On November 5, 2015, the securities regulatory authorities in Manitoba, Ontario, Québec, New Brunswick and Nova Scotia (the Participating Jurisdictions) published, in final form, Multilateral Instrument 45-108 —Crowdfunding (MI 45-108). This instrument includes a crowdfunding prospectus exemption (the Crowdfunding Exemption) and a registration framework for funding portals (the Funding Portal Requirements) to allow start-up and early-stage companies to raise capital.
The final form of the Crowdfunding Exemption comes as a result of consultations following the proposed MI 45-108 published on March 20, 2014.
The crowdfunding regime under MI 45-108 will coexist with the Start-Up Crowdfunding Exemptions implemented by way of harmonized blanket orders in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (for additional information on the Start-Up Crowdfunding Exemptions, please refer to our bulletin here). As a result, there will be two different crowdfunding regimes in Canada applicable to varying groups of issuers, some of which will overlap. Promoters of crowdfunding may be disappointed with the coexistence of two different crowdfunding regimes given the Canadian consensus on the need for harmonized private placement rules.
Provided all necessary Ministerial approvals are obtained, MI 45-108 will come into force in the Participating Jurisdictions on January 25, 2016. The Financial and Consumer Affairs Authority of Saskatchewan will be republishing MI 45-108 for a 60 day comment period.
What is Crowdfunding?
Crowdfunding generally refers to a method of funding a project or venture through small amounts of money raised from a large number of people typically through an internet portal acting as intermediary. The securities-based model of crowdfunding is the practice of the crowd investing in an issuer in exchange for the issuer's securities, which are often equity securities but may include other types of securities, including debt securities. The objective of the crowdfunding regime under MI 45-108 is to enable businesses to raise capital online, through a registered funding portal, while maintaining an appropriate level of investor protection and regulatory oversight.
The Crowdfunding Exemption
The Crowdfunding Exemption is available to reporting issuers and non-reporting issuers that are incorporated or organized under the laws of Canada or a jurisdiction of Canada. MI 45-108 permits the principal operating subsidiary of an issuer to be incorporated or organized under the laws of Canada, a jurisdiction of Canada, the laws of the United States, or a jurisdiction of the United States to be an eligible crowdfunding issuer.
The following is a summary of the significant requirements, limits and conditions that issuers are required to meet under the Crowdfunding Exemption:
- Type of Security. Issuers can only offer non-complex securities including, common shares, non-convertible preference shares, securities convertible into common shares or non-convertible preference shares, non-convertible debt securities, units of a limited partnership and flow-through shares under the Income Tax Act.
- Investment Limit. In the Participating Jurisdictions, a purchaser that is not an accredited investor is subject to an investment limit of $2,500 per distribution, and in Ontario such purchaser is also subject to an annual investment limit of $10,000 for all distributions made in reliance on the Crowdfunding Exemption in the same calendar year. In all Participating Jurisdictions, an accredited investor is subject to an investment limit of $25,000 per distribution and in Ontario, an accredited investor is also subject to an annual investment limit of $50,000 for all distributions made in reliance on the Crowdfunding Exemption in the same calendar year. In Ontario, an investor that is a permitted client (as defined in National Instrument 31-103 — Registration Requirements, Exemptions and Ongoing Registrant Obligations) is not subject to an investment limit.
- Issuer Group Limit. Issuers are not permitted to raise more than $1,500,000 under the Crowdfunding Exemption within the 12-month period ending on the last day of the distribution period.
- Offering Documents and Advertising. Issuers are required to prepare an offering document, based on the form prescribed in MI 45-108, that contains certain information about the issuer, the issuer's business and management, the distribution, the funding portal and informs the potential investor of their rights. An issuer cannot, directly or indirectly, advertise a distribution or solicit purchasers under the Crowdfunding Exemption. However, the issuer may inform purchasers that it proposes to distribute securities under the Crowdfunding Exemption and may refer purchasers to the funding portal facilitating the distribution.
- Liability for Materials. Issuers are subject to liability for misrepresentations or untrue statements of material facts contained in the crowdfunding offering document and other permitted materials, and investors are provided with a related right of action.
