The long awaited start-up crowdfunding exemptions have now been adopted in six Canadian provinces. As of May 14, 2015, the substantially harmonized exemptions are available in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia. The objective of this initiative is to facilitate capital raising by start-up and early stage companies, while protecting the public interest.
The start-up crowdfunding exemptions are limited to smaller crowdfunding efforts by non-reporting issuers. The start-up crowdfunding regime was one of two proposals originally put forward by certain provincial securities regulatory authorities in March 2014. The other crowdfunding proposal – which would be available to both reporting issuers and non-reporting issuers and provide a higher offering limit – has not yet been implemented. Although Ontario is not adopting the start-up crowdfunding exemptions, it is one of the jurisdictions participating in the other crowdfunding proposal.
The start-up crowdfunding exemptions include an exemption from the prospectus requirement for non-reporting issuers, and an exemption from the dealer registration requirement for funding portals. Some of the key conditions of the prospectus exemption are as follows:
- the issuer’s head office must be located in a participating jurisdiction;
- the issuer must distribute the securities using an offering document in prescribed form that is made available through an online funding portal;
- the funding portal used in the distribution must meet the requirements of the start-up registration exemption or must be operated by a registered dealer;
- aggregate funds raised in reliance upon the start-up crowdfunding exemption must not exceed $250,000 per distribution and no more than two start-up crowdfunding distributions may be made by the issuer in a calendar year;
- no person may invest more than $1,500 per distribution;
- each distribution must remain open not more than 90 days; and
- the issuer must provide each purchaser with a contractual right to withdraw the purchaser’s offer to purchase securities within 48 hours of the purchaser’s subscription or notification to the purchaser that the offering document has been amended.
To rely on the start-up crowdfunding registration exemption, a funding portal must, at least 30 days before facilitating its first start-up crowdfunding distribution, deliver to the securities regulators a funding portal information form and individual information forms for each of its principals (promoters, directors, officers and control persons). A funding portal will not be permitted to use the registration exemption if a participating regulator finds that the portal’s principals or their past conduct demonstrate a lack of integrity, financial responsibility or relevant knowledge or expertise. Some of the other requirements a funding portal must satisfy to use the registration exemption include the following:
- its head office must be located in Canada;
- the majority of its directors must be Canadian residents;
- it must not provide advice to any purchaser about the merits of the investment or otherwise recommend or represent that a security is suitable;
- it must not receive a commission, fee or any other amount from a purchaser of securities; and
- it must make available to purchasers online the offering document of the issuer and prescribed risk warnings, and it must not allow a subscription to be completed until the purchaser has confirmed that it has read and understood those documents.
The start-up crowdfunding exemptions will expire on May 13, 2020.