On March 20, 2014, the Autorité des marchés financiers, the Financial and Consumer Affairs Authority of Saskatchewan, Financial and Consumer Services Commission of New Brunswick, the Manitoba Securities Commission and the Nova Scotia Securities Commission (“Participating Jurisdictions”) published for a 90-day comment period:
- the “integrated prospectus and registration exemption” (“Crowdfunding Exemption”) as set out in a proposed Multilateral Instrument 45-108 “Crowdfunding” and Companion Policy (“MI 45-108”);
- a separate prospectus and registration exemption for “start-up companies” published under local blanket rulings (“Start-Up Exemption”).
It is intended that both proposed exemptions will coexist as they target issuers at different stages of development.
The Ontario Securities Commission also published materials for comment on March 20, 2014 materials on a prospectus and registration exemptions substantially similar to the Crowdfunding Exemption under a local Ontario Notice entitled “ Introduction of Proposed Prospectus Exemptions and Proposed Reports of Exempt Distributions in Ontario.”
On March 20, 2014, the British Columbia Securities Commission also published a local notice (BC Notice 2014/03) soliciting comments on the Start-Up Exemption.
Alberta, PEI and Newfoundland as well as the Canadian Territories are not formally participating in the request for comments.
Please see an earlier BAX Bulletin dated December 6, 2013 for a summary of the crowdfunding exemption which is currently in force in Saskatchewan.
The following is a summary of the Crowdfunding Exemption under proposed MI 45-108:
Issuers: MI 45-108 sets out a number of requirements for issuers who wish to avail themselves of the Crowdfunding Exemption. First of all it is only available to issuers selling their own securities. It is also only available to Canadian companies – issuers must be incorporated or organized in Canada with a Canadian head office and a majority of resident Canadian directors. Issuers can be public or private companies. The exemption is not available to investment funds, real estate issuers that are not public companies, or issuers without a written business plan. It is also not available to issuers not in compliance with the ongoing requirements of the Crowdfunding Exemption.
Type of securities offered: Only certain types of securities can be offered under the Crowdfunding Exemption: common shares, non-convertible preference shares, securities convertible into common shares or non-convertible preference shares, non-convertible debt securities linked to a fixed or floating interest rate, units of a limited partnership, and flow-through shares under the Income Tax Act (Canada)
Restrictions on offerings: An issuer will not be able to raise more than $1.5 million under the Crowdfunding Exemption during the period commencing 12 months prior to the current offering. The $1.5 million limit will apply in aggregate, to the issuer, an affiliate of the issuer, and any other issuer that is engaged in a common enterprise with the issuer or with an affiliate of the issuer.
An offering cannot remain open for more than 90 days and an offering document must disclose a minimum offering size and whether there is a maximum offering size. It will not be possible to close the offering unless: (i) the minimum offering is fully subscribed; and (ii) at time of completion of offering, the issuer has financial resources sufficient to achieve the next milestone in a written business plan or, if there is no milestones, to carry out the activities set out in the business plan.
Advertising restrictions: Issuers, portals or any other person involved with an offering cannot advertise the offering or solicit potential investors, except as prescribed. Marketing materials, which are limited to offering documents, documents described in offering documents and any term sheets or other summary (including a video), must be made available to potential investors on portal’s website and cannot be posted on any other website. Investors can be directed to portal’s website by paper notice or through social media. Offering materials must be delivered to the regulator at same time they are posted on portal’s website.
Investment limits: An investor cannot invest more than $2,500 in a single investment and not more than $10,000 in total under the Crowdfunding Exemption in a calendar year.
Risk Acknowledgment Form: Investors must sign a risk acknowledgement form (proposed Form 45-108F2) confirming that the investor falls within the investment limits, that the investor could lose all of the money he or she invests, and understands the other specified risks that are set out in the form.
Disclosure documents: A disclosure document must be provided to investors that includes basic information about the offering, the issuer and the portal and certain financial information: the amount of issuer’s cash together with third party confirmation of cash in bank account or held in trust if the issuer has not incurred any expenditures and its only asset is cash; and annual financial statements if the issuer has incurred expenditures. The annual financial statements must be audited if the issuer has achieved the Financial Threshold as defined below, or be reviewed by an independent public accounting firm if the issuer has not achieved the Financial Threshold.
An issuer will achieve the financial threshold if it has raised more than $500,000 under the Crowdfunding Exemption or any other prospectus exemption since its formation and has expended more than $150,000 since that time (“Financial Threshold”).
Statutory rights: Investors are entitled to rights of action for rescission or damages in the event of a misrepresentation in any materials made available to purchaser. Investors will have 48 hours prior to the disclosed offering deadline to withdraw.
Ongoing disclosure: Public companies must provide ongoing continuous disclosure in accordance with securities law requirements. Private companies must provide the following ongoing disclosure on an annual basis: annual financial statements that are audited if the issuer has achieved the Financial Threshold, or reviewed by an independent public accounting firm if the issuer has not achieved the Financial Threshold; a notice that discloses how the proceeds of a crowdfunding offering have been expended, and disclosure of certain specified events.
Books and records: Private companies must keep books and records which contain at a minimum: the offering document; documents described in the offering document and any term sheet or other summary (including a video) provided to investors; completed risk acknowledgement forms; ongoing disclosure documents required for private companies, the number of securities issued by the issuer under the Crowdfunding Exemption as well as the issue price and date, and names of all security holders and the number and type of securities held by each security holder.
