Ontario has joined four other provinces, Manitoba, Québec, New Brunswick and Nova Scotia (collectively, the Jurisdictions), to provide reporting and non-reporting issuers with a crowdfunding prospectus exemption and a registration framework for the operation of a funding portal. On November 5, 2015, the securities regulatory authorities in the Jurisdictions published Multilateral Instrument 45-108 Crowdfunding (the Rule) in final form, which is expected to come into force on January 25, 2016.
The Rule is intended to provide another way for start-ups and small and medium-sized enterprises to raise capital more effectively and at a lower cost, while protecting investor interests.
1. Issuer’s Restrictions
To rely on the crowdfunding prospectus exemption, the issuer must distribute non-complex securities, such as common shares, non-convertible preference shares, non-convertible debt securities and limited partnership units. The distribution period must end no later than 90 days after it first offers securities to investors, and the total proceeds must not exceed $1.5 million within the 12-month period ending on the last day of the distribution period.
2. Investment Limits for Individuals
The aggregate investment limits for all securities acquired under the Rule are:
- for an investor that does not qualify as an accredited investor
- $2,500 per investment, and
- in Ontario, $10,000 in total for all investments in reliance on the Rule in a calendar year;
- for an accredited investor other than a permitted client
- $25,000 per investment, and
- in Ontario, $50,000 in total for all investments in reliance on the Rule in a calendar year; and
- in Ontario, none for a permitted client (e.g. net financial assets exceeding $5 million).
Each investor must complete a risk acknowledgement form, confirmation of accredited investor status, if applicable and the investor is outside Ontario, and confirmation of investment limits, if the investor is in Ontario.
3. Issuer’s Documents
The issuer must post a prescribed form of crowdfunding offering document on the funding portal that, among other things, is certified and provides purchasers a right of action in the case of a misrepresentation (reporting issuer) or untrue statement of a material fact (non-reporting issuer).
Additional materials, such as a term sheet, video and other summary materials (Additional Materials), must be made available only through the funding portal and must be consistent with the information in the offering document. The Additional Materials, along with the offering document must be filed within 10 days after the closing of the distribution.
The issuer must maintain all relevant books and records for eight years after the distribution.
4. Funding Portal
Issuers must distribute their securities through a single funding portal that is registered as an investment dealer, exempt market dealer or restricted dealer. The funding portal must not advertise a distribution or solicit investors under the Rule and may only make available the offering document and Additional Materials. These funding portals will be required to fulfill gatekeeper functions such as: reviewing the issuer’s disclosure documents; requiring corrections thereon, if necessary; monitoring communications from the issuer on the funding portal; obtaining background checks on the issuer and its directors, executive officers and promoters; and obtaining personal forms from any of the foregoing who are individuals.
5. Ongoing Disclosure Requirements
The following are additional disclosure requirements:
- non-reporting issuers must also deliver to the applicable securities regulatory authorities and make available to investors, within 120 days after the financial year end, comparative annual financial statements - audited or reviewed, if $250,000 to less than $750,000 is raised, and audited, if $750,000 or more is raised.
- issuers must accompany their annual financial statements with a notice that sets out the use of proceeds from the crowdfunding distribution; and
- in Ontario, New Brunswick and Nova Scotia, non-reporting issuers must provide notice of a discontinuation of the issuer’s business, a change in the issuer’s industry or a change of control of the issuer.
6. Existing Crowdfunding Exemptions in Certain Jurisdictions
The Rule’s crowdfunding regime, will coexist and is viewed to be complementary (except in British Columbia which is not participating in the Rule) with the start-up crowdfunding exemptions adopted on May 14, 2015 by British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia. These exemptions are available to non-reporting issuers with lower investor investment limits and offering amounts than under the Rule. The securities regulatory authority in Saskatchewan will republish the Rule for a 60 day comment period.