Equity crowd funding provides an innovative, fresh and new
opportunity for entrepreneurs to fund their start up corporations
in New Brunswick. However, the legal implications and
ramifications can be complicated. Outlined below are a few
issues that any entrepreneur will want to consider before entering
the equity crowd funding universe.
How is the share capital of your corporation structured?
Because a potential "funder" will be subscribing for
equity in your corporation, the share capital structure should be
organized appropriately. Before deciding to offer shares to
the "crowd", make sure you know what you are
offering. Consider whether the shares being offered should be
a separate class than those held by other current
shareholders. You may want to restrict the new
shareholder's ability to vote, and/or ensure that existing
shareholders have "super-voting" shares to ensure that
the new shareholders so not have stronger voting power than the
In New Brunswick, unless otherwise stated, all shareholders of a
corporation enjoy pre-emptive rights upon the issuance of
additional shares of a corporation. This can prove to be
problematic for a corporation where there are a large number of
shareholders. Consequently, you may wish to consider
eliminating shareholders' pre-emptive rights by amending the
articles of incorporation before approaching the "crowd"
You should also consider whether the by-laws of the corporation
are conducive to handle shareholders that are not active in the
day-to-day operations of the corporation. Before equity crowd
funding, consider whether timelines for calling meetings are
appropriate and build in time limitations so that shareholders are
deemed to consent in the event that they fail to respond within the
Every entrepreneur who is considering equity crowd funding
should also be prepared for the increase in the importance of good
corporate governance once many shareholders are brought to the
A solid and well thought-out unanimous shareholders agreement is
a must. Every person that subscribes for shares needs to
become a party to the unanimous shareholders agreement. This
requirement and the contents of the agreement will need to be made
available for all potential shareholders prior to the issuance of
Any unanimous shareholders agreement needs to contain customary
language that is designed to protect a corporation from issues that
can arise between shareholders (among other things). This is
particularly important where the corporation does not have a
personal relationship with the shareholders from the
"crowd" that are subscribing for shares. For
example, any wise entrepreneur will ensure that their unanimous
shareholders agreement includes a right of first refusal and drag
along rights which are tailored to protect the corporation.
The agreement should also address the issue of what happens in the
event of a buyout of the corporation.
When dealing with a large number of passive shareholders (which
will be the case for those coming from a round of equity crowd
funding), an entrepreneur should consider implementing a voting
trust agreement to ensure that one person acts as the proxy for a
specific group of shareholders and votes all shares (if voting
shares are offered) on its behalf. This will avoid having to
chase shareholders that do not respond in a timely fashion, and may
avoid the need for the calling of formal meetings in certain
When a large number of shareholders own a corporation, the
entrepreneur at the helm needs to have strong communication and
reporting skills. Every entrepreneur considering equity crowd
funding needs to understand what needs to be communicated to the
shareholders and when to avoid the possibility of a disgruntled
person alleging minority shareholder oppression and consequently
putting the corporation at risk.
Also, once a corporation has more than 50 shareholders, the
reporting requirements are required to be made with the Financial
and Consumer Services Commission. Depending on the residence
of the investors subscribing for shares, multiple filings with
regulatory authorities in different jurisdictions may be
required. Make sure you understand your filing obligations in
all applicable jurisdictions.
Although equity crowd funding may prove to be an effective tool
for entrepreneurs in their quest to finance a corporation, if not
properly thought through, it can turn an entrepreneur's dream
of building a successful corporation into an overwhelming
challenge. Make sure that, prior to going to the
"crowd", you have received sound legal advice. A
qualified securities lawyer is an excellent resource and an
investment worth making.
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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