Canadian securities law has recently embraced the concept of crowdfunding. Canadian securities rules now allow companies or “issuers” to raise small amounts of capital through online portals with a minimum of disclosure. Investors do not have to be “accredited investors” to take participate in these capital raises. The US Securities and Exchange Commission (“SEC”) has also recently introduced a crowdfunding option in the United States. Crowdfunding gives start-ups and small businesses a new way of raising money. The securities rules on how companies / issuers can “crowdfund” vary across Canada:
- British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia announced their crowdfunding exemption in CSA Notice 45-316 “Start-up Crowdfunding Registration and Prospectus Exemptions” on May 14, 2015 (as amended by CSA Notice 45-317 and CSA Notice 45-319) (“Start-up Exemption”).
- Manitoba, Ontario, Québec, New Brunswick and Nova Scotia’s crowdfunding exemption was effective January 25, 2016 – Multilateral Instrument 45-108 Crowdfunding (“MI 45-108 Exemption”) with Alberta joining on October 16, 2016.
- Alberta adopted its own crowdfunding exemption on July 19, 2016 – Alberta Securities Commission Rule 45-517 Prospectus Exemption for Start-up Businesses (“ASC Rule 45-517 Exemption”).
- Prince Edward Island, Newfoundland and Labrador and the Canadian territories do not have a crowdfunding prospectus or registration exemption.
- Manitoba, Quebec, New Brunswick, Nova Scotia have both the Start-up Exemption and the MI 45-108 Exemption.
- Alberta has both the MI 45-108 Exemption and the ASC Rule 45-517 Exemption.
- New SEC rules in the United States came into effect May 16, 2016 which allow companies to sell and offer securities through crowdfunding portals. These rules and amendments are designed to help start-up and early stage companies raise capital while providing investors with additional protection. For more information, please see SEC Investor Bulletin: Crowdfunding for Investors https://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html.
Please note that the use of the internet for raising capital is not restricted to crowdfunding as provided for in the above rules. Many online platforms are used to raise capital under other prospectus exemptions such as the accredited investor exemption or the offering memorandum exemption.
MI 45-108 Exemption in effect in Alberta, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia
If a small business wants to raise money from investors in the provinces of Alberta, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia (“participating jurisdictions”) it can rely on Multilateral Instrument 45-108 Crowdfunding (“MI 45-108 Exemption”). MI 45-108 provides a framework for crowdfunding portals. The MI 45-108 Exemption provides a prospectus and registration exemption and imposes a number of requirements on issuers and crowd funding portals including:
Type of securities: Issuers can only offer non-complex securities such as common shares, non-convertible preferred shares, certain convertible securities and non-convertible debt, flow through shares and units in a limited partnership.
Restrictions on offerings: Issuers (and their “issuer groups”) can only raise $1.5 million in a 12-month period under the MI 45-108 Exemption. Issuer groups include affiliates, controlled entities and entities involved in a common enterprise. The offering can only continue for 90 days.
Issuers: MI 45-108 is available to entities organized or incorporated in Canada, with a head office in Canada and with the majority of directors resident in Canada. The exemption is available to reporting issuers as well as private companies.
Investment limits: Investors are subject to the following investment limits:
- an investor that does not qualify as an accredited investor:
- $2,500 per investment, and
- in Ontario, $2,500 per investment and $10,000 in total in a calendar year,
- an accredited investor other than a permitted client:
- $25,000 per investment, and
- in Ontario, $25,000 per investment and $50,000 in total in a calendar year,
- in Ontario, no investment limits for a permitted client.
Offering documents / risk acknowledgment forms: Issuers are required to prepare an offering document that contains information about the issuer and its business and sign a certificate which certifying that the offering document does not include a misrepresentation. The disclosure must be read by the investor before purchasing the issuer’s securities. The issuer may also provide other materials such as term sheets and videos to investors and materials summarizing the offering document. Investors must complete a risk acknowledgement form 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.
Statutory / Contractual rights: 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 issuers is an “untrue statement of material fact.” For reporting issuers, the standard is a “misrepresentation” which include untrue statements and omissions. Investors have a right of rescission for a misrepresentation for a 180 period after the purchase and a right of action for damages within 180 days of the investor becoming aware of the misrepresentation or statement or three years from the date of purchase whichever is earlier. Investors have the right to withdraw from a purchase within 48 hours of the date of the purchase agreement or any amendment to the disclosure document.
Advertising restrictions: There is a prohibition on advertising and general solicitation. Issuers may only inform purchasers that it proposes to distribute securities under the MI 45-108 Exemption and direct purchasers to the funding portal. Funding portals are allowed to advertise its business but 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) within 120 days of the end of the financial year, (ii) an annual 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. Non-reporting issuers must continue to with these disclosure requirements until the issuer is becomes a reporting issuer, is wound up or dissolved, there are fewer than 51 shareholders. Reporting issuers must continue to comply with all of their disclosure requirements. Non-reporting issuers must keep certain material for 8 years.
Issuer filing requirements: Report of trade forms must be filed by issuers with the applicable securities commissions within 10 days of the closing of the distribution along with a copy of the offering document and all materials provided to investors (except any videos which is on request from a securities regulator).
Commissions or fees: No person in the issuer group may pay a commission, finder’s fee or referral fees to any person in connection with a distribution except to the funding portal. A restricted dealer may pay a referral fee to a third party but cannot participate in a referral arrangement.
Portal requirements: 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 know your client and suitability. 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. Funding portals must have a chief compliance officer who has met certain proficiency requirements.
Start-up Exemption in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia
The provinces of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia have another form of a crowdfunding exemption which is found in local blanket rulings of the specific provinces (“Start-up Exemption”). The start-up exemption orders found in the local blanket rulings will expire on May 13, 2020.
The Start-up Exemption differs from the MI 45-108 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 British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (“participating jurisdictions”). The Start-up Exemption provides a registration and prospectus exemption.
Type of securities: 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: The issuer (and the issuer group) cannot raise aggregate funds totaling more than $250,000 per distribution. Offerings cannot remain open for more than 90 days. The exemption cannot be used more than twice in a calendar year. 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.
Issuers: The Start-up Exemption is not available for reporting issuers. The issuer’s head office must be located in Canada and the majority of the directors must be Canadian residents. This exemption is not available to investment funds. None of the promoters, directors, officers and control persons (collectively, the principals) of the issuer group can be a principal of the funding portal. 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.
Investment limits: An investor cannot invest more than $1,500 in a single investment under the Start-Up Exemption.
Offering document / risk acknowledgement form: Issuers must provide standardized offering document that includes basic information about the issuer, its management and the distribution, including how the issuer intends to use the funds raised and the minimum offering amount. No financial statements are required. Investors must be provided with a risk warning that includes that: the investor understands they may lose their entire investment; the investor understands the illiquid nature of the investment; the investor has read and understood the offering document; the investment opportunity has not been approved by a participating jurisdiction; the investor has not received advice from the portal or the government of a participating jurisdiction; the investor doesn’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. Offering documents are required to disclose minimum offering size and whether there is a maximum offering size. The funding portal must make the offering document of the issuer and the risk warnings available online to purchasers and does not allow a subscription until the purchasers have confirmed that they have read and understood the documents.
Statutory / contractual rights: The issuer must grant individual purchasers a contractual right to withdraw their offer to purchase securities within 48 hours of the purchaser’s subscription or notification to the purchaser that the offering document has been amended or if the start-up crowdfunding distribution is withdrawn by the issuer. If the minimum raise is not achieved the portal must return the funds to the purchasers.
Ongoing disclosure: There is no requirement for ongoing disclosure above any corporate requirements.
