The Alberta Securities Commission (ASC) and Nunavut Securities Office recently published for comment proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-Up Businesses (the Proposed Exemption). The Proposed Exemption aims to facilitate capital raising by start-up and early-stage businesses until they are able to cost effectively use the offering memorandum exemption or other available exemptions from the prospectus requirement.
Every new issuance of securities by a corporation must be made under a prospectus that has been filed with and receipted by the securities commissions in the relevant jurisdictions (a time consuming and costly process), unless the corporation is able to rely on an exemption from the prospectus requirement. Access to capital is especially important for start-up and early stage businesses and many do not have the resources required to prepare a prospectus or effectively utilize existing prospectus exemptions. Similarly, the costs of compliance with the requirements for other available prospectus exemptions (e.g., the offering memorandum exemption) may be too high in comparison with the limited funds required by the start-up business, or which can realistically be raised.
The Proposed Exemption
The Proposed Exemption aims to address the possible financing gap that early stage businesses encounter as well as recognize the reality that technology has changed the way in which corporations communicate with the public and identify potential investors. The Proposed Exemption is available to issuers, other than reporting issuers and investment funds, who have a head office in a jurisdiction which has adopted the Proposed Exemption or in a jurisdiction with a similar exemption. The Proposed Exemption provides an exemption from the prospectus requirement but does not also provide a registration exemption, which is different than the start-up crowdfunding exemptions adopted in other provinces.
The Offering Document
An issuer seeking to rely on the Proposed Exemption is required to provide prospective investors with an offering document containing basic information regarding the business and the securities being distributed, including: (i) the minimum and maximum offering amount; (ii) information on management; (iii) a brief business overview; (iv) the name of any investment dealer retained in connection with the offering; (v) a description of the issuer's operations and industry; (vi) the intended use of the funds raised; (vii) information related to previous start-up distributions by the issuer; (viii) risk factors; (ix) resale restrictions; (x) investors rights; and (xi) a certificate signed by a person authorized to sign on behalf of the issuer stating that the offering document does not contain any misleading or untrue facts or fail to state a fact that is required. The offering document does not require financial statements to be provided to prospective investors.
The offering document and a prescribed form of report of exempt distribution are required to be filed with the securities regulatory authorities on or before the 30th day after the closing of the distribution. However, if the issuer is concurrently conducting a distribution under a similar exemption in another jurisdiction it may utilize (and subsequently file) the form of offering document, risk acknowledgement form and report of exempt distribution required by the similar exemption in that other jurisdiction.
The Proposed Exemption contains a lifetime limit of $1,000,000. Other than the lifetime maximum, there are no proposed limits on how many distributions may occur per year. A start-up may meet the lifetime limit in one distribution, or through several distributions.
The Proposed Exemption contains investment limits which are intended to off-set the risks associated with the reduced disclosure being provided and the limited ability to resell the securities. If a registered dealer is involved (and provides suitability advice) an investor is limited to $5,000 per investment, and to $10,000 in the previous 12 months; if a registered dealer is not involved, the limits are significantly lower, being $1,500 and $3,000, respectively.
Investor Protection Measures
As previously mentioned, the offering document discloses basic information about the issuer and the offering which allows an investor to make an informed decision regarding the risks and benefits of investing in the start-up business. The offering document reduces both the initial and ongoing disclosure required by the issuer, as compared to other prospectus exemptions. In addition to the built-in in investor protection provided by the investment limits applicable to the Proposed Exemption, each investor is required to complete a bluntly worded risk acknowledgment form concurrently with, or prior to signing an agreement to purchase an eligible security from an issuer.
Harmonization with Existing Crowdfunding Models
The securities regulatory authorities in the provinces of British Columbia, Manitoba, Nova Scotia, New Brunswick, Ontario, Quebec and Saskatchewan adopted start-up crowdfunding exemptions, implemented by way of local blanket orders on May 14, 2015. The start-up crowdfunding exemption in these jurisdictions provides both a registration and prospectus exemption allowing start-ups to raise capital through crowdfunding, subject to a requirement to distribute securities only through an online funding portal. The Proposed Exemption, by contrast, is not limited to raising funds through online portals and allows greater flexibility in the distribution of securities.
The Proposed Exemption has been drafted with the intention to harmonize the Proposed Exemption with existing start-up crowdfunding models in other jurisdictions. This harmonization will facilitate distributions by start-ups in multiple jurisdictions at the same time.
Each of the provinces of Manitoba, Nova Scotia, New Brunswick, Ontario and Quebec have published multilateral instrument 45-108 Crowdfunding (MI 45-108), providing for a crowdfunding prospectus and registration exemption, which is considerably different from both the Proposed Exemption and the existing start-up crowdfunding exemptions in those jurisdictions and is expected to come into force on January 25, 2016. It is currently unclear to what extent the Proposed Exemptions will be harmonized with MI 45-108.
The variety of these differing proposed and existing exemptions creates somewhat of a patchwork quilt of regulation that start-up businesses seeking expedient financing will have to navigate and which may ultimately impair the utility of such exemptions. Such differing approaches are reflective of the struggles that regulators experience when attempting to adapt to rapidly evolving technology and business environments and the delicate balance required between investor protection and the need of early stage businesses for efficient access to capital. A more harmonized approach would be welcome.
The ASC is accepting comments on the Proposed Exemption until December 18, 2015. We will continue to monitor any developments and provide additional updates as necessary.