Provincial securities regulators across Canada have given emerging companies hope that an existing gap in their ability to raise capital will soon be filled. Following a broad review of the exempt market, the Ontario Securities Commission announced plans on March 20, 2014 for an exemption from certain securities regulatory requirements to finally permit equity crowdfunding1. The OSC is soliciting comments on its proposal for ninety days2 and the details of the OSC's proposals for a crowdfunding exemption and some other exemptions can be found here3. Similar proposed exemptions are being published for comment by securities regulatory authorities in Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia.
The potential for crowdfunding has resonated with Canadian entrepreneurs as much as any recent topic in the capital markets. We have followed these developments closely and outlined them in our previous bulletins in November and July 2013.
Not surprisingly, the proposed equity crowdfunding regime builds upon the OSC's test case of MaRS VX, where social impact businesses were permitted to raise equity through crowdfunding, upon certain terms and conditions and via a regulated portal. See our bulletin on MaRS VX.
The proposed crowdfunding exemption addresses issuer restrictions, distribution details, investor protection measures and reporting. The highlights are as follows:
- Maximum amount of offering: $1.5 million per year;
- Limits on investment amount: $2,500 per investment4 (and $10,000 can be invested per investor per year using this exemption);
- Solicitation, advertising and registration: the investment (and all solicitation and advertising) must be made through an approved and registered funding portal (described in greater detail below); and
- Other checks and balances: Risk-acknowledgement forms (proposed Form 45-108F2) will need to be signed by investors, a detailed point of sale disclosure document must be provided to investors, issuers must comply with certain ongoing disclosure requirements, and a report of the exempt distribution must be filed.
Unlike with MaRS VX, prospective investors under the new proposal do not need to be accredited investors and as a result, the investment limits are much lower. There are also no real restrictions on the type or size of business that could potentially access the portal, as both reporting and non-reporting issuers of all types can register.
The portals will provide and monitor a platform for issuers to market to, and communicate with, prospective investors. The portals will provide general disclosure about each issuer's activities and mandate, and basic financial information, as well as information about the securities being offered and the amount being raised. There are numerous specific portal requirements:
- It must be registered only as a restricted dealer;
- It must conduct background checks on all involved persons; and
- It must not make recommendations or operate as a market or exchange.
The portal requirements described above are very similar to those imposed in the MaRS VX case.
Both pro-crowdfunders and anti-crowdfunders will undoubtedly find aspects of the OSC proposal that will galvanize their respective positions. Pro-crowdfunders, while pleased that this day has come, will lament the proposed investment caps and potential compliance costs, while the anti-crowdfunders will insist that the investing public is not being sufficiently protected.
For those who believe that this proposal does not go far enough, another possible avenue is the proposal, which was also announced on March 20, 2014, by certain other members of the Canadian Securities Administrators (the "CSA Proposal")5. The CSA Proposal introduces new crowdfunding prospectus and registration exemptions for non-reporting issuers, similar to Saskatchewan's existing regime. British Columbia also announced the same day that it is soliciting comment on the CSA Proposal. These start-up exemption proposals would be available to non-reporting issuers only, would not require portal registration and would have lower capital raising and investment limits.
The OSC's proposals, as well as the other regulators' proposals, are open for comment until June 18, 2014. Let the crowdfunding debate continue.
1. While crowdfunding in general has not been prohibited per se, this latest proposal will soon allow prospective Canadian investors to obtain actual equity interests in companies (and not just be satisfied that a film gets made, for instance). In fact, donation or incentive-based crowdfunding has been occurring in Canada for some time. Major crowdfunding sites like Kickstarter have been operating in Canada for months (see here and here) and Saskatchewan was ahead of other regulators in permitting equity crowdfunding (see here).
2. The proposed changes are: the introduction of Multilateral Instrument 45-108 Crowdfunding and related Companion Policy 45-108CP Crowdfunding, which give effect to the Crowdfunding Prospectus Exemption and Crowdfunding Portal Requirements, prescribed Form 45-108F1 Crowdfunding Offering Document (Form 45-108F1), and prescribed Form 45-108F2 Risk Acknowledgement Form for Crowdfunding Investors (Form 45-108F2).
3. Following through on its December 4, 2013 announcement, the OSC also proposed an offering memorandum exemption, a family, friends and business associates exemption and an existing security holder exemption.
4. If an issuer aimed to raise $500,000, it would therefore be looking at dealing with 200 new shareholders and the associated administrative and compliance costs.
5. The specific jurisdictions are: Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia.
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