On May 14, 2015, six provincial securities regulators (British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia, and together, the "Participating Jurisdictions") announced the implementation of substantially harmonized equity crowdfunding exemptions through Multilateral CSA Notice 45-316 – Start-up Crowdfunding Registration and Prospectus Exemptions (the "Notice"). Each Participating Jurisdiction has implemented the rules mentioned in the Notice by publishing a separate instrument, rule or blanket ruling. The new rules permit start-up and early stage companies in the Participating Jurisdictions to raise capital without having to comply with the prospectus requirement (the "Start-up Prospectus Exemption") and the dealer registration requirement (the "Start-up Registration Exemption"). These new exemptions are available only to early-stage businesses and not to larger companies that currently distribute securities as reporting issuers.
The Start-up Prospectus Exemption
The Start-up Prospectus Exemption permits non-reporting issuers to issue "eligible securities"1 without the need to file a prospectus. This exemption is subject to a number of conditions, which include:
- the business' head office is located in a Participating Jurisdiction;
- the business' securities are issued and paid for through an online funding portal that is either exempt under the Start-up Registration Exemption noted below or is otherwise operated by a registered dealer subject to certain conditions;
- the business distributes its securities using an offering document that includes basic information about its company, its management and the distribution, including how the business intends to use the funds raised, and the minimum offering amount;
- a business is permitted a maximum of $250,000 to be raised per distribution and no more than two crowdfunding distributions in a calendar year;
- no individual investor can invest more than $1,500 per distribution; and
- the distribution may remain open to up to a maximum of 90 days.
The eligible securities are also made subject to an indefinite hold period and can be resold only pursuant to (a) another prospectus exemption, (b) a prospectus, or (c) four months after the issuer becomes a reporting issuer.
The Start-up Registration Exemption
The Start-up Registration Exemption, which expires on May 13, 2020, permits crowdfunding portals to facilitate distributions without the need to register as dealers. This exemption is subject to a number of conditions, which include:
- the funding portal must deliver a funding portal information form and individual information forms for each of its principals to the participating regulators at least 30 days prior to facilitating its first start-up crowdfunding distribution;
- the head office of the funding portal is located in Canada;
- the funding portal is not otherwise registered under Canadian securities legislation;
- the majority of the funding portal's directors are Canadian residents;
- the funding portal does not provide recommendations or advice to a purchaser or otherwise discuss the merits of an investment;
- the funding portal does not receive a commission, fee or any other amount from the investors; and
- the funding portal makes available the offering document of the issuer and the risk warnings and requires any investor to confirm that they have read and understood these documents before they can purchase securities.
The Participating Jurisdictions have described the exemptions as a modern, cost-effective way to connect start-up businesses with local investors. Saskatchewan, which became the first Canadian jurisdiction to exempt crowdfunding from prospectus requirements in December 2013, will repeal its current exemption in order to harmonize with the other Participating Jurisdictions.
Although Ontario is not party to these rules, the six Participating Jurisdictions continue to work closely with the Ontario Securities Commission (the "OSC") with a view to enabling the new exemptions to coexist and complement any Ontario legislation. The OSC has indicated that its own suite of crowdfunding rules will be implemented in the fall of 2015, following last year's crowdfunding exemption proposal. Unlike the rules in the Participating Jurisdictions, the Ontario equity crowdfunding rules are expected to apply to both smaller, non-reporting issuers as well as larger companies already registered to distribute securities. The Ontario rules are also not expected to provide a dealer registration exemption, which means that websites acting as crowdfunding portals would have to become registered under applicable Ontario securities laws and meet certain registration requirements.
1. "eligible securities" means (a) a common share, (b) a non-convertible preference share, (c) a security convertible into a security referred to in (a) or (b), (d) a non-convertible debt security linked to a fixed or floating interest rate, and (e) a unit of a limited partnership.
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