On March 20, 2014, the Ontario Securities Commission published four new prospectus exemptions for a 90-day public comment period, including a prospectus exemption for equity crowdfunding (the “Crowdfunding Exemption”). The purpose of this exemption is to allow Canadian businesses, especially start-ups and early stage businesses, to access capital from a potentially large number of investors using an online “portal” platform that would be registered with the securities regulators.
Elsewhere, the Autorité des marchés financiers, the Financial and Consumer Affairs Authority of Saskatchewan, Financial and Consumer Services Commission of New Brunswick, the Manitoba Securities Commission and the Nova Scotia Securities Commission also published two similar proposed exemptions: the integrated Crowdfunding Prospectus Exemption and Crowdfunding Portal Requirements and the Start-Up Crowdfunding Prospectus and Registration Exemption. The securities regulators in these jurisdictions have worked closely with Ontario regulators in order to coordinate their efforts. British Columbia Securities Commission has concurrently published a notice soliciting comments and, while the Alberta Securities Commission has not published the proposed exemptions for comment, it has asserted that it will be considering the public comments received by the other regulators.
Who is qualified to issue under the exemption?
The proposed Crowdfunding Exemption would permit both reporting issuers and non-reporting issuers to make use of the exemption, with certain exceptions. Investment funds, real estate issuers and ‘blind pools’ (i.e. issuers that do not have a business plan or intend to use the proceeds to invest in, merge with or acquire another unspecified business) would not be qualified to use this exemption; nor would non-Canadian issuers, issuers not complying with the ongoing disclosure requirements under the Crowdfunding Exemption or, potentially, issuers that are subject to sanctions imposed by a court or a regulatory body.
What are the limits on distributions and investments?
The proposed exemption has investor protection measures that the securities regulators have identified, including:
- a limit on offering size of $1.5 million per 12 month period by the issuer, any affiliate of the issuer and any other issuer that is engaged in common enterprise with the issuer or an affiliate of the issuer;
- a crowdfunding offering must not be completed unless:
- the minimum amount of funds to be raised, as disclosed in the required disclosure document, has been subscribed for, and
- at the time of completion of the offering, the issuer has financial resources to: (a) achieve the next milestone set out in its required written business plan OR (b) if the issuer does not have any milestones set out in its written business plan, to carry out the activities set out in its written business plan;
- investor limits of $2,500 per investment and $10,000 per calendar year;
- a crowdfunding offering cannot be open for more than 90 days such that, if not completed in this time frame, it must be withdrawn and a new crowdfunding offering commenced;
- requirements for the issuer to provide investors with certain streamlined disclosure documents at the point of sale, including a business plan, financial information in a form dependent upon the issuer’s expenditures and assets, descriptions of securities, and whether any insiders and related parties will receive proceeds;
- requirements for non-reporting issuers, on an on-going basis, to deliver annual financial statements to the regulator and make them available to each investor and to make available to investors a notice of, among other things, a fundamental change in the nature or discontinuation of the issuer’s business, a material change in the issuer’s capital structure and other significant events. These ongoing requirements for non-reporting issuers cease when the issuer becomes a reporting issuer (as they are subject to continuous disclosure requirements under applicable securities law), the issuer ceases to carry on business and when securities of the issuer are beneficially owned, directly or indirectly, by fewer than 51 security holders worldwide that acquired such securities under the exemption;
- a requirement for the investor to sign a risk acknowledgement form provided by the issuer that highlights the key risks associated with the investment;
- a requirement that all investments be made through a crowdfunding portal that is registered with a securities regulator; and
- a prohibition on the resale of securities issued under the Crowdfunding Exemption until the issuer becomes a reporting issuer or the sale is made under another prospectus exemption.
Along with the Notice and Request for Comment, the Ontario Securities Commission published a supplement that includes:
- a summary of the key provisions for issuers and investors;
- a summary of the key provisions for prospective online portal platforms;
- proposed Multilateral Instrument 45-108 “Crowdfunding”;
- proposed Form 45-108F1 “Crowdfunding Offering Document”;
- proposed Form 45-108F2 “Risk Acknowledgement Form for Crowdfunding Investors”; and
- proposed Companion Policy 45-108CP “Crowdfunding”.
Comments can be submitted by letter, fax or email before the end of the 90-day comment period on June 18, 2014 to the address below. Note all comments will be made publicly available:
Ontario Securities Commission
20 Queen Street West, 22nd Floor
Toronto, Ontario M5H 3S8
Email: [email protected]