A Canadian company, Vrvana, Inc. is seeking
$350,000 through Kickstarter, to finance its development of a
virtual reality headset marketed as the Totem. Vrvana has elected
to pursue a reward-based crowdfunding model. For example, minimal
donations of $15 come with a newsletter subscription and event
invitations. The top end contribution of $8,000 will net a Totem VR
headset and a dinner date with the team of engineers.
Crowdfunding attracts headlines and cash, but in Canada the
rules and laws surrounding equity crowdfunding are still in
development. The securities or equity-based model of crowdfunding
refers to small investments in exchange for securities - which has
a broad definition meant to capture shares in the start-up company,
including pref shares or convertible securities, non-convertible
debt securities, or units of a limited partnership. In plain
terms, a company could use this method of crowdfunding to raise
money by selling a piece of the company, rather than selling
products or services.
In Canada, a number of provinces are considering some variation
of crowdfunding rules, either for a "Crowdfunding
Exemption" or a "Start-up Exemption" or both.
Ontario, B.C., Manitoba, Quebec, New Brunswick and Nova
Scotia are considering the exemptions. Alberta is
considering the public comments, but has not formally published any
Here are the highlights of the proposed Start-up
Exemption for crowdfunding in a number of Canadian
There is a cap. The start-up can only raise a maximum of
$150,000 under each offering.
The distribution cannot remain open for more than 90 days.
There is a limit on the number of times the company can go back
to the trough each year - the exemption only be used twice each
The offering document must disclose the minimum and maximum
One crowdfunding offering at a time. A start-up cannot have two
The offering materials must be made available to potential
investors through a regulated portal (like Kickstarter), which will
also be subject to rules.
Investor are restricted on what they can contribute - there is
a cap of $1,500 for each investment under the exemption.
Securities are subject to an indefinite hold period.
There are other restrictions, such as the requirement for
the start-up to file a report of distribution within 30 days of the
closing of the distribution.
The proposed Crowdfunding Exemption is
a variation, with a few notable differences: it would have higher
thresholds and would be open to both reporting issuers and
The company would be able to raise up to $1.5 million during
every 12 month period.
Investors could invest up to $2,500 per single investment, with
an aggregate cap of $10,000 per calendar year.
Remember this is currently proposed, but not yet
"legal". The comment period closed in June, 2014,
and Canadian securities regulators are considering comments.
Rule changes will not likely come into effect until 2015. However,
Saskatchewan has already launched its Equity Crowdfunding
Exemption which is similar to
the Start-up Exemption summarized above.
In the US, the 2012 Jumpstart Our Business Startups Act
(JOBS Act) promised new rules on equity crowdfunding. While the
federal rules have not yet been finalized, equity crowdfunding is
currently allowed in a number of states that have passed
"intrastate" rules. For example, a Maryland company may
raise funds from Maryland investors. A dozen US states are
considering such rules. Make sure you get US legal advice if you
are considering crowdfunding from US investors.
This is a complex area of law, and the current landscape is more
splintered than harmonized. If you are a start-up, get some
practical advice as you consider your financing options.
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.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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