Canada: Maybe You Can’t Crowdfund! Only Certain Types Of Issuers Can Do Equity Crowdfunding In Canada

Last Updated: May 16 2014
Article by Brian P. Koscak

Not every type of issuer can raise capital under the existing and proposed Equity Crowdfunding exemptions in Canada. This article discusses the availability of certain proposed and existing Equity Crowdfunding exemptions in Canada for issuers looking to raise capital and the published rationale by certain participating Canadian Securities Administrators (CSA) where such exemptions are proposed or sought to be amended.

You can obtain a copy of the proposed Equity Crowdfunding Exemption and changes to the OM Exemption (defined below) proposed by the Ontario Securities Commission (the OSC) and other CSA members here and the proposed Start-Up Equity Crowdfunding Exemption here.

The "OM Exemption" refers to the offering memorandum prospectus exemption set out in Section 2.9 of National Instrument 45-106 – Prospectus and Registration Exemptions. You can read a prior article that explains the OM Exemption in a here and some of the issues and concerns involving the OSC's proposed changes to the OM Exemption here.

Below is a chart that sets out the availability of the proposed and existing Equity Crowdfunding exemptions in Canada for certain types of issuers.

Equity Crowdfunding Proposed in ON, QB, SK, MB NB and NS (6 participating jurisdictions) Start-Up Equity Crowdfunding Proposed in QB, SK, MB NB and NS (5 participating jurisdictions) OM Exemption Proposed ON/NB model OM Exemption- Existing BC and AB models
Available for:- reporting and non-reporting issuers Available for:- non-reporting issuers only Available for:- reporting and non-reporting issuers Available for:- reporting and non-reporting issuers
Unavailable for:1. investment funds2. real estate non-reporting issuers

3. blind pools

4. non-Eligible Canadian issuers

5. non-compliant issuers who previously used the exemption

6. related issuers of the funding portal

Unavailable for:1. reporting issuers2. investment funds

3. issuers whose head office is outside of the participating jurisdictions

4. if a person or company in an issuer group used the exemption more than twice in a calendar year

Unavailable for:1. investment funds2. related issuers Unavailable for:1. N/A

Equity Crowdfunding – Under Proposed Prospectus Exemptions

Below are six proposed restrictions that you need to consider under the proposed Equity Crowdfunding exemption.

(a) Equity Crowdfunding Proposal

Both reporting and non-reporting issuers would be able to use the proposed exemption. The idea is that both public and private small and medium-sized enterprises (SMEs) should be able to rely on the exemption to stimulate capital formation. This may be particularly useful to reporting issuers who are finding it difficult to raise capital through more traditional means in the current economic climate. Moreover, reporting issuers should not have fewer capital raising options than non-reporting issuers since reporting issuers have a continuous disclosure record which is publicly available on SEDAR at www.sedar.com. However, certain issuers would be prohibited from using the exemption as discussed below.

1. No investment funds - Investment funds would be excluded. Certain CSA members believe this is consistent with the objective of facilitating capital raising for start-ups and SMEs. Moreover, the CSA is currently undertaking a separate policy project involving the modernization of product regulation for investment funds which it is separate and apart from this project.

2. No real estate non-reporting issuers – The exemption would not be available for real estate issuers that are non-reporting issuers (i.e., private real estate issuers. Reporting issuers that are real estate issuers (i.e., public real estate issuers) would be able to use the exemption. Real estate issuers include: (a) real estate investment trusts, mortgage investment entities and issuers that primarily invest in, or develop, real estate, or derive their revenue primarily from investments in real estate.

Certain CSA members have concerns with the sale of real estate securities by non-reporting issuers in the exempt market and believe real estate does not stimulate capital formation for SMEs. The proposed Companion Policy to the Equity Crowdfunding Exemption (the Proposed CP) states that the exclusion is intended to capture non‐reporting issuers whose primary business is focused on real estate. It is not intended to capture an issuer with a primary business that is not focused on real estate, but that invests in or develops real estate in the furtherance of its primary business. For example, an issuer that is developing a bakery business might need to rent or purchase real estate in order to establish retail bakery locations. The proposed Companion Policy further states that the regulators would not generally consider real estate activity that is ancillary to the issuer's primary business as precluding the issuer from being able to rely on the exemption.

3. No blind pools – Blind pools or issuers without a business plan are excluded from using the proposed exemption. Issuers without a plan that sets out the proposed business, its goals or milestones and the plan for reaching those goals or milestone is too esoteric for investors who need specifics in order to make an informed investment decision. This is consistent with the focus on SMEs and existing or start-up businesses having a plan since blind pools raise additional investor protection concerns.

