Canada: OSC Approves Ontario Only Equity Crowdfunding Portal For Accredited Investors – MaRS VX

On June 17, 2013, the Ontario Securities Commission (OSC) issued an exemptive relief order (the Order) that for the first time permits an on-line portal registered as a "restricted dealer"¹ to match certain types of issuers with "accredited investors"² (AIs). Some believe this Order will form the basis for similar relief that may be provided to other portals seeking to sell securities to the public under a form of equity crowdfunding exemption as contemplated in "OSC Staff Consultation Paper 45-710"³, if such an exemption is approved by the OSC. The OSC has not provided any follow-up report to OSC Staff Consultation Paper 45-710 but did hold an investor roundtable on equity crowdfunding in June 2013 and publicly stated that an interim update may be provided at the end of the summer.

The OSC provided MaRS VX (also referred to as the Portal) with exemptive relief from the know-your-client (KYC) and suitability requirements in "NI 31-103"⁴ in respect of AIs that have access to its Portal, subject to the terms and conditions set out in the Order. MaRS VX is a not-for-profit entity that is a wholly-owned subsidiary of MaRS Discovery District located in Toronto, Ontario. MaRS VX's objective is to facilitate impact investing by matching Ontario AIs (and potentially AIs in other jurisdictions if the Order is adopted by other CSA members) and Ontario issuers that are "social impact issuers"⁵ and/or "environmental impact issuers"⁶ aiming to solve social or environmental challenges in Ontario.

The Order states, among other things, that there will be no maximum amount that an investor may subscribe for in a particular offering on the Portal provided that the investor is a permitted client⁷ that has waived the KYC and suitability requirements under NI 31-103. However, if the investor is either:

     (a) an AI that is not a permitted client, or

     (b) a permitted client that has not waived the KYC and suitability requirements of certain sections of NI 31-103,

the investor is limited to investing a maximum of $25,000 in a single offering and a maximum of $50,000 in total for all offerings on the Portal in a calendar year. However, there is no maximum amount that the AI may subscribe for in a particular offering on the Portal if the investor provides the Portal with a letter from a registered dealer confirming that such dealer has fulfilled the KYC and suitability requirements of NI 31-103 with respect to that particular offering on the Portal and that the offering is a suitable investment for the investor.

The Order expires on the earlier of:

     (a) June 17, 2015 (two years after the date of the Order) or;

     (b) 90 days after any material changes in the Portal's business, operations or capital.

The Order may also be amended by the OSC from time to time upon prior written notice to the Portal.

Other Key features of the Order

• The on-line platform of the Portal (the Platform) will have two portals: a public portal that is available to the public and has limited information about the Portal and a private platform that is password-protected and can only be accessed by AIs in Ontario (the Private Portal).
• Investors will be required to certify the type of AI they are. In addition, the Portal will have procedures to verify the identity, AI status and residence of prospective investors. Individual AIs will be required to provide the Portal with a piece of government issued identification to prove his, her or its identity and residence.  AIs will also need to provide documentation confirming his, her or its AI status.  Since the Portal is a "matching service" between issuers and AIs, such verification needs to be done before an AI is provided access to the Private Portal.
• Consenting AIs with access to the Portal will be permitted to communicate with one another on the applicable issuer's "Deal Room", but limited to discussing the specific offering, to facilitate obtaining information and/or due diligence regarding the issuer (e.g., crowd-intelligence).
• Investors will be required to enter into an investor agreement with the Portal acknowledging, among other things, the high risk nature of their investments, the illiquidity in the securities to be acquired and that the Portal is not responsible for any misrepresentations by an issuer in any materials provided to investors through the Private Portal.

