Introduction and Legislative History
After a lengthy review process beginning in 2013, the Ontario Securities Commission (the “OSC”) along with provincial securities regulators from Quebec, Manitoba, Nova Scotia and New Brunswick (with Ontario, the “Participating Jurisdictions”), have finalized amendments introducing a crowdfunding prospectus exemption and a regulatory framework for crowdfunding portals. This new crowdfunding regime (the “45-108 Regime”) will, subject to provincial Ministerial approvals, come into force on January 25, 2016 via Multilateral Instrument 45-108 (“MI 45-108”). For the OSC’s bulletin which includes Multilateral Instrument 45-108, click here. Saskatchewan, which participated in the drafting of MI 45-108, has also republished MI 45-108 for a comment period ending January 4, 2016.
The securities regulatory authorities of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia had previously implemented start-up crowdfunding exemptions by way of local blanket orders on May 14, 2015 (the “Start-Up Regime”). The Start-Up Regime and 45-108 Regime are viewed by the those jurisdictions (except for British Columbia, which is not participating in the 45-108 Regime) as complementary, as the 45-108 Regime is available to both reporting and non-reporting issuers and provides both higher investment limits for investors and higher limits on the amount issuers can raise as compared to the Start-Up Regime.
As discussed in our previous posts discussing the initial OSC consultation report, the OSC’s March 2014 draft rules and the Start-Up Regime in other provinces across Canada, the new crowdfunding rules have been introduced with the intention of facilitating capital raising for business enterprises, particularly start-ups and small and medium-sized enterprises, by permitting issuers to issue eligible securities without the need to file a prospectus, an exercise which can be prohibitively costly and time consuming for smaller enterprises. A multitude of investor protection measures accompany the crowdfunding prospectus exemption. Highlighted below are some of the key rules with respect to investment limits, issuer group limits, acknowledgement and disclosure requirements, liability provisions, advertising and solicitation rules and funding portal ‘gatekeeping’ requirements.
Distribution and Investment Limits
In all Participating Jurisdictions, there is a $1.5 million limit on aggregate proceeds that may be raised in any 12 month period by an issuer and its affiliates or subsidiaries. There are limits for investors as well. Non-accredited investors may not invest more than $2,500 per distribution and accredited investors not more than $25,000. In Ontario, non-accredited investors are also subject to a $10,000 annual limit in reliance of the crowdfunding prospectus exemption of and accredited investors subject to a $50,000 annual limit. Ontario, however, has exempted investors from both the distribution or annual limits if they qualify as “permitted clients” by having net “financial assets” of greater than $5 million.
Disclosure, Acknowledgement Requirements and Advertising
In connection with the closing of a distribution, the issuer must make available a crowdfunding offering document in the form of Form 45-108F1, containing plain language disclosure about the issuer, the distribution, the funding portal and other relevant information. For reporting issuers in Ontario and Nova Scotia, this document is considered an offering memorandum, and for reporting issuers in Quebec is considered a document authorized by the Autorité des marches financiers for use in lieu of a prospectus, and relevant securities law rules concerning liability for misrepresentations and rights of action apply accordingly. For non-reporting issuers, MI 45-108 requires that the crowdfunding offering document contain a contractual right of action against the issuer for rescission and damages if any disclosure materials contain an untrue statement of a material fact. On an ongoing basis, non-reporting issuers must also make available certain documents, including annual financial statements (which in certain cases must be audited), an annual notice regarding the use of proceeds and notices in the events of discontinuation, change in industry or change in control.
In addition to providing a streamlined offering document, issuers must also receive executed risk acknowledgement forms from each investor (Form 45-108F2) and, in Ontario, confirmation of investment limits (Form 45-108F3) or, in the remaining Participating Jurisdictions, confirmation that the investor is an accredited investor if their investment is greater than $2,500.
Funding Portal Requirements
The securities regulators in the Participating Jurisdictions have incorporated many of the investor protection mechanisms into MI 45-108 through the regulation of the funding portals. These ‘gatekeeping’ rules begin with requiring all securities issued under the crowdfunding prospectus exemption to be issued through a single, registered funding portal. For every distribution, the funding portal must obtain an issuer access agreement and perform background checks on the issuer (and its principals) and review all of the issuer’s disclosure materials to confirm that the issuer is meeting its obligations and has not made any misrepresentations. In addition to these major obligations, funding portals must also comply with a myriad of rules concerning everything from advertising to referrals to providing advice.