The Autorité des marchés financiers, along with the securities regulators of British Columbia, Saskatchewan, Manitoba, New Brunswick and Nova Scotia (the “Jurisdictions”), recently implemented a new equity crowdfunding exemption (the “Crowdfunding Exemption”) by way of Multilateral CSA Notice 45‑316 – Start-up Crowdfunding Registration and Prospectus Exemptions (“45-316”). This was in response to the success and ever increasing importance of alternative financing platforms for start-ups targeting a broad base of atypical smaller individual investors (“ASII”) and fuelled by the connectivity provided by the internet and social media networks. 45-316 now allows early‑stage companies in the Jurisdictions that are not reporting issuers to access financing without having to comply with the prospectus requirements typically required to access ASII. as well as the associated dealer registration requirement (the “Registration Exemption”).
The Crowdfunding Exemption authorizes non-reporting issuers to issue common shares, non-convertible preference shares, securities convertible into the two previous categories of shares, non-convertible debt securities linked to a fixed or floating interest rate, and units of a limited partnership (the “Eligible Securities”) without filing a prospectus, subject to certain conditions, including:
- the issuer’s head office is located in one of the Jurisdictions;
- the issuer’s securities are issued and paid for via an online funding portal that is exempt pursuant to the Registration Exemption described hereinafter or is operated by a registered dealer, subject to certain conditions;
- the issuer distributes Eligible Securities using an offering document that includes basic information about its business and management as well as the proposed financing, including the use of the funds raised, and the minimum financing amount;
- the issuer group is authorized to raise a maximum of $500,000 per calendar year using a maximum of two financings of not more than $250,000;
- each ASII cannot invest more than $1,500 per financing;
- the financing must be completed within a maximum period of 90 days; and
- the issuer provides each purchaser with a contractual right to withdraw an offer to purchase securities within 48 hours of subscription or reception of a notification from the issuer that an amendment has been made to the offering document.
The Registration Exemption authorizes crowdfunding platforms to facilitate financings without the need to register as a dealer, subject to certain conditions, including:
- the funding portal must deliver a funding portal information form and individual information forms for each of its principals to the participating jurisdiction at least 30 days prior to facilitating its first financing;
- the head office of the funding portal is located in Canada;
- the platform is not registered;
- the majority of the funding portal’s directors are Canadian residents;
- the platform does not provide any advice to the ASII nor promote in any way the merits of an investment;
- no commission, fee or any other amount is paid to the funding portal by the ASII;
- the funding portal provides the issuer’s offering document and risk warnings, and requires any ASII to confirm that it have read and understood these representations before it can acquire Eligible Securities;
- the funding portal receives payment through its website;
- the funding portal maintains books and records for a period of 8 years from the date the record is created;
- the funding portal holds the purchaser’s assets in trust, separate from its own assets; and
- the funding portal either (i) releases funds to the issuer after the minimum offering amount has been reached (provided that the 48-hour right of withdrawal has elapsed); or (ii) returns the funds to the purchasers if the minimum offering amount is not reached or if the start-up crowfunding distribution is withdrawn by the issuer.
A participating regulator in the Jurisdictions reserves the right to notify the funding portal that it cannot rely on the Registration Exemption because its principals or their past conduct demonstrate a lack of integrity, financial responsibility, or relevant knowledge or expertise.
It is important to note that the Eligible Securities issued under the Crowdfunding Exemption are subject to the same indefinite hold period as securities issued under the private issuer exemptions and, accordingly, can only be resold under another prospectus exemption, a prospectus, or four months after the issuer becomes a reporting issuer.
Nevertheless, the Crowdfunding Exemption can be an extremely interesting alternative to the existing private placement prospectus exemptions (such as the accredited investor exemption, the minimum investment amount exemption, the prescribed offering memorandum exemption or the close friends, family and business associates exemption) for early-stage non-reporting issuers and should be considered, either as a main platform or as a complement to a more traditional effort, if you are an issuer planning a financing. However, in order to ensure that you qualify for the Crowdfunding Exemption, you should carefully consider the applicable conditions which must be met prior to offering securities through a funding portal and be aware in which jurisdiction you and the investors are based, since different regulatory regimes may apply. (Note, for instance, that Ontario currently does not have a crowdfunding exemption in force.)