On March 20, 2014, the Ontario Securities Commission (OSC) and the securities regulators in six other provinces published for comment proposed prospectus exemptions for issuers seeking to use crowdfunding to raise capital.
Under the proposed exemptions, qualifying issuers would be allowed to use crowdfunding to issue securities without having to prepare a prospectus. The exemptions would significantly reduce the cost of raising capital while providing a regulatory framework for investors who participate in the increasingly popular equity-raising vehicle.
While established methods of raising capital have typically focused on raising relatively large amounts of money from a smaller pool of traditional investors, crowdfunding instead relies on raising relatively small amounts of money from a larger pool of people, many of whom may not be traditional investors. Crowdfunding predominantly takes place through the Internet and can often involve investors contributing as little as $1.
In December 2012, the OSC began a consultation process to consider prospectus exemptions for crowdfunding. Since then, the OSC and the securities regulators in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia have been working co-operatively on considering and drafting the proposals for public comment. The proposed exemptions are meant to strike a balance between allowing issuers to raise capital through crowdfunding while protecting investors from being exposed to fraud.
The Canadian exemptions follow a similar move by the U.S. Securities and Exchange Commission, which published its own crowdfunding proposals in October 2013.
Two separate prospectus exemptions have been proposed:
- An integrated Crowdfunding Prospectus Exemption and Crowdfunding Portal Requirements pursuant to Multilateral Instrument 45-108 – Crowdfunding (the Crowdfunding Exemption), which has been proposed by Saskatchewan, Manitoba, Quebec, New Brunswick and, in substantially similar form, Ontario; and
- A local Start-Up Crowdfunding Prospectus and Registration Exemption, which is being introduced in Manitoba, Quebec, New Brunswick and Nova Scotia (the Start-Up Exemption).
The British Columbia Securities Commission is also soliciting comments on the proposed Start-Up Exemption. While the Alberta Securities Commission is not publishing either exemption for comment, it will be considering the public comments in respect of the exemptions. The Start-Up Exemption is largely based on a prospectus exemption that was implemented in Saskatchewan in December 2013 (General Order 45-925 – Saskatchewan Equity Crowdfunding Exemption). For harmonization purposes, the Financial and Consumer Affairs Authority of Saskatchewan has agreed to subsequently adopt the Start-Up Exemption that would be adopted by the other provincial regulators.
Each exemption targets issuers at different stages of development. The Start-Up Exemption is aimed at early-stage companies, while the Crowdfunding Exemption is aimed at companies who have moved past the start-up stage.
Each exemption also contains requirements for the funding portals used to raise capital. Funding portals cannot provide specific recommendations or advice, solicit purchases or sales, or facilitate resales of securities issued under the exemption. Portals under the Crowdfunding Exemption must register under applicable securities laws, while portals under the Start-Up Exemption are not required to register if they meet the applicable requirements.
Highlights of the proposed Crowdfunding Exemption include:
- The exemption would be available to both reporting and non-reporting issuers;
- A qualifying issuer would be able to raise up to $1.5 million using the exemption during the 12-month period prior to the offering in question;
- An investor cannot invest more than $2,500 in a single investment under the exemption and cannot invest more than $10,000 in total under the exemption in a calendar year;
- Issuers using the exemptions must prepare annual financial statements; and
- Portals will be required to conduct background checks on issuers, directors, officers, promotions and control persons.
The Start-Up Exemption is aimed at early-stage issuers and features lower monetary ceilings and less stringent standards.
Highlights of the proposed Start-Up Exemption include:
- The exemption would only be available to non-reporting issuers;
- A qualifying issuer would be able to raise up to $150,000 per offering and would be limited to using the exemption for two offerings per year;
- Individual investors cannot invest more than $1,500 in a single investment under the exemption;
- Issuers will not be subject to any more ongoing disclosure than is already required by the issuer’s corporate governance statute; and
- Portals will not be required to conduct the background checks required under the Crowdfunding Exemption.
All participating jurisdictions are inviting comments on the proposed crowdfunding exemptions on or before June 18, 2014.