The securities commissions in Manitoba, Ontario, Québec, New Brunswick and Nova Scotia (“Participating Jurisdictions”) are publishing in final form Multilateral Instrument 45-108 Crowdfunding (“MI 45-108”), which includes a crowdfunding prospectus exemption and a registration framework for funding portals (the “New Crowdfunding Exemption”).
MI 45-108 is expected to come into force in the Participating Jurisdictions on January 25, 2016. Saskatchewan has gone out for a 60 comment period on MI 45-108. The provinces of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia also have another form of crowdfunding exemption which is focused on starts up which has been place since May 14, 2014. On October 19th, 2015 the province of Alberta and the territory of Nunavut published a request for comments on their version of the crowdfunding exemption.
The New Crowdfunding Exemption encompasses measures which are intended to provide effective protection for investors, including:
Type of security – issuers can only offer non-complex securities such as common shares and nonconvertible debt.
Offering limit – issuers can only raise $1.5 million in a 12 month period under the New Crowdfunding Exemption.
Distribution period – the offering can only continue for 90 days.
Issuer qualification – available to entities organized or incorporated in Canada, with a head office in Canada with the majority of directors resident in Canada.
Investment limits – investors are subject to the following investment limits:
1. an investor that does not qualify as an accredited investor:
· $2,500 per investment, and
· in Ontario, $10,000 in total in a calendar year,
2. an accredited investor other than a permitted client:
· $25,000 per investment, and
· in Ontario, $50,000 in total in a calendar year,
3. in Ontario, no investment limits for a permitted client.
In Ontario the funding portal must file For 45-108F3 – Confirmation of Investment Limits.
Offering document – issuers are required to prepare an offering document that contains all of the information about the issuer and its business that an investor should know before purchasing the issuer’s securities. The issuer must also provide financial statements and may provide other materials such as term sheets; videos and other summaries.
Risk acknowledgement form 45-108F3 (“RAF”) – investors must complete a RAF requiring them to positively confirm having read and understood the risk warnings and information in the crowdfunding offering document before they can enter into an agreement to purchase securities.
Cooling off period – Investors have a two business day right of withdrawal.
Liability for materials – issuers are accountable for and are subject to a standard of liability on the crowdfunding offering document and other permitted materials, and investors are provided with a related right of action. The standard for non reporting issuer is an “untrue statement of material fact.” For reporting issuers the standard is a “misrepresentation” which include untrue statements and omissions.
Advertising and solicitation – there is a prohibition on advertising and general solicitation. Issuers may only inform purchasers that it proposed to distribute securities under the New Crowdfuding Exemption and direct purchasers to the funding portal. Funding portals are allowed to advertise its business but is prohibited from recommending or endorsing a particular issuer or distribution, including highlighting or showcasing an issuer or its distribution.
Ongoing disclosure – non-reporting issuers must make available to investors (i) annual financial statements (audited in some circumstances), (ii) a notice of use of proceeds, and (iii) in New Brunswick, Nova Scotia and Ontario, a notice of a discontinuation of the issuer’s business, a change in the issuer’s industry or a change of control of the issuer. Reporting issuers must continue to comply with all of their disclosure requirements.
Registered funding portal – issuers can only distribute securities through a single funding portal that is registered as an investment dealer, exempt market dealer or restricted dealer, and must post the offering document and other permitted materials solely on that funding portal’s online platform. Investment dealers and exempt market dealers must comply with all of the requirements of their registration, including FYC, KYP and suitability.
Funding portal requirements – funding portals are prohibited from offering securities of a related issuer but can offer real estate securities; a funding portal must fulfill certain gatekeeper responsibilities prior to allowing an issuer access to its online platform, including reviewing the issuer’s disclosure in the crowdfunding offering document and other permitted materials for completeness, accuracy and any misleading statements, a funding portal must review information and obtain background checks on the issuer and its directors, executive officers and promoters (including criminal checks), and deny an issuer access to the funding portal in certain circumstances. During the period of distribution are also required to report “bad actors” to the OSC.
Please note that the use of the internet for raising capital is not restricted to the New Crowdfunding Exemption as defined in MI 45-108. Many online platforms are used to raise capital under other prospectus exemptions such as the accredited investor exemption or the offering memorandum exemption.
For more information on the New Crowdfunding Exemption please call Barbara Hendrickson at 647.403.4606.