Canadian and U.S. companies will be able to raise capital through crowdfunding beginning in 2016. Crowdfunding is already established as a way of raising money via donations from groups of people over the Internet to fund various projects and ventures. Acknowledging advances in technology and social media, securities regulators in Canada and the United States have now established legal frameworks to permit crowdfunding via sales of securities. The objective is to facilitate capital-raising by start-ups and other small companies, who often face difficulties using traditional financing models, while at the same time creating new investment opportunities for small investors.
Below, Appendix I provides a comparative overview of the new crowdfunding regimes in Canada and the United States. Generally speaking, Canadian companies may crowdfund in Canada and U.S. companies may crowdfund in the United States.
How Do the Crowdfunding Rules Work?
Companies wishing to raise capital through crowdfunding will be required to prepare an offering document containing prescribed information, on which they will be liable, and are permitted to raise C$1.5 million in Canada or U.S.$1 million in the United States per year. Additionally, issuers are required to use an online funding portal to facilitate their crowdfunding offerings, and the portal will have certain gate-keeping obligations, such as conducting background checks, to help protect investors and maintain the integrity of the market. A portal's obligations in the United States include providing communication channels to facilitate online discussions about available offerings.
While the Canadian and U.S. regimes are largely similar, one of the key differences is that in Canada, both public and private companies can raise funds via crowdfunding, while in the United States only non-reporting companies are eligible to do so. Thus, while the U.S. exemption may be attractive to start-up companies, those that choose to list on a U.S. securities exchange, such as emerging growth companies going public under the JOBS Act, will not be eligible to crowdfund.
Potential Implications of Crowdfunding
Costs of Crowdfunding Offerings
Given the limits on the amount of capital that can be raised via crowdfunding, these offerings may be relatively costly compared to capital raised from angel investors or through other financing models. In particular, there will be the time and expense of preparing an offering document and engaging an online portal. On the other hand, crowdfunding offers a unique opportunity to tap into a large pool of investors, and can be a publicity boon for a company, increasing its visibility with the broader market.
Number of Investors
Companies raising capital via crowdfunding may find themselves with a very large number of new investors. For context, in order to raise C$1.5 million under the Canadian regime, it would require 600 non-accredited investors (who can each invest a maximum of C$2,500) or 60 accredited investors (who can each invest a maximum of C$25,000). Accordingly, issuers will need to consider the implications of having an extensive investor base, including potentially having to obtain shareholder approval for future transactions or financings.
What's Next?
The Canadian and U.S. crowdfunding regimes may create a viable new way for start-ups and other small companies to expand their businesses, possibly as a step toward an IPO, and may also be a catalyst for technological innovation in capital raising. As market practices evolve over time, we expect funding portals to continually adapt by finding ways to disseminate information and facilitate offerings cost-effectively, while issuers may find innovative and efficient mechanisms to handle large investor bases, whether through unique corporate structures or the use of third-party service providers. The viability and ultimate success of the crowdfunding regimes will become evident as issuers, online funding portals and other market participants seek to take advantage of this new opportunity.
Please see Appendix I below for a comparative overview of the Canadian and U.S. crowdfunding rules.
APPENDIX I
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Canada (C$) |
United States (US$) |
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Legal Rule |
Multilateral Instrument 45-108 - Crowdfunding1 to be effective on January 25, 2016. |
Regulation Crowdfunding to be effective on May 16, 2016. |
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Maximum Offering Size |
$1.5 million per rolling 12-month period. |
$1 million per rolling 12-month period. |
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Eligible Companies |
Canadian private and public companies with (i) a majority of the board resident in Canada, (ii) head office in Canada and (iii) principal operating subsidiary, if any, in the U.S. or Canada. SPACs are not eligible. |
U.S. private companies. Companies without a specific business plan and SPACs are not eligible. |
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Intermediary Hosting Online Platform |
Online funding portal registered with securities regulators. The issuer may grant securities to the portal as offering compensation, up to a maximum 10% ownership interest. The portal may not be related to the issuer and may not provide investment recommendations. |
Online funding portal or broker-dealer, registered with SEC and FINRA. The intermediary may not have a financial interest in the issuer except for securities granted as offering compensation. Funding portals may not provide investment recommendations. |
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Publicity |
No advertising or solicitation of potential investors is permitted beyond informing them of the offering and referring them to the information available on the funding portal. |
Basic advertising about the issuer's business is permitted in addition to referring potential investors to the information available on the funding portal. |
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Investment Limits |
Based on accredited investor status and location. Accredited investors may invest $25,000 per distribution (in Ontario, there is also an annual limit of $50,000). Non-accredited investors may invest up to $2,500 per distribution (in Ontario, there is also an annual limit of $10,000). In Ontario, Permitted Clients, as defined in NI 31-103, are not subject to any investment limits.. |
Based on investor income or net worth. If either is less than $100,000, the maximum investment is the greater of
If both are $100,000 or more, the maximum investment is the lesser of
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Resale Restrictions |
Crowdfunded securities generally cannot be re-sold except to an accredited investor or under another prospectus exemption. However, if the issuer is a reporting issuer, the securities will be freely tradeable after a four-month hold period. |
Crowdfunded securities generally cannot be re-sold for one year except to an accredited investor or family member. |
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Offering Document |
Information about the offering and the issuer's business, directors, officers and major shareholders; related party transactions; planned use of proceeds; risk factors; and financial statements, which may need to be reviewed or audited, depending on the offering amount. |
Information about the offering and the issuer's business, directors, officers and major shareholders; related party transactions; planned use of proceeds; risk factors; and financial statements, which may need to be reviewed or audited, depending on the offering amount. |
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Issuer's Ongoing Obligations |
Non-reporting issuers must provide annual financial statements and a notice of the use of proceeds. In some provinces, notice of certain fundamental changes is also required. |
An annual report must be provided including financial statements and information similar to that required in the offering document. |
Footnotes
1 Adopted in Manitoba, New Brunswick, Nova Scotia, Ontario and Québec, and being considered in Saskatchewan. There is also a more limited start-up crowdfunding rule in British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec and Saskatchewan, and a similar rule is being considered in Alberta and Nunavut.
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.
