You've probably heard about "crowdfunding" websites like Kickstarter and Indiegogo. On these sites, companies with a great idea that are in need of capital can let the world know about that idea and raise money to bring it to fruition. In exchange for the funds that a user contributes to the crowdfunding campaign, the user usually receives some type of reward such as a product pre-order or the like. As discussed on the blog last week, a new type of crowdfunding that became legal in Ontario and other Canadian jurisdictions (Quebec, Manitoba, Nova Scotia and New Brunswick) on January 25th under Multilateral Instrument 45-108 ("MI 45-108") allows companies to raise funds in exchange for a different type of reward: equity in the company itself. According to the Ontario Securities Commission, equity crowdfunding allows new or existing businesses to raise capital by selling "many small stakes, usually in the form of shares, to a large number of investors over the internet."
In this two-part series, we will discuss the reality and implications of new crowdfunding rules to M&A activity in Canada. Part 1 will focus on the new crowdfunding rules themselves and Part 2 will discuss some of the potential implications of these rules to M&A activity.
MI 45-108 contains an exemption for prospectuses in the case of a crowdfunding offering, in addition to a registration regime for funding portals, whereupon regular, non-accredited investors may subscribe to crowdfunding offerings.
In order for a crowdfunded offering to occur under MI 45-108, there are a number of stipulations placed upon investors, issuers, and portals.
A few limitations are placed upon investors, including that investors may only invest in a crowdfunded offering if:
- A maximum of $2,500 is invested per offering (in Ontario there is also a $25,000 limit in the case of an accredited investor and no limit for a "permitted client" having net financial assets over $5 million)
- A maximum of $10,000 is invested per calendar year (in Ontario, $50,000 for accredited investors and no limits for permitted clients)
- They have agreed to a Risk Acknowledgment Form that requires them to confirm their understanding of the risk warnings in the issuer's offering document
A number of important limitations are placed upon issuers, including the following:
- Raise no more than $1.5 million in any 12 month period
- Provide an offering document (Form 45-108F1) that details in plain language important information about the offering – the types of things that an investor should know before investing
- Make the offering only through a registered funding portal, unrelated to the issuer
- Offer only simple, non-complex securities
- Advertise only in a way that makes known the existence of the crowd offering and directs potential investors to the funding portal, which is the only place where offering documents may be made available
- Upon raising funds, provide investors with annual financial statements, and information about the use of proceeds
- In some provinces, provide investors with ongoing disclosure related to changes in the business
The most stringent limitations are placed upon funding portals themselves. A funding portal must:
- Refrain from advertising specific offerings
- Be registered with the appropriate securities commission
- Refrain from distributing securities of a related issuer
- Perform gatekeeper responsibilities before allowing an issuer to make an offering (such as reviewing disclosure and checking documents for accuracy)
- Obtain background checks on issuers, their directors, officers and promoters, disabling access for issuers that do not meet appropriate standards
Overall, the new crowdfunding rules will make it vastly simpler for a company to raise capital in exchange for equity. These changes, over the long term, may have significant implications on the way that financing occurs, especially for start-ups and small to midsized enterprises. In Part 2, we will consider some of the potential implications of this new form of capital raising to M&A transactions and activity in Canada.
The author would like to thank Al Hounsell, articling student, for his assistance in preparing this legal update.
Norton Rose Fulbright Canada LLP
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