In 2013, the Autorité des marchés financiers (AMF) launched a consultation on equity crowdfunding, as we already discussed it in this publication last fall. Following this consultation, the AMF and the securities regulators of Saskatchewan, New Brunswick, Manitoba and Nova Scotia (the “Participating Jurisdictions”) published last March the Draft Regulation 45-108 respecting Crowdfunding (the “Draft Regulation”) and the Draft blanket order relating to the Start-up Crowdfunding Prospectus and Registration Exemption (the “Draft Exemption”). Some other Canadian jurisdictions published similar draft local notices.
Currently, in Canada, crowdfunding respecting the issuance of securities is not allowed. The Canadian Securities Administrators are aware of the increasing development of Internet-based fundraising and the fundraising needs of start-ups and SMEs. Participant Jurisdictions define crowdfunding as a method of funding a project or venture through small amounts of money raised from a potentially large number of people over the Internet via an Internet portal.
For the purpose of facilitating such fundraising, in the Draft Regulation and Draft Exemption, Participating Jurisdictions propose two offering schemes the first one, available to reporting issuers and non-reporting issuers and the second one, available to start-ups (which are necessarily non-reporting issuers). The rules governing crowdfunding by these two classes of issuers would be somewhat different. The rules applicable to start-ups will be less stringent than those applicable to reporting issuers and non-reporting issuers. The concept of start-up is not defined in the proposed rules.
Furthermore, by adopting the Draft Regulation, Participating Jurisdictions wish to regulate the registration of funding portals. For instance, funding portals for offering to be conducted under the Draft Regulation would be required to register as exempt market dealers while funding portals for offering to be conducted under the Draft Exemption would not be subject to such requirements. By so distinguishing between the various types of issuers, Participating Jurisdictions are of the view that they facilitate fundraising at the various stages of the growth of enterprises.
Many rules will apply to crowdfunding. The following table shows the most important of those:
Click here to view table.
A streamlined disclosure document must be provided that includes basic information about the offering, the issuer and the portal. This document must also contain certain financial information. In the case of a start-up, it will rather be a standardized document (a form) without any obligation to provide financial statements. It must be noted that under Quebec securities regulations, such a document must be prepared either in French or in French and English, both for a Quebec issuer and an issuer from another jurisdiction which intends to distribute its securities to Quebec subscribers.
Reporting issuers who complete this type of financing will remain subject to the continuous disclosure obligations under securities legislation while non-reporting issuers will henceforth be required to provide, among other things, annual financial statements (audited or reviewed under the circumstances provided for in the Draft Regulation). Start-ups that will have distributed their securities under the Draft Exemption will have no ongoing disclosure obligation than that provided under their corporate governance statutes.
Funding portals which serve as intermediaries for the crowdfunding of non-reporting issuers and reporting issuers will be required to register as exempt market dealer. The funding portals of start-ups under the Draft Exemption will have no registration obligation but will be required to send to the Participating Jurisdictions information such as personal information on each of its promoters, directors, officers and each person participating in the control of the portal. A portal cannot provide specific recommendations or advice to investors about securities being offered on its platform. Portals will be required to ensure that the maximum investment thresholds per investor are complied with.
Issuers will not be allowed to pay compensation under any form whatsoever to a person other than the portal respecting the offering under the regime of this exemption. Such prohibition does not apply to the fees of lawyers and accountants who may help the issuer in drafting the offering documents.
Prior to allowing an issuer to access their websites, registered portals will also be required to conduct background checks on the issuer’s, directors, officers and promoters through the requirement to file a personal information form such as that required by the Canadian Securities Administrators for prospectuses or the Canadian exchanges.
This Draft Regulation will not apply to issuers of the real-estate sector who are not reporting issuers or to investment funds.
In conclusion, the intention of the Participating Jurisdictions to facilitate fundraising by some start-ups and SMEs is genuine. However, public protection requires a framework for this “new” financing method. It remains to be seen whether the industry will view the proposed framework as providing an adequate balance between regulatory requirements and compliance costs. The consultation period ends on June 18, 2014.