes to their securities legislation to provide for registration and prospectus exemptions for start-ups and early-stage companies that wish to raise capital through crowdfunding (Start-up Exemption). The notable difference between the Start-up Exemption and the Crowdfunding Exemption is that the Start-up Exemption is available only to non-reporting issuers.  In addition, the offering limit under the Start-up Exemption is $500,000 versus $1.5 million under the Crowdfunding Exemption. There is no portal requirement under the Start-up Exemption.

The Alberta and Nunavut regulatory authorities have also published for comment a prospectus exemption to facilitate capital raising of up to $1 million for start-ups and early stage businesses. The exemption is being designed to work with the above noted start-up and crowdfunding exemptions.

United States

Finally, the United States Securities and Exchange Commission’s (SEC) much anticipated crowdfunding exemption was adopted on October 30, 2015.  The exemption, titled “Regulation Crowdfunding”, limits an issuer’s capital raise to an aggregate of US$1 million through crowdfunded offerings in a 12-month period and, in that same period, limits investors across all crowdfunding offerings to: (i) the greater of US$2,000 or 5% of the lesser of their annual income or net worth if either is less than US$100,000; or (ii) if both their annual income and net worth are equal to or more than US$100,000, 10% of the lesser of their annual income or net worth (not to exceed US$100,000 for any individual). Regulation Crowdfunding may not be used by companies who already report to the SEC, or by non-US incorporated companies. It is expected to become effective in May 2016.