Canada: Access To Capital For Small And Medium-Sized Businesses — ASC Adopts New Capital-Raising Initiatives For Start-Up Businesses

The Alberta Securities Commission (ASC) has adopted ASC Rule 45-517 Prospectus Exemption for Start-Up Businesses (Start-Up Exemption) which came into effect July 19, 2016. The Start-Up Exemption is a prospectus exemption intended to allow Alberta-based small and start-up issuers to raise modest amounts of capital. The Start-Up Exemption can be found here.

Additionally, on July 26, 2016, the ASC published for a 30-day comment period Multilateral Instrument 45-108 Crowdfunding (Online Crowdfunding Exemption). The Online Crowdfunding Exemption is a prospectus exemption designed to enable moderate financing across multiple Canadian jurisdictions via an online funding portal registered as either a "registered dealer funding portal" or a "restricted dealer funding portal". The Online Crowdfunding Exemption has already been adopted in Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia effective January 25, 2016. The Online Crowdfunding Exemption can be found here.

Start-Up Exemption Highlights

  • Availability — available to an issuer that is not an investment fund or a reporting issuer and is not subject to reporting obligations in a foreign jurisdiction similar to those of a reporting issuer. The head office of the issuer must be located in Alberta or a jurisdiction in Canada that has adopted a corresponding exemption. An issuer can raise money using other prospectus exemptions concurrently with a Start-Up Exemption distribution.
  • Type of Security — each security distributed must be an "eligible security" which means any of the following:

    1. a common share;
    2. a non-convertible preference share;
    3. a security convertible into (a) or (b);
    4. a non-convertible debt security linked to a fixed or floating interest rate;
    5. a limited partnership unit; and
    6. an investment share that is a non-convertible preference share issued by a cooperative organized under the Cooperatives Act (Alberta).
  • Method — funds can be raised through:

    1. an online funding portal (provided that the portal is compliant with registration requirements) or other more traditional revenue sourcing avenues;
    2. a dealer (provided that the dealer is compliant with registration requirements) that will solicit investment and distribute securities through traditional distribution channels; or
    3. the issuer's principal's own network of contacts (provided that they are not in the business of trading securities such that the dealer registration requirement is triggered). Additionally, no commission or fee or other amounts can be paid to the issuer group1, or any principals, employees or agents thereof.
  • Distribution Limit — a maximum of two distributions with an aggregate limit of $250,000 in a calendar year. A "lifetime limit" also applies such that the aggregate funds raised by the issuer group through all Start-Up Exemption distributions must be less than $1,000,000.
  • Investment Limits — if a registered dealer is not involved in the distribution, no investor can invest more than $1,500 in a single investment up to a maximum of $3,000 per issuer group in the same calendar year under all Start-Up Exemption distributions.
  • No Registration Exemption — the Start-Up Exemption does not provide an exemption from the requirement that a person or company who is a dealer must be registered. A person or company acting as a dealer in respect of a distribution of securities under the Start-Up Exemption is required to comply with registration requirements.
  • Offering Document & Subscription Requirements — to rely on the Start - Up Exemption, issuers must provide to investors an offering document in the form of Form 45-517F1 Start-up Business Offering Document and must obtain a signed risk acknowledgment from each investor prior to the investor signing the agreement to purchase the securities. The risk acknowledgment must be in the form prescribed by Form 45-109F2 Start-up Business Risk Acknowledgment. The issuer must also provide the investor the right to withdraw the offer to purchase the security within 48 hours of the later of the investor's subscription and an amended offering document being delivered to the investor.
  • Filing Requirements — within 30 days after the closing of any distribution under the Start-Up Exemption, the issuer must file with the ASC a completed report of exempt distribution in the form of Form 45-106F1 Report of Exempt Distribution, together with the offering document, including all applicable amendments. The report of exempt distribution and offering document must be filed electronically through the System for Electronic Document and Analysis and Retrieval (SEDAR) in accordance with National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR).
  • Implications — an issuer that relies on the Start-Up Exemption:

    1. may no longer be considered a "private issuer" under NI 45-106 and will be unable to rely on the "private issuer" prospectus exemption for future distributions of securities. Losing access to the private issuer exemption may deter potential issuers from relying on the Start-Up Exemption;
    2. may have an unusually large number of minority shareholders which would increase costs associated with shareholder meetings and communications with shareholders; and
    3. these investment limits per investor are potentially problematic as the issuer will need to locate a fairly large number of investors to raise the maximum amount and the compliance costs associated with each subscription could be significant relative to the amount of funds that can be raised.

