Canada: Crowdfunding In Canada And The United States

Last Updated: December 17 2015
Article by Stewart L. Muglich

In Canada, two separate crowdfunding initiatives have been implemented:

  • The securities regulatory authorities in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (collectively, the "startup participating jurisdictions") recently adopted substantially harmonized registration and prospectus exemptions (together, the "startup crowdfunding exemptions") that allows start‑up and early stage companies to raise capital in these jurisdictions, subject to certain conditions; and
  • The securities regulatory authorities in Manitoba, Ontario, Québec, New Brunswick and Nova Scotia (collectively, the "45108 crowdfunding participating jurisdictions") are publishing in final form a crowdfunding prospectus exemption (the "45108 crowdfunding exemption") and a registration framework for funding portals (the "funding portals") (the 45‑108 crowdfunding exemption and the funding portals collectively, the "45108 crowdfunding regime").

The 45-108 crowdfunding regime and the start-up crowdfunding exemptions are viewed by those jurisdictions (except for British Columbia, which is not a jurisdiction participating in the 45-108 crowdfunding regime) as complementary regimes, as the 45-108 crowdfunding regime is available to both reporting and non-reporting issuers and provides both higher investment limits for investors and higher limits on the amount issuers can raise.

Substance of the start‑up crowdfunding exemptions

The start‑up crowdfunding exemptions are comprised of an exemption from the prospectus requirement (the "startup prospectus exemption") and an exemption from the dealer registration requirement (the "startup registration exemption").

The start‑up prospectus exemption permits non‑reporting issuers to issue eligible securities, subject to a number of conditions. The key conditions are:

  • the head office of the issuer is located in a start-up participating jurisdiction;
  • the issuer distributes eligible securities of its own issue through an online funding portal;
  • the issuer distributes eligible securities using an offering document in the form required that is made available through the online funding portal. The offering document includes basic information about the issuer, its management and the distribution, including how the issuer intends to use the funds raised and the minimum offering amount;
  • the issuer group cannot raise aggregate funds of more than $250,000 per distribution and is restricted to not more than two start-up crowdfunding distributions in a calendar year;
  • no person invests more than $1,500 per distribution;
  • the distribution may remain open for up to a maximum of 90 days;
  • the distribution must be made through a funding portal that is either relying on the start‑up registration exemption or is operated by a registered dealer. Registered dealers that operate funding portals must meet their existing registration obligations under securities legislation and confirm to issuers that they meet or will meet certain conditions provided in the start‑up registration exemption;
  • the issuer provides each purchaser with a contractual right to withdraw their offer to purchase securities within 48 hours of the purchaser's subscription or notification to the purchaser that the offering document has been amended; and
  • none of the promoters, directors, officers and control persons (collectively, the "principals") of the issuer group is a principal of the funding portal.

The eligible securities are subject to an indefinite hold period and can only be resold under another prospectus exemption, under a prospectus or four months after the issuer becomes a reporting issuer.

The start‑up registration exemption permits funding portals to facilitate distributions under the start‑up crowdfunding exemptions, subject to a number of conditions. The key conditions are:

  • 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 majority of the funding portal's directors are Canadian residents;
  • the funding portal does not provide advice to a purchaser or otherwise recommend or represent that an eligible security is suitable, or about the merits of the investment;
  • the funding portal does not receive a commission, fee or any other amount from a purchaser of eligible securities;
  • the funding portal makes the offering document of the issuer and the risk warnings available online to purchasers and does not allow a subscription until the purchasers have confirmed that they have read and understood these documents;
  • the funding portal receives payment for an eligible security electronically through the funding portal's website;
  • the funding portal holds the purchasers' assets separate and apart from its own property, in trust for the purchasers and, in the case of cash, at a Canadian financial institution;
  • the funding portal maintains books and records at its head office to accurately record its financial affairs and client transactions, and to demonstrate the extent of the funding portal's compliance with the orders implementing the start‑up crowdfunding exemptions for a period of eight years from the date a record is created;
  • the funding portal either:

    • releases funds to the issuer after the minimum offering amount has been reached and provided that the 48 hour right of withdrawal has elapsed, or
    • returns the funds to purchasers if the minimum offering amount is not reached or if the start‑up crowdfunding distribution is withdrawn by the issuer; and
    • a participating regulator has not notified the funding portal that it cannot rely on the start‑up registration exemption because its principals or their past conduct demonstrate a lack of integrity, financial responsibility or relevant knowledge or expertise.

Substance of the 45-108 crowdfunding regime

The 45‑108 crowdfunding regime encompasses measures which are intended to provide effective protection for investors. The key provisions are:

  • issuers can only offer non-complex securities;
  • the total proceeds raised by the issuer group in reliance on the 45-108 crowdfunding regime does not exceed $1,500,000 within the rolling 12-month period;
  • investors are subject to the following investment limits:

    • an investor that does not qualify as an accredited investor:

      • $2,500 per investment, and
      • in Ontario, $10,000 in total in a calendar year,
    • an accredited investor other than a permitted client:

      • $25,000 per investment, and
      • in Ontario, $50,000 in total in a calendar year,
  • in Ontario, no investment limits for a permitted client;
  • issuers are required to prepare an offering document that contains all of the information about the issuer and its business that an investor should know before purchasing the issuer's securities;
  • investors must complete a risk acknowledgement form requiring them to positively confirm having read and understood the risk warnings and information in the crowdfunding offering document before they can enter into an agreement to purchase securities;
  • issuers are accountable for and are subject to a standard of liability on the crowdfunding offering document and other permitted materials, and investors are provided with a related right of action;
  • a prohibition on advertising and general solicitation;
  • non-reporting issuers must make available to investors (i) annual financial statements, (ii) a notice of use of proceeds, and (iii) in New Brunswick, Nova Scotia and Ontario, a notice of a discontinuation of the issuer's business, a change in the issuer's industry or a change of control of the issuer; and
  • reporting issuers must continue to comply with all of their disclosure requirements.

