On September 21, 2017, the British Columbia Securities Commission (“BCSC”) published the amended BC Instrument 45-535 Start-up Crowdfunding Registration and Prospectus Exemptions, (the “BC Instrument 45-515”), which details improvements to crowdfunding rules that will enable BC-based issuers to access investors in Alberta when conducting crowdfunding campaigns.
These amendments also raise the limit on investments, from $1500 to $5000. The amendments are the result of a survey carried earlier in the year out by BCSC staff of BC Fintech business and stakeholders. The survey identified the lack of harmonization across jurisdictions as one of the major concerns. The new amendments take steps to resolve that issue by allowing an interface between the BC and Alberta crowdfunding rules. Respondents also recommended increasing the investment amounts allowed under the current crowdfunding rules. The new amendments raise the investment limit from $1500 to $5000 if the investor has obtained advice from a registered dealer that the investment is suitable for them.
BC Instrument 45-515 is the local BC rule for what has been referred to as the “Start-up Exemption” which was implemented in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (the “Start-up Jurisdictions”) in May of 2015 by local rules. See CSA Notice 45-316 “Start-up Crowdfunding Registration and Prospectus Exemptions” published on May 14, 2015 as amended – see CSA Notice 45-317 published on January 21, 2016 and CSA Notice 45-319 published on June 30, 2016 (“Start-up Exemption”). To date there has been no CSA notice evidencing amendments to the local rules of the Start-up Jurisdictions which would correspond to the recent BC amendments. The following is a summary of BC Instrument 45-515 which will expire on May 13, 2020.
Type of securities: BC Instrument 45-535 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: BC Instrument 45-535 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 $5,000 in a single investment under the Start-Up Exemption if the investor has obtained advice from a registered dealer that the investment was suitable for them. An investor cannot invest more than $1,500 without that advice.
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 must be filed by issuers within 30 days of the closing of the distribution along with the offering document. Issuers in BC must file Form 45-106F1 through BCSC eServices.
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 provided that the funding portal provides the BCSC with certain documentation included a completed Forms 3 and 4 and has not been notified that the business of the funding portal is prejudicial to the public interest and meets certain requirements. 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 BC Instrument 45-535 orders for a period of eight years from the date a record is created.
The amended BC Instrument 45-535 is available from the website of the British Columbia Securities Commission. https://www.bcsc.bc.ca/Securities_Law/Policies/Policy4/PDF/45-535__BCI___July_13__2017/
For more information, 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.
