With the popularity of crowdfunding sites like Kickstarter, Indiegogo and Rockethub in recent years, crowdfunding has become an increasingly attractive way for startups and smaller private companies to raise capital. Generally, crowdfunding is broken down into two main models. The first is known as donation or reward based funding (such as Kickstarter) where a large number of individuals contribute small sums of money to finance a specific project in exchange for a reward or some other recognition by the issuer. The second and more recent model is investment or equity based crowdfunding, where businesses seeking capital sell ownership stakes to large groups of investors online in the form of equity or debt. Until recently most Provinces in Canada only permitted equity crowdfunding in reliance on a limited prospectus exemption such as the accredited investor exemption or the offering memorandum exemption. In response to increasing interest in equity crowdfunding, securities regulators in British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (the “Participating Jurisdictions”) have each recently adopted crowdfunding registration and prospectus exemptions aimed at non-public startups and early stage businesses.
The new crowdfunding exemption (the “Crowdfunding Prospectus Exemption”) consists of two elements: a prospectus exemption permitting an issuer to distribute securities without a prospectus, and a registration exemption exempting a funding portal from having to register as a dealer. Start-ups and early stage issuers intending to rely on the new exemptions must use a funding portal that is either relying on the Crowdfunding Prospectus Exemption or is operated by a registered dealer. A funding portal lists investment opportunities and facilitates the payment of the purchase price from the investor to the issuer. The main conditions that apply to the use of the Crowdfunding Prospectus Exemption include the following:
- Issuers must produce an offering document in the prescribed form, which contains basic information about the issuer, its management and the distribution.
- Issuers cannot raise aggregate funds of more than $250,000 per distribution and are limited to a maximum of two such distributions in a calendar year.
- No investor will be allowed to invest more than $1,500 per distribution.
- The distribution may remain open up to a maximum of 90 days.
- The issuer must be a non-reporting issuer (and cannot be an investment fund) and have its head office in a Participating Jurisdiction.
- Each investor must have a contractual right to withdraw a subscription by delivering notice to the funding portal within 48 hours of their subscription.
- None of the principals (a promoter, director, officer or control person) of the issuer may be a principal of the funding portal.
- Eligible securities are subject to an indefinite hold period and can only be resold under another prospectus exemption, pursuant to a prospectus or four months after the issuer becomes a reporting issuer.
- The funding portal cannot provide advice to an investor, cannot recommend a security and cannot receive a commission or fee from an investor.
The conditions associated with the new exemptions are outlined in Multilateral CSA Notice 45-316 Start-up Crowdfunding Registration and Prospectus Exemptions. The exemptions can’t be used by reporting issuers, however, certain regulators of the Participating Jurisdictions, as well as Ontario, are continuing to work on proposed Multilateral Instrument 45-108 – Crowdfunding, which would allow reporting issuers to access crowdfunding portals to raise capital.
Further details on the new Crowdfunding Prospectus Exemption are available here.
For further information on the new Crowdfunding Prospectus Exemption, please contact any member of Clark Wilson’s Corporate Finance & Securities Group.