The Canadian Securities Administrators (“CSA”) and securities regulators of British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia (the “participating jurisdictions”), announced on May 14, 2015, the adoption of a start-up crowdfunding exemption (the “start-up exemption”) in each of the participating jurisdictions. This exemption is aimed at helping start-ups and early stage companies to raise capital, and represents an important step in modernizing the Canadian securities regulatory regime to reflect changes in technology and the growth of social media.
The start-up exemption permits funding portals to facilitate the offering of securities by way of crowdfunding, subject to a number of conditions. The start-up exemption actually compromises two separate exemptions: (1) an exemption from the requirements to file a prospectus when issuing securities; and (2) an exemption from the dealer registration requirements for funding portals. Certain key elements of the start-up exemption are as follows:
- The issuer must be a non-reporting issuer (and cannot be an investment fund);
- The issuer’s head office must be in one of the participating jurisdictions;
- The issuer can raise a maximum of CA$250,000 per offering and can only conduct up to two offerings per year;
- An investor can invest no more than CA$1,500 per offering;
- While the offering must be completed through an online funding portal, the funding portal does not need to be a registered dealer. However, registered dealers can also operate funding portals as long as they still comply with their registration requirements under securities law and confirm they meet certain conditions provided in the start-up registration exemption;
- The issuer will not be required to provide investors with financial statements either at the point of sale or on an ongoing basis, but the issuer will be required to produce an offering document in the required form;
- Investors must be provided with a contractual right to withdraw within 48 hours of their subscription;
- The funding portal must deliver a funding portal information form to the regulators in the participating jurisdictions 30 days prior to its first start-up crowdfunding distribution;
- The funding portal’s head office must be located in Canada and the majority of its directors must be Canadian residents;
- The funding portal cannot provide advice to an investor, cannot recommend a security and cannot receive a commission or fee from an investor; and
- None of the promoters, directors, officers and control persons of the issuer can be a principal of a funding portal used to raise funds for that issuer.
The major changes to the start-up exemption since it was originally published for comment in March 2014 are: (1) an increase in the maximum offering size from CA$150,000 to CA$250,000 per offering with a limit of two offerings per year; and (2) allowing registered dealers to operate a funding portal. The start-up exemption will expire in five years on May 13, 2020.
In connection with adopting the start-up exemption, the CSA notes that the participating jurisdictions continue to work closely with the Ontario Securities Commission in developing proposals related to an “integrated crowdfunding exemption”. The “integrated crowdfunding exemption,” which was also published for comment in March 2014, has not yet been adopted. The proposed integrated exemption would apply to both public and private companies and have a higher offering limit of CA$1.5 million. The CSA has confirmed that the newly adopted start-up exemption and a proposed integrated exemption have been conceived to co-exist and be complementary.