On June 23, 2021, the Canadian Securities Administrators (CSA) announced National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions ("NI 45-110"). On September 21, 2021, this new Instrument will replace and enhance the equity crowdfunding ("ECF") requirements currently in effect in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Nunavut, Quebec, and Saskatchewan (the "ECF Jurisdictions").
For readers looking for a synopsis of the legislation in the ECF Jurisdictions and a brief summary of what crowdfunding and ECF are generally, readers should refer to the prior blog post on June 30, 2015 available here.
When growing your company, access to capital is king and one potential path is through securities crowdfunding. Up until now, securities crowdfunding was largely regulated on a province-by-province basis which created a multilayered and overly complex exempt offering framework due to the differing rules across the country. With the introduction of NI 45-110, the CSA hopes to simplify, harmonize, and improve access to private capital markets for small businesses and startups by streamlining the rules for crowdfunding on a national level. The intention is to encourage capital formation and expand investment opportunities while still preserving and improving important investor protections.
Key Summary Points
- Increase in the amount a company can raise within a 12-month period from $500,000 to $1.5 million;
- Increase in the amount of money an individual can invest from $1,500 to $2,500 to a maximum of $10,000 where a registered dealer advises that the investment is suitable;
- Providing access to the exemption by provincial co-operatives or associations;
- Mandating that funding portals relying on the exemption certify on a semi-annual basis that they have sufficient financial resources to continue operations for the next six months; and
- Company cannot be an investment fund and must have operations beyond purchasing assets or businesses as investment;
- Proceeds of the crowdfunding distribution cannot be used to merge with, amalgamate or acquire a business unless the issuer or the business is identified in the completed offering documents (described below).
- Company must be selling their own shares, must have a head office in Canada and cannot be a publicly traded company in Canada or the equivalent in any foreign jurisdiction
- Cannot have multiple crowdfunding distributions for the same purpose at the same time
Accessing the Exemption
A company seeking to use the exemption must complete an Offering Document ("Form 45-110F") which is to be provided to the portal the company is using for the distribution. This offering document, found here, must disclose how the issuer intends to use the assets raised and the minimum offering required to close. Form 45-110F must also allow for purchasers to withdraw for up to 2 business days after agreeing to purchase securities of the company or where the company amends Form 45-110F. The company is responsible for ensuring the Form 45-110F Offering Document is accurate at all times throughout the offering. If the company becomes aware that it is inaccurate, it must advise the portal, amend the Form 45-110F and provide the amended form to the portal.
A company that uses the distribution must also file the completed Form 45-110F and a report of exempt distribution ("Form 45-106F1") with the securities regulator authority or regulator in its jurisdiction.
There is optimism that the harmonization of rules across the nation will help the EVF funding model flourish in Canada as seen in successful crowdfunding markets like the US1 or UK2 which have also implemented similar regulations.
NI 45-110 will provide startups with an increased opportunity to leverage crowdfunding to raise important seed capital while being exempt from filing a full prospectus with the securities commission. The benefit of increased capital thresholds opens the door for companies to grow their business with less visits to the capital market enabling more time and focus to be spent on the next stage of development and creating value for their investors.
Investors can feel secure knowing that the ECF process includes many built-in investor protections. For example, NI 45-110 includes provisions addressing risk identification and filing of offering documents that must be made available on the funding portal the issuer is using to raise capital.
NI 45-110 also sets out restrictions and qualifications around the use of particular types of information by the issuer. For example, an issuer may not refer to measures of financial performance, position or cash flow unless financial statements for the previous year have been prepared, reconciled and released. In addition, companies must disclose any crowdfunding distribution that founders, directors, officers and control persons have been involved in in the past five years, including whether this distribution successfully closed, was withdrawn by the issuer or did not close because the minimum offering was not reached. While this list is not exhaustive it does provide a snapshot into some of the detail required in order to leverage the ECF exemption.
Given the complexities around an ECF capital-raise, both issuers and funding portals (intermediaries) are encouraged to seek professional advice. The changes proposed by NI 45-110 have been touted as a turning point for Canadian crowdfunding and though obstacles have been reduced, there remain several information and document requirements for issuers to be aware of when considering the use of ECF to raise capital.
The lawyers at McKercher have experience with the regulatory requirements for ECF and have acted as counsel to many businesses, startups, and funding portals. In addition to the regulatory requirements touched on in this blog post, issuers should especially be aware of the internal corporate governance matters which should be addressed prior to undertaking any capital raise, with ECF or not.
We at McKercher interact daily with startup founders, angel investors, venture capital investors, and government funding agents. We are proud to offer a startup package of legal resources to startups at fixed fee pricing and we regularly advise clients on all manner of financing transactions. Please contact us if you are a startup looking to raise capital.
1. Schmidt, Jonas, "Crowdfunding Statistics Worldwide: Market Development, Country Volumes, and Industry Trends" online: https://p2pmarketdata.com/crowdfunding-statistics-worldwide/ 2020, May 16.
2. Paresys, Etienne, "Record breaking year for equity crowdfunding as 433 campaigns successfully raised £332 million in 2020" online: https://www.ukcfa.org.uk/2021/01/20/record-breaking-year-for-equity-crowdfunding-as-433-campaigns-successfully-raised-332-million-in-2020/ 2021, Jan 20.
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.