Crowdfunding has revolutionized how entrepreneurs and start-ups can raise cash. In short, start-up crowdfunding is a process through which a business can raise small amounts of money from a large number of people using the internet.
National Instrument 45-110 – Start-Up Crowdfunding Registration and Prospectus Exemptions of the Canadian Securities Administrators allows a start-up or early-stage business to raise cash by distributing eligible securities without filing a prospectus through an online funding portal if the issuer satisfies certain legal requirements.
So, how can you use crowdfunding for your start-up?
Here are eight things your start-up should know about crowdfunding:
What is a funding portal?
A funding portal posts start-up crowdfunding projects on its website. The funding portal is responsible for explaining the risks of investing to potential investors, holding all investor funds in trust until the start-up raises the minimum funding target, and returning funds to investors (without deduction) if the start-up does not reach its target.
Before a funding portal can operate in any Canadian jurisdiction, it must meet certain regulatory conditions such as filing mandatory documents with the securities regulator in that jurisdiction, relying on a registration exemption or being operated by an exempt market dealer or investment dealer.
How do I start crowdfunding?
Start-ups looking to crowdfund must first prepare an "Offering Document" in accordance with applicable securities law which can be found in Form 45-110F1 Offering Document. The Offering Document must set out certain prescribed information related to the start-up, including information related to the start-up's business plan, the key details about the start-up's industry and operations, information relating to the directors, officers and founders of the start-up, risk factors applicable to the start-up, the minimum and maximum amount to be raised, and the type of securities being offered, in addition to other disclosure requirements prescribed by securities law. The start-up is not required to provide financial statements or any continuous disclosure to the investors. The Offering Document must be posted on the start-ups' funding portal for potential investors to review. Investors have a 2 day right of withdrawal if they change their minds.
How much can an investor invest?
Each investor can contribute up to $2,500 per start-up crowdfunding offering. However, each investor can contribute up to $10,000 if the investor received advice from a registered dealer that the investment is suitable for the investor.
Is there a limit on how much I can crowdfund?
Yes, the maximum amount a start-up can raise when crowdfunding is $1,500,000 during a 12-month period.
How long do I have to crowdfund?
The distribution of securities by the start-up must close within 90 days after the Offering Document is made available to a prospective purchaser on the funding portal and no concurrent crowdfunding distribution can be made by the start-up for the same purposes as described in the Offering Document. Although a start-up cannot have more than one start-up crowdfunding campaign running at the same time, the start-up can raise funds using other prospectus exemptions during a start-up crowdfunding campaign.
Are there any other restrictions or conditions?
There are further restrictions related to crowdfunding, some of which are as follows:
- The head office of the start-up must be in Canada;
- The start-up can only sell "eligible securities";
- Principals of the start-up cannot be principals of the funding portal;
- The start-up must have operations other than to identify and evaluate assets or a business with a view to completing an investment/amalgamation and cannot intend to use proceeds to invest in an unspecified business;
- Each investor must confirm that they have read and understood the Offering Document and the risk warning by signing Form 45-110F2 Risk Acknowledgement;
- The start-up must file a Form 45-106F1 Report of Exempt Distribution; and
- The securities sold are subject to restrictions on resale.
Is a kickstarter a crowdfunded business?
No, a "kickstarter" is not crowdfunding. A key difference between crowdfunding and kickstarting is that, when crowdfunding, start-ups issue securities of the corporation in exchange for the investment. When kickstarting, the purpose of the fundraising is to pre-purchase a product in order to provide the business with the necessary cash to manufacture or otherwise develop the product.
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.