4. No non-Eligible Canadian issuers Only eligible Canadian issuers can raise capital under this proposed exemption. "Eligible Canadian issuers" are those where: (a) the issuer, and if applicable, the parent and the principal operating subsidiary of the issuer, are incorporated or organized under the laws of Canada or a jurisdiction of Canada; (b) the head office of the issuer is situated in Canada; and (c) a majority of the directors of the issuer are resident in Canada.

5. No non-compliant issuers who previously used the exemption – Issuers who have previously raised capital in reliance on the proposed Equity Crowdfunding Exemption and who are not in compliance with sections 23 (annual financial statements), 24 (annual disclosure of use of proceeds), 25 (notice of specified events), 26 (period of time for providing ongoing disclosure) and 27 (books and records) of the proposed exemption cannot use it for future capital raises.

6. No related issuer of the funding portal – A registered funding portal and every registered individual of the registered funding portal must not allow an issuer access to the funding portal's website if the issuer is a "related issuer" of the registered funding portal. A "related issuer" is described in National Instrument 33-105 Underwriting Conflicts (NI 33-105) and generally refers to a situation where there is cross-ownership between an issuer and the registered funding portal. Subsection 1.2(2) of NI 33-105 provides that an entity is a related issuer to another entity if one of them is an "influential securityholder" of the other, or each of them is a related issuer of the same third party.

If a registered funding portal or a related registered individual proposes to allow an issuer that is a connected issuer access to the registered funding portal, the registered funding portal should ensure that the issuer's offering documents include the disclosure required by Appendix C to NI 33-105. The definition of a "connected issuer" is described in NI 33-105 and generally refers to a situation where an issuer is not a related issuer of the registrant, but has some other relationship with the registrant that would cause a reasonable investor to question whether the registrant and the issuer are independent of each other for purposes of the distribution.

(b) Start-Up Equity Crowdfunding Proposal

Below are five the restrictions on issuers who seek to raise capital under the proposed Start-Up Equity Exemption.

1. Issuer can only distribute its own securities – An issuer can only use this exemption to sell securities from its own treasury and it is not available to selling shareholders.

2. Issuer is not a reporting issuer – This exemption is for start-ups only and not established reporting issuers hence the exemption is unavailable to reporting issuers.

3. Issuer is not an investment fund – See comments above under "(a) Equity Crowdfunding Exemption – No investment funds".

4. Head office of the issuer is located in any of the participating jurisdictions – This is different than the Eligible Canadian issuer requirement under the proposed Equity Crowdfunding Exemption since the issuer is not required to be established under Canadian law or to have a majority of its directors as Canadian residents. An issuer is only required to have its head office in one of he participating jurisdictions.

5. No person or company in the issuer group has used the exemption more than twice in a calendar year – This is to prevent persons or related issuers of an issuer group from circumventing the limits of the exemption by raising capital through various entities.

(c) Offering Memorandum Exemption – Proposed ON/NB model

Below are the restrictions on issuers who seek to raise capital under the OM Exemption as proposed by the Ontario Securities Commission and New Brunswick Securities Commission.

1. No investment funds - See comments above under "(a) Equity Crowdfunding Exemption – No investment funds".

2. No related issuers of the dealer – See comments above under "(a) Equity Crowdfunding Exemption – No related issuer of the funding portal" although reference should be made to an EMD and not a funding portal where the EMD is not a funding portal. Certain CSA members believe that it is unlikely that a start-up or SME would find it worthwhile to establish a related registrant to sell its securities. Moreover, the OSC states that, through its compliance reviews, it continues to identify significant compliance issues with EMDs that distribute securities of "related issuers" and "connected issuers" as those terms are defined in NI 33-105. As the exemption will expand the class of investors with whom an EMD may deal to include retail investors, the OSC is concerned that these issues may be exacerbated if the EMD is related to the issuer. Accordingly, the OSC has proposed that the exemption not be available for a distribution by a registrant of securities of a related issuer.

No such restrictions exist under the existing form of the OM Exemption or proposed by any CSA member other than Ontario and New Brunswick as discussed above.

Equity Crowdfunding – Under Existing Prospectus Exemptions

There are no restrictions on the type of issuer that can raise capital and sell its securities under the existing OM Exemption or under the existing accredited investor exemption through a registered EMD.

I note that the British Columbia Securities Commission (BCSC) has publicly stated that EMDs selling securities on the internet under the OM Exemption is Equity Crowdfunding.

Final thoughts

In summary, not all issuers can raise capital under the proposed and existing Equity Crowdfunding exemptions in Canada. Issuers need to make sure they can rely on these exemptions and, if they cannot, as discussed above for certain types of issuers, readers are encouraged to submit a comment letter to their local CSA member and discuss their concerns before the end of the comment period on June 18, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions