By Barbara Hendrickson

On March 20, 2014, the securities commissions of Quebec, Saskatchewan, New Brunswick, Manitoba and Nova Scotia (“participating jurisdictions”) published for comment:

  • proposed Multilateral Instrument  45-108 and CP “Crowdfunding” (“crowdfunding exemption”); and
  • 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 are meant to target issuers at different stages of development.

On March 20, 2014, the OSC also published a request for comments on an exemption substantially similar to the crowdfunding exemption under a local Ontario notice. On the same date the BCSC published a local notice soliciting comments on the start-up exemption.

Alberta, P.E.I., Newfoundland and the territories are not formally participating in the request for comments. Saskatchewan introduced an exemption on Dec. 6, 2013 which is similar to the start-up exemption. The proposals create the potential for a patchwork of regulation in Canada the crowdfunding area.

The following is a summary of the crowdfunding exemption:

  • Available to private or public Canadian issuers selling their own securities.
  • Not available to investment funds, non-public real estate issuers, issuers without a written business plan; and issuers who are non-compliant with the crowdfunding exemption.
  • Available for common shares, non-convertible preference shares, certain convertible securities, limited partnership units, and flow-through shares.
  • Issuers cannot raise more than $1.5 million during a 12-month period.
  • Offerings cannot remain open for more than 90 days and must have a minimum and maximum.
  • Offerings can only be closed if the minimum offering is fully subscribed and the issuer has financial resources to meet targets in a business plan.
  • Issuers cannot advertise the offering or solicit potential investors, except as prescribed.  Prescribed materials can only be made available to potential investors on portal’s website. Investors can be directed to the 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.
  • An investor cannot invest more than $2,500 in a single investment and not more than $10,000 in a calendar year and must sign a risk-acknowledgement form.
  • Disclosure documents must include basic information about the offering, the issuer, the portal and certain prescribed financial information.  Financial statements may be required and must be audited if the issuer has raised more than $500,000 under a prospectus exemption and has expended more than $150,000 since its formation.
  • Investors are entitled to rights of action for rescission or damages in the event of a misrepresentation.
  • Special rules for private companies for ongoing disclosure including audited annual financial statements in certain circumstances.
  • Special rules for private companies to maintain books and records including offering documents; marketing materials; risk acknowledgement forms; and details of the offerings and investors.
  • Reports of trade must be filed within 10 days of completion of the distribution.
  • Offering must be made through a funding portal registered in the restricted dealer category. Portals must comply with general registrant requirements applicable to exempt market dealers (with certain exceptions).
  • Basic due diligence required by portals includes background checks on issuers, directors, officers, promoters and control persons; understanding of securities offered; review of materials on website; and signed risk acknowledgement forms obtained.
  • Portals cannot advise or market securities; pay finder’s fees; hold or handle investor funds/securities; invest in securities offered (subject to 10 per cent compensation options) or facilitate resales.

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 differences between the exemptions:

  • Not available for public companies and the issuer’s head office must be located in a participating jurisdiction.
  • Not available for flow through shares.
  • Cannot raise more than $150,000 under each offering. Cannot be used more than twice in a calendar year.
  • Each promoter, officer, director and control person of the issuer must deliver a complete individual information form at least 10 business days prior to beginning to trade.
  • An investor cannot invest more than $1,500 in an issuer.
  • No financial statements required.
  • No requirement for ongoing disclosure.
  • Report of trade forms must be filed within 30 days.
  • No registration requirement for portals.  Head office of portals must be in a participating jurisdiction.
  • Promoters, directors, officers and control persons of the portal must be Canadian residents and must deliver a completed portal individual information form and portal information form at least 30 days prior to commencing operations.
  • Portals can: only allow trading after the investor confirms they have read and understood the offering documents and risk warnings; only release funds to the issuer after reaching the minimum offering; and must provide issuers with the details on the investors within 15 days of closing of the offering.

The comment period is open until June 18, 2014.

Barbara Hendrickson is securities partner BAX Securities Law