In recent years, crowdfunding has proven an exceptionally popular and efficient means by which individuals and companies make use of the internet to attract investors for a variety of purposes. The traditional model generally involves a large number of individuals contributing small sums of money to finance specific ideas or projects. Increasingly, however, equity crowdfunding is emerging as a way for start-ups and early-stage companies that are non-reporting issuers to raise capital at an earlier stage of development through the issuance of securities. Equity crowdfunding has already proven successful in certain foreign jurisdictions, and is expected to make an impact in Canada.
Following a consultation period held early last year, the securities regulators of British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec and Saskatchewan (Jurisdictions) announced on May 14, 2015 that they have implemented, or expect to implement in the near future, 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. Businesses wishing to rely on the exemptions will be able to conduct crowdfunding distributions in the Jurisdictions.
The start-up crowdfunding exemption actually consists of two distinct exemptions. The first is a prospectus exemption for start-up companies seeking to raise capital. The second is a dealer registration exemption for persons wishing to operate a funding portal, a platform which facilitates start-up crowdfunding distributions.
The Jurisdictions plan to implement these exemptions by way of local blanket orders. The conditions associated with the two exemptions are outlined in Multilateral CSA Notice 45-316 Start-up Crowdfunding Registration and Prospectus Exemptions (CSA 45-316), and are summarized below. The start-up crowdfunding exemptions will be effective in each Jurisdiction concurrently with, or as soon as possible after, the publication of the notice of CSA 45-316. Each exemption order is available, or will be available shortly, on the websites of each Jurisdiction’s securities regulatory authority.
The start-up prospectus exemption
The start-up prospectus exemption permits non-reporting issuers to issue eligible securities, subject to a number of conditions. The key conditions are:
- the head office of the issuer is located in a participating Jurisdiction;
- the issuer distributes eligible securities of its own issue through an online funding portal;
- the issuer distributes eligible securities using an offering document in the form required that is made available through the online funding portal. The offering document includes basic information about the issuer, its management and the distribution, including how the issuer intends to use the funds raised and the minimum offering amount;
- the issuer group cannot raise aggregate funds of more than $250,000 per distribution and is restricted to a maximum of two crowdfunding distributions per calendar year;
- no person invests more than $1,500 per distribution;
- the distribution may remain open to up to a maximum of 90 days;
- the distribution must be made through a funding portal that is either relying on the start-up registration exemption or is operated by a registered dealer. Registered dealers that operate funding portals must meet their existing registration obligations under securities legislation and confirm to issuers that they meet or will meet certain conditions provided in the start-up registration exemption;
- the issuer provides each purchaser with a contractual right to withdraw their offer to purchase securities within 48 hours of the purchaser’s subscription or notification to the purchaser that the offering document has been amended;
- none of the promoters, directors, officers and control persons (principals) of the issuer group is a principal of the funding portal; and
- the eligible securities are subject to an indefinite hold period and may only be resold under another prospectus exemption, under a prospectus or four months after the issuer becomes a reporting issuer.
The start-up registration exemption
The start-up registration exemption permits funding portals to facilitate distributions under the start-up crowdfunding exemptions, subject to a number of conditions. The key conditions are:
- the funding portal must deliver a funding portal information form and individual information forms for each of its principals to the participating regulators at least 30 days prior to facilitating its first start-up crowdfunding distribution;
- the head office of the funding portal is located in Canada;
- the majority of the funding portal’s directors are Canadian residents;
- the funding portal does not provide advice to a purchaser or otherwise recommend or represent that an eligible security is suitable, or about the merits of the investment;
- the funding portal does not receive a commission, fee or any other amount from a purchaser of eligible securities;
- the funding portal makes the offering document of the issuer and the risk warnings available online to purchasers and does not allow a subscription until purchasers have confirmed that they have read and understood these documents;
- the funding portal receives payment for an eligible security electronically through the funding portal’s website;
- the funding portal holds the purchasers’ assets separate and apart from its own property, in trust for the purchasers and, in the case of cash, at a Canadian financial institution;
- the funding portal maintains books and records at its head office to accurately record its financial affairs and client transactions, and to demonstrate the extent of the funding portal’s compliance with the start-up crowdfunding exemption orders for a period of eight years from the date a record is created;
- the funding portal either:
- releases funds to the issuer after the minimum offering amount has been reached and provided that the 48-hour right of withdrawal has elapsed, or
- returns the funds to purchasers if the minimum offering amount is not reached or if the start-up crowdfunding distribution is withdrawn by the issuer; and
- a participating regulator has not notified the funding portal that it cannot rely on the start-up registration exemption because its principals or their past conduct demonstrate a lack of integrity, financial responsibility or relevant knowledge or expertise.