Crowdfunding is an increasingly popular way for small- and medium-sized enterprises ("SMEs") and start-ups to raise capital—and it has caught the attention of Canadian securities regulators. Recently, Nova Scotia ("N.S.") and New Brunswick ("N.B.") securities regulators joined those of three other Canadian provinces to propose a regulatory framework customized for crowdfunding.
- Crowdfunding 101. What crowdfunding is, the legalities around it, and the reason for the recent attention from securities regulators.
- Proposed Crowdfunding Exemptions. N.S. and N.B. have proposed creating two new exemptions that, if applicable, would relieve companies raising capital through crowdfunding from the requirement to file a prospectus.
- Crowd Pleaser. If adopted, the proposed framework should facilitate regulatory compliance by SMEs and start-ups when accessing this growing source of capital.
Crowdfunding. Crowdfunding is a way for businesses to access capital. Individual investors— the members of the "crowd"—each provide a small amount of money to finance a project or business venture, typically through an internet platform or portal. Crowdfunding investors have traditionally received products or services in return for their contribution. However, crowdfunding is evolving with investors increasingly receiving an equity interest (such as shares) in the business they fund—and this means securities laws come into play.
Securities Laws. Every Canadian province has securities laws regulating the issuance of equity securities (e.g., shares or units) to investors. One of the main purposes of this regulation is investor protection. Securities laws generally require an issuer to create and make available a prospectus—a detailed document describing a security to be issued to potential investors and disclosing other specified information— to investors unless the issuance fits within an exemption to the requirement. A prospectus is a time-consuming and costly document to prepare, especially for an SME or start-up, so issuers frequently seek to take advantage of prospectus exemptions available to them.
Crowdfunding Exemptions. Existing securities laws apply to securities issued in the crowdfunding context, but the prospectus exemptions currently available do not work well for crowdfunding. With crowdfunding use growing and evolving to grants of equity, securities regulators are focusing their attention on developing a regulatory framework tailored to crowdfunding.
N.S. and N.B. Crowdfunding Exemption Proposal
On March 20, 2014, securities regulators in N.S. and N.B. joined those in Manitoba, Quebec, and Saskatchewan in publishing proposed crowdfunding prospectus exemptions (Multilateral CSA Notice of Publication and Request for Comment in respect of, among other things, a proposed Multilateral Instrument 45-108 – Crowdfunding and associated Companion Policy). Saskatchewan had already adopted a crowdfunding exemption in December 2013 but participated in publishing this notice to harmonize its exemption with that of the other provinces. Neither Prince Edward Island nor Newfoundland and Labrador has adopted any crowdfunding exemptions to date, and neither participated in this proposal.
The proposal would create two new exemptions from the requirement to file a prospectus, as follows:
Crowdfunding Exemption. This exemption would be available to reporting and nonreporting issuers formed in Canada
- with their head office located in Canada, and
- with a majority of directors resident in Canada.
- Some key features of this proposed exemption are as follows:
- An issuer cannot have raised more than $1.5 million under the exemption in the 12 months before the current offering.
- The offering can remain open only for up to 90 days.
- An investor can invest a maximum of only $2,500 in any single investment under the exemption, and a maximum of $10,000 total during a calendar year.
- Issuers must give investors an offering document identifying the minimum offering size, and must provide ongoing financial and other disclosure.
- Crowdfunding portals
- must be registered in the restricted dealer category and comply with the requirements applicable to exempt market dealers, with certain exceptions;
- would be prohibited from providing specific recommendations and advice to investors or soliciting purchases or sales of securities; and
- would be required to deny access to an issuer if there was reason to believe the issuer or offering was fraudulent.
Start-up Exemption. This exemption would be available to non-reporting issuers with their head office in one of the participating jurisdictions (N.S., N.B., Manitoba, Saskatchewan, and Quebec), but not investment funds.
Some key features of this proposed exemption are as follows:
- The offering cannot exceed $150K.
- The distribution can remain open for only 90 days.
- An investor may invest a maximum of $1,500 in any single investment under the exemption.
- The exemption can be used a maximum of two times in a calendar year.
- Crowdfunding portals would not be subject to a registration
requirement under securities law if they meet certain criteria,
including the following:
- Their head office must be in one of the participating jurisdictions, and their promoters, directors, officers, and control person must be Canadian residents.
- They cannot provide investment advice or be related to the issuer of the securities being offered.
- They can allow an investment only after the investor confirms online having read and understood the issuer's offering document and important risk warnings.
Next Steps. The proposed exemptions were open for public review and comment until June 18, 2014. The regulators in the participating provinces will now review the feedback received and decide whether to proceed with the proposal and if so, whether further modifications are necessary.
A Crowd Pleaser
The details still need to be fleshed out, but, generally, this has the opportunity to be a positive development for SMEs and start-ups. If implemented, the framework proposed by the regulators will be directed toward facilitating regulatory compliance by SMEs and start-ups when accessing capital through crowdfunding, by means of creating a tailored set of rules balancing the needs of both issuers and investors.
Originally published by Internet and E-Commerce Law in Canadam July 2014 Volume 15, No. 3.
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.