an article on this blog summarized the recent amendments to the accredited investor
exemption which came into effect May 5, 2015. Ordinarily a company
cannot issue securities unless it has filed a prospectus. In
certain circumstances, such as those described in the accredited investor
exemption, a company can sidestep this requirement. This
exemption assumes that accredited investors have a certain degree
of financial literacy in order to assess an investment without a
prospectus and that, if the company's situation takes a turn
for the worse, the investor's future financial prospects will
not be devastated.
One of the aforementioned amendments requires a
corporation to acquire a Risk Acknowledgment Form from investors
before distributing securities. This form states (in bold letters)
"WARNING! This investment is risky. Don't invest unless
you can afford to lose all the money you pay for this
investment." With such a conspicuous disclaimer, it seems one
purpose of the amendments was to make sure investors appreciated
the risk involved.
The goal of crowdfunding a project is to raise
funds to pursue a certain project. This phenomenon has been
successful in the past where companies have had people invest in
their project in exchange for the pre-sale of the product of their
project or for promotional items. Alternatively, equity
crowdfunding allows a business to issue securities in exchange for
an investor's monetary contribution to the project.
On the one hand, the start-up crowdfunding
exemption provides a corporation with an alternative avenue for
raising capital which avoids the potential costs associated with
preparing audited financial statements and a prospectus as well as
concerns about control of the company that can arise with venture
capital. On the other hand, the same concern about an
individual's ability to accurately assess the risk associated
with an investment arises as with the accredited investor
Although the exemption allows the corporation
to issue securities, there are safeguards in place to protect investors.
Precautions include having the business file a prescribed offering
document online outlining its idea, limiting the maximum
investment amount to $1,500 per individual and requiring the
crowdfunding campaign to be made through a funding portal that
meets the required conditions.
Despite these protections, the British Columbia
Securities Commission cautions investors that investing in a
start-up or small business can be risky and that an investor could
lose their entire investment. Additionally, the Commission cautions
that investors may have to hold onto their securities indefinitely
if they are unable to find a purchaser.
Ultimately, the investor should do some
homework before investing. While the start-up crowdfunding
exemption may provide investment opportunities not previously
available, there are risks associated with exempting crowdfunding
projects from the scrutiny of securities regulators.
The author would like to thank Corey
McClary, summer student, for his assistance in preparing this legal
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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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