This is an update to a list of publications on crowdfunding regulation, the first of which can be found here and the second found here.

Rules for Crowdfunding in Ontario: Effective from January 25, 2016

Equity crowdfunding is a way in which businesses can sell shares or other securities in their company to a large group of retail investors. Crowdfunding has recently become a popular way for small businesses to raise funds. Using equity crowdfunding, businesses can rely on a larger group of people investing small amounts to meet a specific target, instead of relying on a small group of individuals investing large amounts of money.

The  Ontario Securities  Commission  (the  "OSC"),  in connection with securities regulators in the Provinces of Manitoba, Quebec, New Brunswick and Nova Scotia have published a "final form" of Multilateral Instrument 45-108 ("MI 45-108") to regulate  crowdfunding.  This  final  form  is  the  culmination  of  a  draft  of  45-108 published in March 2014 (the "draft materials") and subsequent comments to the draft materials provided by the public. The final form of MI 45-108 will establish a prospectus exemption for crowdfunding and be in effect on January 25, 2016.   What does MI 45-108 say?

Eligibility

An "eligible crowdfunding issuer" is qualified to utilize crowdfunding to raise funds without submitting a prospectus. To be an "eligible crowdfunding issuer", a company must meet certain criteria, including: being incorporated or organized under the laws of Canada or any province of Canada, having its head office located in Canada, having a majority of its directors be resident in Canada, and having its principal operating subsidiary (if any) incorporated under the laws of Canada or any province of Canada, or laws of the United States or any state or territory of the United States (including the District of Columbia).

 

Prior to the Sale

Before an eligible crowdfunding issuer may raise funds through a funding portal, a crowdfunding offering document must be provided containing information about the issuer and its business that an investor should know before purchasing that issuer's securities. All investors must complete a risk acknowledgement form confirming that they have read and understood the risk warning and information in the offering document before they can invest.

Monetary Limits

An eligible crowdfunding issuer cannot raise more than $1.5 million within a twelve month period, and cannot use more than one crowdfunding portal to distribute its securities. In Ontario, a non-accredited investor is capped at $2,500 per investment up to $10,000 in total investments in a calendar year and an accredited investor is capped at $25,000 per investment up to $50,000 in total investments in a calendar year. There is no investment limit for a "permitted client" (as defined in National Instrument 31-103). The proceeds raised under the crowdfunding prospectus exemption cannot be used by the issuer to invest in, merge with or acquire an unspecified business that is not disclosed in its offering document. Some of the investment limitations in MI 45-108 for Ontario are relaxed in other provinces in which MI 45-108 applies.

Changes from Proposed Rules to MI 45-108

The final form of MI 45-108 (as applicable to Ontario) contained certain changes from the March 2014 draft materials. The following is a brief summary of some key changes:

Investment Limits

Previously, accredited investors were subject to the same $2,500 limit per investment (up to $10,000 per calendar year) as non-accredited investors. MI 45- 108  now  contains  a  separate  limit  for  accredited  investors  of  $25,000  per investment (up to $50,000 in a calendar year), reflecting the ability of accredited investors to obtain financial advice and withstand financial loss.

Lead Investors

MI 45-108 now contains certain changes to facilitate the involvement of lead investors. Lead investors are accredited investors that have the capability to signal an investment's potential to other investors and may provide skills and expertise in management for the benefit of other investors. Qualifying companies will now be permitted to distribute differently priced securities (with or without different terms and conditions) under other prospectus exemptions during an active crowdfunding round.

Financial Statement Thresholds

A non-reporting issuer's financial statements must be audited if the non-reporting issuer's cumulative amount raised under prospectus exemptions since its formation is above $750,000. If the non-reporting issuer's cumulative amount raised under prospectus exemptions since its inception is between $250,000 and $749,999, its financial statements must either be reviewed or audited by an independent public accounting firm. The $250,000 threshold for annual financial statements to be reviewed by an independent public accounting firm modifies the former requirement for all issuers that have incurred expenditures to do so. Moreover, the $750,000 threshold for annual financial statements to be audited has been raised from the former threshold of $500,000.

Custodial Requirements

Whereas the draft materials previously prohibited funding portals from holding, handling, or having access to a purchaser's funds or assets, the final form of MI 45- 108 expands the scope of what funding portals may do. Now, a restricted dealer funding portal may hold, handle, control and have access to purchaser funds or assets as long as minimum capital and fidelity bond insurance is maintained by the portal.

Overall, the final form of MI 45-108 is in furtherance of OSC's mandate to protect investors and fostering fair, efficient, and confidence in capital markets. Barring any unforeseen circumstances, the rules and requirements outlined above represent the OSC's first foray into regulating a new and useful tool for businesses to raise much needed capital.