In an exciting development for Alberta-based startups and small businesses, the Alberta Securities Commission has adopted a new rule – Prospectus Exemptions for Start-up Businesses (ASC Rule 45-517). The rule is designed to streamline small, local investment rounds for startups and high-growth companies, while still providing appropriate levels of investor protection. The issuer cannot be a reporting issuer in any Canadian jurisdiction, and must have its head office in Alberta. Investors must also be Alberta-based.
Distributions made under this rule do not require an accompanying prospectus. Instead, in order to rely on this exemption, the issuer must prepare an offering document that provides information about its business, its management, and the nature and purpose of the offering. However, there is no requirement to disclose financial statements or provide continuous disclosure to investors. Distributions may be made via registered online funding portals, registered dealers, or through the issuer's own efforts, which means the rule is not limited to just online fundraising.
Since the exemption is targeted at smaller companies engaging in smaller rounds of fundraising, there are limits on the amount that can be raised under these exempt distributions. The maximum amount that can be raised in each distribution is $250,000, with a maximum of two distributions per year under this exemption and a lifetime cap for the issuer's corporate family of $1 million. Further, each distribution can raise a maximum of $1,500 in subscriptions per investor, unless the investor receives advice from a registered dealer (in which case their maximum subscription amount is $5,000).
Some commentators, including the National Crowdfunding Association of Canada, consider these maximums to be too low for the needs of high-growth Alberta companies. Another potential downside of this exemption is that distributions under the startup exemption may preclude issuers from future reliance on the private issuer exemption. Finally, although the exemption theoretically allows for multi-jurisdictional offerings, this will not be possible in practice until other Canadian securities regulators adopt it. As a result, the exemption is best suited for early bootstrapping rounds within the issuer's local community.
In an attempt to provide larger-scale solutions for high-growth Alberta companies, the Alberta Securities Commission has also announced a 30-day comment period on the possibility of adopting Multilateral Instrument 45-108 (the Crowdfunding Exemption available in Ontario and other participating jurisdictions, as previously covered on Startupsource).
It remains to be seen whether other jurisdictions will mirror Alberta's approach. Regardless, this is a welcome announcement for Alberta startups, and continues a national trend towards increasing flexibility for capital-raising by small and high-growth companies.
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