Online Crowdfunding Exemption Highlights

  • Availability — available to reporting issuers and non-reporting issuers provided that the issuer:

    1. is organized in a jurisdiction in Canada;
    2. has its head office in Canada;
    3. has a board of directors comprised of a majority of Canadian residents; and
    4. is not an investment fund.
  • Type of Security — the same parameters that apply to the Start-Up Exemption apply to the Online Crowdfunding Exemption with the exception that flow-through shares under the Income Tax Act (Canada) are permissible for distribution pursuant to the Online Crowdfunding Exemption whereas investment shares that are non-convertible preference shares issued by a cooperative organized under the Cooperatives Act (Alberta) are not.
  • Method — funds must be raised through a single funding portal that is registered as either a "registered dealer funding portal" or a "restricted dealer funding portal". Both restricted dealer funding portals and registered dealer funding portals will be subject to additional requirements imposed by the Online Crowdfunding Exemption that will require dealers to provide certain "gatekeeper" functions aimed at investor protection and issuer monitoring. Additionally, the funding portal:

    1. must not advertise a distribution or solicit purchasers under the Online Crowdfunding Exemption;
    2. may only make available to purchasers: the crowdfunding document, a term sheet, a video, and other materials summarizing the information in the crowdfunding document; and
    3. must ensure that the information about the issuer and a distribution of securities of the issuer is presented or displayed on its online platform in a fair, balanced and reasonable manner.
  • Distribution Limit — up to $1,500,000 within a calendar year, subject to certain limitations including:

    1. the Online Crowdfunding Exemption is not available if the proceeds are being used to invest in, merge with, or acquire an unspecified business;
    2. the Online Crowdfunding Exemption is not available if the issuer is in default of its ongoing disclosure obligations;
    3. the offering cannot remain open for more than 90 days and the offering cannot close if the minimum subscription has not been raised; and
    4. the offering document must disclose the minimum offering size and whether there is a maximum offering size.
  • Investment Limits

    1. non-accredited investors – maximum of $2,500 per distribution and $10,000 per calendar year for all distributions under the Online Crowdfunding Exemption; and
    2. accredited investors – maximum of $25,000 per distribution and $50,000 per calendar year in all distributions under the Online Crowdfunding Exemption; and
    3. permitted clients (as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations) – no limit.
    Finally, no person or company in the issuer group or director or executive officer of an issuer in the issuer group may directly or indirectly lend or finance, or arrange lending or financing for a purchaser to purchase securities of the issuer under the Online Crowdfunding Exemption
  • Offering Document & Subscription Requirements — in order to rely on the Online Crowdfunding Exemption, issuers are responsible for preparing and providing to investors the offering document. Financial statements are required as part of the offering document and are subject to the following requirements:

    1. (i) to be approved be management where the issuer raises no more than $250,000 under any prospectus exemptions;
    2. (ii) to be approved by management and accompanied by a review report where the issuer has raised between $250,000 and $750,000 under any prospectus exemption; and
    3. (iii) to be approved by management and accompanied by an auditor's report where the issuer has raised more than $750,000 under any prospectus exemption.
    4. In the event of a reporting issuer, the offering document must also include a two-day right of withdrawal at the option of the investor and in the event of a misrepresentation, the right of action for damages or rescission. In the event of a non-reporting issuer, the offering document must include a contractual right of action against the issuer for rescission and damages in the event of an untrue statement of a material fact included in any of the materials made available to the purchaser. Additionally, investors retain a right to withdraw their purchase within 48 hours of purchase and subsequent to any amendment to the offering document. Finally, in the event of a reporting issuer, securities distributed are subject to a four-month hold period and if a non-reporting issuer, to an indefinite hold period and can only be resold under another prospectus exemption.
    The issuer must additionally obtain a signed risk acknowledgment from each investor prior to the investor signing the agreement to purchase the securities requiring them to positively confirm having read and understood the risk warnings and information in the crowdfunding offering document. The risk acknowledgement must be in the form prescribed by the proposed Form 45-108F2 Risk Acknowledgment. The issuer must additionally obtain an investment limit form in the form of 45-108F3 Confirmation of Investment Limits whereby the investor confirms how he, she, or it qualifies to buy securities under the Online Crowdfunding Exemption.
  • Filing Requirements – within 10 days after the closing of any distribution under the Online Crowdfunding Exemption, the issuer must file through SEDAR a completed report of exempt distribution with the ASC in the form of Form 45-106F1 Report of Exempt Distribution, the offering document, and a term sheet as well as any other materials summarizing the information in the offering document if applicable. Upon request, the issuer may also be required to deliver to the securities regulator a video relating to the distribution, if access to such a video has been provided to investors.
  • Implications – in the event that the Online Crowdfunding Exemption is adopted as a new rule in Alberta, the Start-Up Exemption will be amended to allow a distribution under the Start-Up Exemption to be facilitated by a restricted dealer funding portal complying with specified requirements of the Online Crowdfunding Exemption.

Going Forward

Both the Start-Up Exemption and the Online Crowdfunding Exemption would allow issuers who may not have access to capital from accredited investors to access smaller amounts of capital from a wider range of persons. It remains to be seen whether these exemptions can be utilized in a cost-efficient manner, and whether, under the Start-Up Exemption, issuers will be willing to surrender access to the private issuer exemption in favour of this new exemption.

Footnotes

1. "issuer group" means an issuer together with each of the following:

  • each affiliate of the issuer;
  • each other issuer that is either of the following:
    • that is engaged in a common enterprise with the issuer or with an affiliate of the issuer;
    • that has a founder that is a founder of the issuer.

About BLG

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
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