In recent years, equity crowdfunding has captured the interest of small-to medium-sized enterprises and start-ups as a way to raise capital by the distribution/sale of securities to members of the broad public rather than through conventional means. Crowdfunding is typically conducted through an online funding portal. This funding portal allows for issuers to connect with prospective public investors.
How to best regulate equity crowdfunding has proven to be a vexing issue for Canadian securities regulators in recent years. However, whether a consensus around a new regulatory regime has now developed in Canada is debatable but we at least will have rules in place covering equity crowdfunding in most Canadian jurisdictions. Previously, we have discussed this emerging regulatory regime in our March 2014 and September 2015 bulletins.
New Multilateral Instrument 45-108 - Crowdfunding
Multilateral Instrument 45-108 - Crowdfunding (“MI 45-108”) is expected to come into force on January 25, 2016 in Ontario, Quebec, Manitoba, New Brunswick and Nova Scotia. MI 45-108 creates a prospectus exemption for equity crowdfunding issuers, in addition to a registration framework for funding portals. The important aspects of MI-45-108 are as follows:
- an individual investment limit of $2,500 per investment (and in Ontario, $10,000 per calendar year) for non-accredited investors, and $25,000 per investment (and in Ontario, $50,000 per calendar year) for accredited investors (in addition, in Ontario only, there are no investment limits for “permitted clients”);
- a limit of $1.5 million on the amount that an issuer can raise from equity crowdfunding exemption over a one year period (note that the issuer can still raise money via other exemptions, such as the accredited investor exemption);
- an obligation on investors to complete a Risk Acknowledgement Form;
- liability of issuers for statements made in offering documents and other permitted materials; and
- all equity crowdfunding must be conducted through an online funding portal that is formally registered with securities regulators.
The registration framework for funding portals seeks to protect crowdfunding investors by requiring funding portals to ensure that investors understand the risks associated with crowdfunding. The following are some of the important parts of the registration framework:
- funding portals are required to register as a restricted dealer under National Instrument 31-103 -Registration Requirements, Exemptions and Ongoing Registrant Obligations;
- funding portals must conduct due diligence on a prospective issuer, including reviewing the issuer’s disclosure documents and obtaining background checks on the issuer, as well as its directors, executive officers and promoters;
- funding portals are prohibited from permitting issuers to offer complex securities; and
- a funding portal must disclose any compensation that is paid to it by an issuer.
MI 45-108 and Multilateral CSA Notice 45-316
Quebec, British Columbia, Manitoba, New Brunswick, Nova Scotia and Saskatchewan already have a regulatory regime in place for equity crowdfunding, which was adopted in May 2015 in Multilateral CSA Notice 45-316. It provides a prospectus exemption for issuers and a registration exemption for funding portals. For Quebec, Manitoba, New Brunswick and Nova Scotia, the new MI 45-108 crowdfunding regime will largely coexist with CSA Notice 45-316. However, because MI 45-108 has not been adopted by British Columbia and Saskatchewan, an issuer cannot use the MI 45-108 crowdfunding exemption as a basis for raising capital from investors residing in those provinces.
Prospectus exemption under CSA Notice 45-316
Similar to MI 45-108, the prospectus exemption pursuant to CSA Notice 45-316 allows for issuers to raise capital through crowdfunding, without having to comply with many of the onerous obligations associated with a traditional public offering of securities.
In order for an issuer to take advantage of CSA Notice 45-316 the issuer must:
- not be a “reporting issuer” (for instance, a publicly traded company) or an investment fund;
- have its head office located in one of British Columbia, Manitoba, New Brunswick, Nova Scotia, Quebec or Saskatchewan;
- comply with certain limitations on the type of, and manner that, securities must be offered. These include:
- a requirement to allow investors a 48 hour cooling off period;
- $1,500 limitation on amounts that can be raised from a single, individual investor;
- $250,000 aggregate limit from any offering conducted under the prospectus exemption; and
- limitation of two offerings per year under this prospectus exemption.
This new prospectus exemption is already allowing companies who are under-funded to find unique, new investors. For instance, British Columbia based company Guusto successfully raised over $50,000 from 18 investors this fall.
Registration exemption under CSA Notice 45-316
The registration exemption under CSA Notice 45-316 allows for funding portals to facilitate distributions/offerings made under this system without having to be formally registered under the applicable provincial securities regime. However, like the prospectus exemption, there are numerous conditions that apply to this exemption. These include the following:
- submission of information forms by the funding portal and its principals;
- a requirement that the funding portal be “Canadian” (the head office must be in Canada and a majority of directors must be Canadian residents); and
- the funding portal cannot receive a commission, fee or any other amount from any purchaser.
Another crowdfunding exemption regime?
Alberta has not participated in either of the above-described regulatory regimes. However, the Alberta Securities Commission and the Nunavut Securities Office recently released a proposed crowdfunding exemption for start-ups in their jurisdictions (Proposed Exemption: 45-109 Prospectus Exemption for Start-Up Businesses). The Alberta Securities Commission is accepting comments on the proposed exemption until December 18, 2015.
*Nicholas Sharratt is an articled student based in Toronto.