- Ongoing Disclosure Requirements.Non-reporting issuers must make available to investors: (i) annual financial statements, (ii) a notice of use of proceeds, and (iii) in New Brunswick, Nova Scotia and Ontario, a notice of a discontinuation of the issuer's business, a change in the issuer's industry or a change of control of the issuer. Reporting issuers must continue to comply with their disclosure requirements, under National Instrument 51-102 – Continuous Disclosure Obligations.
- Investor Protections. Investors must complete a Risk Acknowledgment Form requiring them to positively confirm having read and understood the risk warnings and information in the crowdfunding offering document before they may enter into an agreement to purchase securities.
- Resale Restrictions. Securities of a reporting issuer acquired under the Crowdfunding Exemption are subject to a four-month hold period. Securities of a non-reporting issuer cannot be resold in a jurisdiction: (a) until the issuer becomes a reporting issuer and certain other conditions are met; or (b) unless the sale is made under another available prospectus exemption.
- Concurrent Distributions. An eligible crowdfunding issuer may distribute securities under other prospectus exemptions, such as the accredited-investor exemption or the offering-memorandum exemption, during the distribution period. Securities distributed under other prospectus exemptions do not need to have the same price, terms and conditions as those distributed under the Crowdfunding Exemption.
Funding Portal Requirements under MI 45-108
Issuers may only distribute securities through a single funding portal that is registered as an investment dealer, exempt market dealer or restricted dealer as outlined in MI 45-108.
A funding portal must fulfill certain gatekeeper responsibilities before granting an issuer access to its online platform, which include the following:
- Reviewing the issuer's disclosure in the crowdfunding offering document and other permitted materials for completeness, accuracy and any misleading statements;
- Obtaining background checks on the issuer and its directors, executive officers and promoters; and
- Denying an issuer access to the funding portal in certain circumstances.
Additional requirements are imposed on restricted dealer funding portals. In Ontario, a restricted dealer funding portal is only allowed to distribute securities under the Crowdfunding Exemption as the Start-up Exemption is not currently available in this jurisdiction. In the Participating Jurisdictions other than Ontario, this type of funding portal will be permitted to act as an intermediary in connection with securities offerings under both exemptions.
Funding portals are prohibited from offering securities of a related issuer and may not, directly or indirectly, advertise a distribution or solicit purchasers under the Crowdfunding Exemption. Issuers may post the offering document and other permitted materials solely on that funding portal's online platform.
Crowdfunding in the United States
On October 30, 2015, the United States Securities and Exchange Commission (SEC) adopted the final rules to permit equity crowdfunding in the United States. The SEC adopted Regulation Crowdfunding under theSecurities Act of 1933 and the Securities Exchange Act of 1934 to implement the requirements of Title III of theJumpstart Our Business Startups Act. Regulation Crowdfunding also provides a framework for the regulation of registered funding portals and broker-dealers that issuers are required to use as intermediaries in reliance on the crowdfunding exemption. Non-U.S. companies will not be eligible to use the Regulation Crowdfunding exemption. The final rules will be effective 180 days after publication in the Federal Register.
The crowdfunding regime under MI 45-108 encompasses many of the investor protection elements of the crowdfunding exemption under Regulation Crowdfunding. Below is a comparison chart of the key requirements under both MI 45-108 and Regulation Crowdfunding.
Click here to view the table.
Funding Portal Requirements under Regulation Crowdfunding
Regulation Crowdfunding transactions must take place through an SEC registered intermediary, either a broker-dealer or a funding portal. Under Regulation Crowdfunding, offerings must be conducted exclusively through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant. The rules require these intermediaries to:
- Provide investors with educational materials;
- Take measures to reduce the risk of fraud;
- Make available information about the issuer and the offering; and
- Provide communication channels to permit discussions about offerings on the platform; and facilitate the offer and sale of crowdfunded securities.
The rules prohibit funding portals from:
- Offering investment advice or making recommendations;
- Soliciting purchases, sales or offers to buy securities offered or displayed on its platform;
- Compensating promoters and others for solicitations or based on the sale of securities; and
- Holding, possessing, or handling investor funds or securities.