Issuer reporting requirements: Report of trade forms along with the offering document must be filed by issuers within 30 days of the closing of the distribution.
Commissions or fees: The funding portal cannot receive a fee from any purchaser of the securities sold through the portal.
Portal requirements: There is no registration requirement for the portals relying on the Start- up Exemption. The distribution must be made through a funding portal that is either relying on the Start-up Exemption or is operated by a registered dealer. Funding portals relying on the exemption must file certain forms with the securities regulators more than 30 days before commencing capital raising. The funding portal cannot provide advice to a purchaser or otherwise recommend or represent that an eligible security is suitable, or about the merits of the investment. The funding portal must maintain books and records at its head office to accurately record its financial affairs and client transactions, and to demonstrate the extent of the funding portal’s compliance with the Start-up Exemption orders for a period of eight years from the date a record is created.
ASC 45-517 Exemption in Alberta
ASC Rule 45-517 was introduced to help facilitate Alberta-based small or start-up issuers seeking to raise small amounts of capital. ASC Rule 45-517 allows issuers to rely on the exemption with or without a funding portal or other registered dealer. ASC Rule 45-517 provides a prospectus exemption but not a registration exemption. An issuer can raise funds in reliance on the exemption through a registrant or the issuer’s own network of contacts provided that the issuer is not in the business of trading securities. The ASC Rule 45-517 requirements include the following:
Type of securities: Only certain types of securities can be sold under the crowdfunding exemption: common shares; certain types of preference share; a security convertible into a common share or preference share; a non-convertible debt security linked to a fixed or floating interest rate; or certain shares issued under the Cooperatives Act (Alberta); and limited partnership units.
Restrictions on offerings: The aggregate funds raised by an issuer together with all funds raised by members of the “issuer group” cannot exceed $1,000,000. This is a lifetime limit. The funds raised in any one distribution cannot exceed $250,000. Issuers can only have two offerings per year.
Issuers: The issuer cannot be an investment fund nor a reporting issuer in Canada nor one that is subject to reporting obligations in a foreign jurisdiction. The head office of the issuer must be located in Alberta or a Canadian jurisdiction with a corresponding crowdfunding exemption.
Investment limits: The acquisition cost of the securities acquired by the investor cannot exceed $1,500 unless a registered dealer provides the investor with positive suitability advice in respect of the purchase, in which case the maximum acquisition cost of the securities acquired by an investor is $5,000.
Offering documents/ risk acknowledgement forms: At the same time or before the investor signs the agreement to purchase the security, the issuer or, if the issuer has retained a registered dealer in respect of the distribution, the dealer (i) delivers to the investor an offering document in the prescribed form, and (ii) obtains a risk acknowledgment in the prescribed form from the investor which evidences that the investor has read and understood the contents of that form. The offering documents must contain a certificate which states that the document does not include a statement that is misleading or untrue. Any financial statements provided to investors must be made in accordance with Canadian GAAP applicable to reporting issuers.
Statutory / contractual rights: The issuer provides to the investor a contractual right to withdraw the investor’s offer to purchase the security which right can be exercised by the investor delivering a notice to the issuer or, if the issuer has retained a registered dealer in respect of the distribution, the dealer within 48 hours of the later of (i) the investor’s subscription, and (ii) an amended offering document being delivered to the investor.
Issuer filing requirements: The issuer must file a report of trade along with the offering document with the ASC within 30 days of any distribution on SEDAR.
Commissions or fees: No commission, fee or payment can be made to the issuer or the issuer group or any founders, control persons or promoters of the issuer.
Portal Requirements: Funding portals must be registered as an exempt market dealer to take advantage of the ASC exemption. The exemption can also be used to raise money through an investment dealer or an exempt market dealer where the dealer will solicit investments and distribute securities through “traditional distribution channels”.
For information on crowdfunding please call Barbara Hendrickson at BAX Securities Law 416.601.1004.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.
