As funding milestones continue to be achieved,I two recent developments will continue to shape the regulatory landscape for equity crowdfunding in Canada and the United States: 1) the Ontario Securities Commission's decision to allow MaRS VX to operate an online portal connecting environmental and social impact issuers with accredited investors, and 2) the Securities and Exchange Commission's decision to permit general marketing and advertising of private securities offerings, including via social networks such as Facebook and Twitter.
1. OSC Decision Regarding MaRS VX
On June 17, 2013, the OSC released its decision to permit the launch of MaRS VX ii(or SVX, which stands for MaRS Social Venture Connexion) as an online portal to connect accredited investors with social or environmental impact projects in Ontario.iii
The decision allows MaRS VX to operate without complying with the Know-Your-Client (KYC) and suitability requirements under National Instrument 31-103. By lifting these requirements for two yearsiv, on very clear and principled conditions, the OSC has laid out the elements of a possible framework for permitting equity crowdfunding in Ontario to help bridge the existing funding/capital gap for emerging companies.
The Portal is expected to launch in September 2013; the details of how the Portal will be run and who will be allowed access to the Portal are as follows:
The Portal will provide, and monitor, a platform for certain issuers to market to, and communicate with, accredited investors. The Portal will provide general disclosure about each issuer's activities and mandate, third-party certifications and basic financial information, as well as information about the security being offered and the amount being raised. More detailed information will be available in "Deal Rooms" that are accessible only upon request by interested investors. Issuers will have to pay access fees for each offering, but investors will not be charged any fees.
Notably, the Portal will not be permitted to operate as a market or refer to itself as a market or exchange, recommend any particular security or sale, or assist issuers with their documentation, among other things.
The Portal will be limited to corporations or co-operatives in Ontario, with revenues of less than $25 million, with a prioritized mission and who have a proven impact in the social or environmental field.
Each issuer will confirm, via an issuer agreement, that it is responsible for complying with applicable securities laws and that it will provide audited annual financial statements, interim financial statements and updates on its business activities to investors. Background checks for all directors and officers, and business references for the issuer's leadership, will also be required.
The Portal will only be accessible to accredited investors to a maximum investment per calendar year of $50,000 and up to $25,000 in any single offering.v
In order to participate, investors will be required to sign an investor agreement that acknowledges that the securities being offered carry significant risk, are highly illiquid and are intended primarily to have a demonstrable environmental or social impact. Investors will have to provide government-issued identification to prove their identity and demonstrate their status as accredited investors annually by providing proof of their income and assets such as notices of assessment from Canada Revenue Agency, financial statements showing their assets, or a letter of reference confirming same from a financial institution or chartered accountant.
This portal will be an important learning opportunity for both provincial securities regulators and for third parties interested in equity crowdfunding, in general, or in establishing similar platforms, in particular.
2. SEC "Likes" Facebook and "Follows" Twitter
On July 10, 2013, the SEC ruled on Title II of the Jumpstart Our Business Startups Act (JOBS Act) voting to remove the current prohibition on general solicitation and advertising of private securities offerings relying on Rule 506 of Regulation D, which will provide exposure to private securities offerings to a significantly larger pool of potential investors. Notably, the ruling opens up new and novel methods and platforms for promoting the sale of an issuer's securities including via social networks such as Facebook and Twitter, and print and television media, so long as it leads back to a platform that verifies one's accredited investor status. Overall, the ruling represents an important incremental step towards implementation of Title III of the JOBS Act which, once approved by the SEC, will permit private issuers to offer and sell securities to non-accredited investors via an online funding portal.
In order to make use of the rule, issuers are required to take reasonable steps to verify that investors are accredited investors at the time of purchase.vi The SEC ruling provides general guidance on what would constitute reasonable steps to verify the status of accredited investors. This includes: reviewing copies of IRS forms reporting the income of the investor and obtaining a written representation that the investor will likely continue to earn the necessary income in the current year; and requesting written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that the issuer has taken reasonable steps to verify the investor's accredited status.
The ruling does not yet address the sale of securities to non-accredited investors; such ruling is expected in early 2014. That said, the ruling is significant in the context of the current legal framework and gives an indication of how things may progress in Canada. For now however, many jurisdictions in Canada are taking a "wait and see" approachvii and the OSC is expected to issue a further report later this summer. Stay tuned...Footnotes
i. The Ubuntu Edge smartphone has raised more than $10.3 million on Indiegogo and has now replaced the Pebble watch (which was on Kickstarter) as the largest crowdfunding campaign ever; with just under a week remaining, however, it remains $20 million shy of its lofty $32 million target.
ii. A not-for-profit entity owned by MaRS Discovery District.
iii. Social impact issuers are organizations that aim to create opportunity and break the cycle of poverty in areas such as affordable housing, employment services, food security, education, First Nations and new Canadians. Environmental impact issuers are organizations that build environmental sustainability in areas such as renewable energy, sustainable agriculture, consumer products, water and transportation.
iv. Or less, if there is any material change to MaRS VX's business, operations, or capital.
v. Unless investors provide a letter from a registered dealer who has undertaken the KYC and suitability requirements with respect to a particular offering. Permitted clients, meaning mostly large institutional investors, will be limited to the same annual amounts unless they waive the KYC and suitability requirements.
vi Under the existing Rule 501 of Regulation D, a person qualifies as an accredited investor if he or she has an individual or joint net worth with a spouse exceeding $1 million at the time of purchase, or has an individual annual income exceeding $200,000 or joint annual income with a spouse exceeding $300,000 in the two preceding years and a reasonable expectation of the same income level in the current year. (This is similar to the thresholds for accredited investors in many jurisdictions in Canada.)
vii. Other than Saskatchewan, where, on July 9, 2013, the securities regulator proposed an equity crowdfunding framework with very little regulation and oversight, and with lower investment limits. See here.