Reports of trade: Reports of exempt distribution must be filed within 10 days of completion of the distribution.
Crowdfunding portal requirements: Investments under the Crowdfunding Exemption must be made through a funding portal registered under applicable securities law. A portal must be registered as a restricted dealer. Portals will not be permitted to register in any other dealer or adviser category (i.e., there will be no dual registration of portals). Portals must comply with general registrant requirements applicable to Exempt Market Dealers (with certain exceptions), including minimum capital, insurance, regulatory reporting, record-keeping and record-retention requirements.
Due diligence requirements for portals: Portals will be required to conduct background checks on issuers, directors, officers, promoters and control persons; understand the general structure, features and risks of a security offered; review the information presented by the issuer on the portal’s website to confirm that the information adequately sets out the general features and structure of the securities being sold, issuer-specific risks, parties involved, any identified conflicts of interest, and the intended use of funds; deny access to an issuer if it has reason to believe that the issuer or its offering is fraudulent; provide investor education materials in plain language and obtain a signed risk acknowledgement form from investors.
Permitted and prohibited activities for portals: MI 45-108 imposes certain requirements on portals. For example, a portal may apply criteria to limit the offerings on its platform, provided the criteria are disclosed, applied consistently and would not be viewed by a reasonable person as a recommendation or endorsement.
A portal cannot provide specific recommendations or advice to investors about securities being offered on their platform; solicit purchases or sales of securities offered on their platform (other than through posting an offering on the platform); compensate employees or agents to solicit the sale of securities on their platform; hold or handle investor funds/securities; invest in any issuer or underwrite any issuer (subject to receiving fees in the form of securities that do not exceed a 10% ownership interest in the issuer); endorse or comment on the merits or expected returns of an investment to investors (since this would constitute a recommendation or advice); or facilitate secondary trading (resales) in any securities issued under the exemption.
Start- Up Exemption
The Start-up Exemption differs from the Crowdfunding Exemption in that there is no requirement for portal registration; the maximum raises are lower and the provisions are generally less prescriptive. The following is a summary of the Start-Up Exemption under the local blanket orders of the Participating Jurisdictions.
Issuers: The Start-up Exemption is not available for public companies and the issuer’s head office must be located in a Participating Jurisdiction. This exemption is not available to investment funds.
Type of securities offered: The Start-up Exemption is limited to distributions by an issuer of securities of its own issue and to certain types of securities: common shares; non-convertible preference shares; securities convertible into common shares or non-convertible; preference shares; non-convertible debt securities linked to a fixed or floating interest rate; and units of a limited partnership.
Restrictions on offerings: An issuer will not be able to raise more than $150,000 under each offering and offerings cannot remain open for more than 90 days. The exemption cannot be used more than twice in a calendar year. Offering documents are required to disclose minimum offering size and whether there is a maximum offering size. The minimum amount must be equal to the amount needed to carry out the purpose for which the funds are sought. There can be no concurrent offerings using the exemption for the same project. Each promoter, officer, director and control person of the issuer deliver a complete Individual Information form at least 10 business days prior to beginning to trade.
Advertising restrictions: Offering materials can be made available to potential investors only on the portal’s website and must be delivered to regulator at least 10 days before the distribution.
Investment limits: An investor cannot invest more than $1,500 in a single investment under the Start-Up Exemption.
Risk Acknowledgement Form: Investors must be provided with a risk warning that includes that: the investor understands they may lose their entire investment; they understand the illiquid nature of the investment; they have read and understood the offering document; the investment opportunity has not been approved by a Participating Jurisdiction; they have not received advice from the portal or the government of a Participating Jurisdiction; they don’t have as many legal rights when purchasing under this exemption as they would through a prospectus offering; and they reside in a Participating Jurisdiction.
Disclosure documents: Issuers must provide standardized disclosure document that includes basic information about the offering, the issuer and the portal. No financial statements are required.
Statutory rights: Investors must be informed that there may be limited or no right of action for rescission or damages in the event of a misrepresentation in any materials made available to purchaser.
Ongoing disclosure: There is no requirement for ongoing disclosure above any corporate requirements.
Report of trade: Report of trade forms must be filed by issuers within 30 days of the closing of the distribution.
Portal requirements: There is no registration requirement for the portal. The head office of the portal must be located in any of the Participating Jurisdictions and its promoters, directors, officers and control person must be Canadian residents. The portal must deliver a complete Portal Information form to the securities regulatory authority in the Participating Jurisdiction at least 30 days prior to beginning to facilitate distributions. Each promoter, director, officer and control person of the owner of the portal must deliver a complete Portal Individual Information form at least 30 days prior to the Portal beginning to facilitate distributions.
Due Diligence and other requirements: Portals will be required to make the offering document of the issuer and the important risk warnings separately available to investors electronically online; allow an investment only once the investor confirms online they have read and understood the offering document and important risk warnings; release funds to the issuer only when the minimum offering amount to close the offering has been reached; ensure that all funds received for an offering are held in trust for the investors; provide the issuer with the details on the investors (name, address, telephone number, email address, detail of purchase) within 15 days of closing of the offering.
Prohibited activities: A portal cannot provide investment advice or be related to the issuer of the securities.
The comment period for the proposed exemptions is open until June 18, 2014.