Under the 45-108 crowdfunding regime, funding portals are regulated such that:

  • issuers can only distribute securities through a single funding portal that is registered as an investment dealer, exempt market dealer or restricted dealer as outlined in the Rule, and must post the offering document and other permitted materials solely on that funding portal's online platform;
  • funding portals are prohibited from offering securities of a related issuer;
  • a funding portal must fulfill certain gatekeeper responsibilities prior to allowing an issuer access to its online platform, including reviewing the issuer's disclosure in the crowdfunding offering document and other permitted materials for completeness, accuracy and any misleading statements; and
  • a funding portal must review information and obtain background checks on the issuer and its directors, executive officers and promoters, and deny an issuer access to the funding portal in certain circumstances.

United States

Recently, the Securities and Exchange Commission (the "SEC") advised that it will consider whether to adopt final rules that would allow the offer and sale of securities through crowdfunding. The recommended rules would give small businesses an additional avenue to raise capital and provide investors with important protections. If adopted, this would complete the Commission's major rulemaking mandated under the JOBS Act.

Highlights of the Recommended Final Rules

The recommended rules would, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for the intermediaries facilitating crowdfunding transactions. More specifically, the recommended rules would:

  • permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12 month period;
  • permit individual investors, over a 12 month period, to invest in the aggregate across all crowdfunding offerings up to:

    • if either their annual income or net worth is less than $100,000, than the greater of:

      • $2,000; or
      • 5 percent of the lesser of their annual income or net worth.
    • if both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
    • during the 12 month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Under the recommended rules, certain companies would not be eligible to use the exemption. Ineligible companies would include non‑U.S. companies, Exchange Act reporting companies, certain investment companies, companies that are subject to disqualification under the proposed regulations for crowdfunding, companies that have failed to comply with the annual reporting requirements under the proposed regulations for crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Securities purchased in a crowdfunding transaction generally could not be resold for one year. Holders of these securities would not count toward the threshold that requires a company to register its securities under the Securities Exchange Act of 1934, Section 12(g), if the company is current in its annual reporting obligations, retains the services of a registered transfer agent and has less than $25 million in total assets as of the end of its most recently completed fiscal year.

In addition, all transactions relying on the new rules would be required to take place through an SEC‑registered intermediary, either a broker‑dealer or a funding portal.

Disclosure by Companies

Companies that rely on the recommended rules to conduct a crowdfunding offering must file certain information with the SEC and provide this information to investors and the intermediary facilitating the offering, including among other things, to disclose:

  • the price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount;
  • a discussion of the company's financial condition;
  • financial statements of the company that, depending on the amount offered and sold during a 12 month period, are accompanied by information from the company's tax returns, reviewed by an independent public accountant, or audited by an independent auditor. A company offering more than $500,000 but not more than $1 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the company are available that have been audited by an independent auditor;
  • a description of the business and the use of proceeds from the offering;
  • information about officers and directors as well as owners of 20 percent or more of the company; and
  • certain related‑party transactions.

In addition, companies relying on the crowdfunding exemption would be required to file an annual report with the SEC and provide it to investors.

Crowdfunding Platforms

A funding portal would be required to register with the SEC and become a member of a national securities association (currently, FINRA). A company relying on the rules would be required to conduct its offering exclusively through one intermediary platform at a time.

The recommended rules would require intermediaries to, among other things:

  • provide investors with educational materials that explain, among other things, the process for investing on the platform, the types of securities being offered and information a company must provide to investors, resale restrictions, and investment limits;
  • take certain measures to reduce the risk of fraud, including having a reasonable basis for believing that a company complies with the propose regulations for crowdfunding and that the company has established means to keep accurate records of securities holders;
  • make information that a company is required to disclose available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold in the offering;
  • provide communication channels to permit discussions about offerings on the platform;
  • provide disclosure to investors about the compensation the intermediary receives;
  • accept an investment commitment from an investor only after that investor has opened an account;
  • have a reasonable basis for believing an investor complies with the investment limitations;
  • provide investors notices once they have made investment commitments and confirmations at or before completion of a transaction;
  • comply with maintenance and transmission of funds requirements; and
  • comply with completion, cancellation and reconfirmation of offerings requirements.

The rules also would prohibit intermediaries from engaging in certain activities, such as:

  • providing access to their platforms to companies that they have a reasonable basis for believing have the potential for fraud or other investor protection concerns;
  • having a financial interest in a company that is offering or selling securities on its platform unless the intermediary receives the financial interest as compensation for the services, subject to certain conditions; and
  • compensating any person for providing the intermediary with personally identifiable information of any investor or potential investor.

The proposed regulations for crowdfunding would contain certain rules that are specific to registered funding portals consistent with their more limited activities than that of a registered broker‑dealer. The rules would prohibit funding portals from, among other things: offering investment advice or making recommendations; soliciting purchases, sales or offers to buy securities; compensating promoters and other persons for solicitations or based on the sale of securities; and holding, possessing, or handling investor funds or securities.

The rules would provide a safe harbor under which funding portals could engage in certain activities consistent with these restrictions. The rules also would require funding portals to maintain certain books and records related to their transactions and business.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Stewart L. Muglich
Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions