On November 5, 2015, securities regulators in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia (the participating jurisdictions) published the final form of the much anticipated Multilateral Instrument 45-108 - Crowdfunding (MI 45-108 or the crowdfunding regime) which introduces a crowdfunding prospectus exemption for reporting and non-reporting issuers, as well as a registration regime for funding portals. Provided all necessary Ministerial approvals are obtained, MI 45-108 will come into force in the participating jurisdictions on January 25, 2016.
For recent background on the crowdfunding regime and exempt market review, see our July bulletin.
The crowdfunding regime will allow businesses to benefit from greater access to capital from a large number of investors online, including retail investors, through a funding portal operated by a registered dealer.
The following is a summary of some of the key aspects of the crowdfunding regime:
Type of securities and distribution period. Issuers are limited to distributing non-complex “plain vanilla” securities, and the distribution period must end no more than 90 days after the securities are first offered to investors.
Amount of offering and investment limits. The total offering cannot exceed $1.5 million within a 12-month period. Investors are subject to investment limits based on the investor’s income and financial resources.
Offering document, investor rights and delivery requirement. The issuer must file a prescribed form of crowdfunding offering document that, among other things, is certified and provides purchasers with a right of action in the case of a misrepresentation (for a reporting issuer) or untrue statement of a material fact (non-reporting issuer). The offering document and additional offering materials, such as a term sheet or other materials summarizing the offering, must be filed with the regulator within 10 days after the closing of the distribution. The issuer may also be required to deliver to the regulators a video that the issuer made available to purchasers through the funding portal.
Dealer framework. Securities distributed pursuant to the crowdfunding prospectus exemption are required to be distributed through a single funding portal that is registered as an investment dealer, exempt market dealer or restricted dealer.
- Restricted dealer funding portal. The crowdfunding regime provides for a “restricted dealer funding portal” category of registration. The restricted dealer funding portal and a registered individual of that portal are not required to comply with certain dealer obligations under National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations (NI 31-103), including certain KYC and suitability obligations. However, restricted dealer funding portals and registered individuals of those portals are not permitted to provide a recommendation or advice to an investor.
Within Ontario, a restricted dealer funding portal may only act as an intermediary in connection with a distribution of securities made in reliance on the crowdfunding prospectus exemption (outside of Ontario, the funding portal may also act as an intermediary in connection with a distribution of securities made in reliance on a start-up crowdfunding registration and prospectus exemptive relief order, provided that the funding portal is in compliance with the terms and conditions of MI 45-108). In other words, a restricted dealer is not permitted to rely on any other prospectus exemptions, including the offering memorandum exemption and the accredited investor exemption. A restricted dealer funding portal will not be able to register in any other registration category, and, in Ontario, is not permitted to be affiliated with another registered firm.
- Registered dealer funding portal. The participating jurisdictions have amended the crowdfunding regime to permit investment dealers and exempt market dealers to use the crowdfunding prospectus exemption, in addition to other prospectus exemptions, such as the accredited investor or offering memorandum exemptions. Exempt market dealers and investment dealers using the crowdfunding prospectus exemption are required to comply with certain funding portal registration requirements that apply to all funding portals in addition to all of the requirements applicable to their registration category, including KYC and suitability obligations under NI 31-103.
- Funding portal obligations applicable to all registration categories. Funding portals will be required to fulfill certain gatekeeper functions that include:
- Reviewing the issuer’s disclosure for completeness, accuracy and any misleading statements, and requiring corrections to disclosure, if necessary
- Obtaining background checks on the issuer and its directors, executive officers and promoters and obtaining personal information forms from any of the foregoing who are individuals, and denying an issuer access to the funding portal in certain circumstances
- Monitoring online communications from the issuer on the funding portal
The funding portal is not permitted to advertise a distribution or solicit investors under the crowdfunding prospectus exemption and may only make available to prospective investors the crowdfunding offering document and other offering materials including a term sheet, video and other summary materials. A funding portal is not permitted to act as an intermediary in connection with a distribution of, or trade in, securities of an eligible crowdfunding issuer that is a related issuer of the funding portal.
Ongoing disclosure requirements. Additional disclosure requirements are required for non-reporting issuers, including delivery of comparative annual financial statements, with an accompanying use of proceeds from the crowdfunding distribution. In Ontario, New Brunswick and Nova Scotia, non-reporting issuers must provide notice to securityholders of key specified events, including a discontinuation of the issuer’s business, a change in the issuer’s industry and a change of control of the issuer.