Canada: Regulation Crowdfunding Now In Effect

On Monday, May 16, 2016, the U.S. Securities and Exchange Commission's, Regulation Crowdfunding came into effect. Regulation Crowdfunding provides an exemption from certain registration requirements under U.S. securities law for certain crowdfunding transactions. Issuers qualified to rely on the Regulation Crowdfunding exemption can raise up to $1 million in a 12-month period under such exemption. Individual investments in all crowdfunding issuers in a 12-month period are limited to:

  1. the greater of $2,000 or 5 per cent of annual income or net worth, if the annual income or net worth of the investor is less than $100,000; or
  2. 10 per cent of the lesser of annual income or net worth (not to exceed an amount sold of $100,000), if annual income or net worth of the investor is $100,000 or more.

Investors are limited to a maximum aggregate investment of $100,000 in all crowdfunding offerings in a 12-month period.

Four years ago, when signing the bill permitting crowdfunding regulation into law, President Obama stated that, "for the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in."

Regulation Crowdfunding essentially allows anyone to dip their toe into the venture capital world, according to Stacy Cowley of the New York Times. Previously, under U.S. securities laws only "accredited investors" (those with an annual income of at least $200,000 or a net worth of at least $1 million) were permitted to take equity stakes in most private companies. The introduction of Regulation Crowdfunding presents a new way for startups and other early-stage companies in the U.S. to raise capital, as well as providing startups and other early-stage companies access to a huge number of potential investors.

In Ontario, the Ontario Securities Commission recently introduced crowdfunding regulation through Multilateral Instrument 45-108 – Crowdfunding. Crowdfunding regulation for both Ontario and the U.S., respectively, requires that crowdfunding raises by issuers are conducted through certain online funding portals registered with the applicable securities regulator. Both jurisdictions also require issuers seeking to raise capital under the respective crowding funding exemption to provide certain information to potential investors, including information regarding the issuer's directors, offices and major stakeholders, related party transactions, planned use of the funds raised and risk factors.

While the Ontario and U.S. crowdfunding regulations have similarities, there are important differences, including the following:

  • Issuers relying on the Ontario crowdfunding exemption can raise up to C$1.5 million in a 12-month period; while issuers relying on Regulation Crowdfunding can raise up to US$1 million within the same time period.
  • Issuers that are reporting companies under applicable U.S. securities law are not eligible to rely on Regulation Crowdfunding; while qualified private and public issuers can both rely on the Ontario crowdfunding exemption to raise capital.

Both issuers and investors benefit from the introduction of crowdfunding regulation. As Tanya Prive of Forbes Magazine outlines, advantages include greater access to capital, the hedging of risk and an ability to have a greater public audience become aware of the business or product. Issuers seeking to obtain capital through crowdfunding in either Ontario or the U.S. should compare the costs associated with such funding to more traditional methods. In addition, issuers should be mindful of the costs and corporate governance issues that can arise as a result of having a large number of investors.

For more information about Equity Crowdfunding in Ontario, view our "Equity Crowdfunding is Arriving in Ontario" article here.

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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