The Alberta Securities Commission (the ASC) has recently announced two initiatives intended to make it easier for Alberta businesses to access small levels of investment.
On July 26, 2016, ASC Rule 45-517 Prospectus Exemption for Start-up Businesses (the Start-up Business Exemption or the Exemption) was implemented. The Start-up Business Exemption aims to facilitate raising capital by small enterprises. On October 31, 2016, the ASC adopted Multilateral Instrument 45-108 Crowdfunding (MI 45-108), which permits larger capital raises than the Start-up Business Exemption, and which has also been adopted by five other provinces.
In 2015, the ASC proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses (MI 45-109), as described in our previous publication entitled Alberta and Nunavut propose start-up business exemption. What was proposed in MI 45-109 and what has become effective in ASC Rule 45-517 are substantively similar.
This alert provides a short summary of MI 45-108 and the Start-up Business Exemption. For additional details of MI 45-108, and how it fits with crowdfunding rules in other provinces, see New crowdfunding regime adopted by five provinces.
MI 45-108 crowdfunding
Crowdfunding is a method of funding a project or venture through capital raised from members of the public via an online portal. MI 45-108 allows issuers to raise modest amounts of capital through crowdfunding securities offerings (also known as "distributions") across six provinces. The general framework of MI 45-108 consists of two parts:
- A prospectus exemption; and
- A requirement that the distribution be conducted through a registered funding portal that is either a “registered dealer funding portal” or a “restricted dealer funding portal.”
For investors that do not qualify as “accredited” by virtue of certain levels of income, assets or financial sophistication, the investment limit is $2,500 per distribution and $10,000 in all distributions relying on MI 45-108 in a calendar year. For accredited investors that do not meet the still higher thresholds that would qualify them as “permitted clients,” the investment limits are $25,000 per distribution and $50,000 in all distributions relying on MI 45-108 in a calendar year.1 The maximum aggregate proceeds that an “issuer group” may raise under MI 45-108 are $1.5 million in a 12-month period.
Other conditions of MI 45-108 include a requirement to provide investors with an offering document, financial statements, and rights to rescind their investment or recover damages in certain circumstances. There are also a number of rules relating to funding portal requirements and prohibitions.
Start-up Business Exemption
The Start-up Business Exemption is available for distributions of securities by non-reporting issuers seeking to raise small amounts of capital from investors. The Exemption can be used by issuers that wish to raise funds through local contacts, to crowdfund via an online portal that is registered as a dealer, or to access investors through a conventional registered dealer. The Exemption is intended to be simpler and less costly for issuers than other capital raising alternatives.
The Exemption provides that the maximum investment per investor is $1,500, or $5,000 with positive advice from a registered dealer. For the “issuer group,” the maximum offering amount is $250,000 with a limit of two offerings per year and a lifetime limit of $1 million. The Exemption requires no funding portal, but does not provide an exemption from the registration requirement. If a portal or any other intermediary is used, it must be registered as a dealer.
The Exemption has several other conditions, including providing investors with an offering document in the prescribed form, filing requirements, rules regarding communications with investors, and certain books and records requirements. Investors must sign a risk acknowledgement form as well.
The Start-up Business Exemption is available to non-reporting issuers. MI 45-108 is available to reporting issuers and non-reporting issuers that are organized under the laws of a Canadian jurisdiction, have their head office in Canada and have a majority of Canadian resident directors. Investment fund issuers are not eligible for either the Start-up Business Exemption or MI 45-108.
Conducting financings using multiple exemptions
- Start-Up Business Exemption and MI 45-108
An issuer is permitted to use MI 45-108 in Alberta and other participating provinces up to the offering limits. An Alberta-based non-reporting issuer could also raise funds under the Start-Up Business Exemption in Alberta concurrently with an MI 45-108 financing, assuming it meets the applicable conditions.
- Start-up Business Exemption and other provinces’ crowdfunding exemptions
As noted in our insight "New crowdfunding regime adopted by five provinces" (see link above), six other provinces have adopted exemptions that allow companies to crowdfund amounts similar to the limits under the Start-up Business Exemption. There are provisions in the Start-up Business Exemption that provide for Alberta issuers to raise funds under those exemptions concurrently, but they are not yet in force. When those provisions do become effective, however, the offering limits noted above and below ($250,000 per offering, two offerings per year and a lifetime maximum of $1 million) will apply in aggregate to all applicable jurisdictions. That is, when the crowdfunding rules are coordinated in the future, the dollar amounts that may be raised by Alberta issuers under the crowdfunding rules will not increase, though such issuers will be able to draw on a much larger pool of potential investors by accessing the other provinces.
- Start-up Business Exemption and non-crowdfunding prospectus exemptions
An Alberta issuer that elects to use the Start-up Business Exemption is not precluded from using other prospectus exemptions for which it qualifies. For example, an issuer could conduct an offering under the Start-up Business Exemption and the “accredited investor” exemption concurrently.
Key conditions of the two regimes
|Start-Up Business Exemption (ASC Rule 45-517)||MI 45-108|
|Investment Limits (per investor)||
|Online Funding Portals||