The Portal

• The Order sets out a list of activities the Portal cannot do, including participating in the creation of offering documents  (other than providing assistance to issuers with respect to their pitch information prior to it being made available to investors), handling funds, or assisting in the completion of an issuer's subscription documentation.
• The Portal also cannot participate in a "referral arrangement" (as defined in section 13.7 of NI 31-103), issue any securities of any related or connected issuer or lend money or extend credit to investors to finance any purchase of a security.
• The OSC will complete background checks on current and prospective employees of the Portal that meet the definition of "registered individual" or "permitted individual" in section 1.1 of NI 33-109.⁸
• The Portal cannot refer to itself as an 'exchange' or 'trading system', must comply with applicable securities legislation in relation to any advertising and can charge access fees only to issuers on a per offering basis; investors will not be charged any fees.
• The Portal is required to maintain books and records, and must provide a quarterly report to the OSC regarding its activities.
• The Portal has agreed to remove any issuer from the Portal or prohibit any person from accessing the Portal at the request of the OSC.

Portal Due Diligence

• The Portal will require issuers to provide copies of constating documents indicating the location of such issuer's registered office and an officer's certificate with respect to the issuer's primary place of business in order to verify the Ontario residence of social impact issuers and/or environmental impact issuers.
• The Portal will require directors and officers of the issuer at the time of initial application to complete a personal information form and consent to criminal record and other background checks. In addition, each issuer will be required to provide at least two business references in order to help establish the reputation of the issuer's leadership. Based on the results of such investigations, the Portal is required to observe certain procedures as set out in the Order.

Issuers

• Issuers will be required to make available to investors certain general disclosure about the issuer including, a description of the business and terms of the offering so that an AI can independently evaluate and assess the merits of an offering.
• No secondary trading of securities is permitted through the Portal.
• The Portal will require each issuer to enter into an issuer agreement that requires, among other things, that issuers must prepare and send to securityholders:
   

o annual audited financial statements prepared in accordance with Canadian GAAP  within 120 days of year-end; and

o six-month interim financial statements prepared in accordance with Canadian GAAP within 60 days after the end of its six-month interim period.

In addition, in each case, together with those financial statements, an issuer must prepare and send to securityholders an update on the issuer's business activities, including with respect to the use of proceeds received by the issuer from its investors for so long as the issuer has outstanding securities in respect of which offerings were posted on the Portal.

• Issuers that have access to the Portal can undertake supplementary marketing activities, as approved by the Portal, including webinars, meetings, presentations, investor breakfasts and other forms of marketing targeted exclusively to AIs that have satisfied the requirements for accessing the Portal and their financial advisors. However, only AIs who have signed an investor agreement with the Portal will be invited to the marketing events. Any additional information about issuers or offerings, beyond information already available on the Portal provided at these supplementary marketing events will be filed on the Portal shortly after each such event.
• The Portal will require each issuer to confirm that it is responsible for compliance with applicable securities laws, including those pertaining to prospectus exemptions, the drafting/delivery/filing of offering memoranda, the filing of reports of exempt distributions and the payment of private placement fees.

A copy of the Order is available here.

Footnotes

¹ "restricted dealer" is a special type of dealer that is permitted under NI 31-103 for dealers that do not squarely fit within any existing dealer category under NI 31-103 such as 'exempt market dealer' or 'investment dealer'.
² "accredited investor" is defined in section 1.1 of National Instrument 45-106 - Prospectus and Registration Exemptions.
³ "OSC Staff Consultation Paper 45-710" means OSC Staff Consultation Paper 45-710 Considerations for New Capital Raising Prospectus Exemptions.
⁴ "NI 31-103" means National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
⁵ "social impact issuer" means an issuer that focuses on creating opportunities and/or breaking the cycle of poverty in subsectors including, but not limited to, affordable housing, employment services, food security, education, First Nations and new Canadians.
⁶ "environmental impact issuer" means an issuer that focuses on building environmental sustainability in subsectors including, but not limited to, renewable energy, sustainable agriculture, consumer products, water and transportation.
⁷ "permitted client" is defined in section 1.1 of NI 31-103.
⁸ "NI 33-109" means National Instrument 33-109 Registration Information Requirements.

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