Recently Ontario joined regulators in Manitoba, Saskatchewan, Quebec, New Brunswick and Nova Scotia (the “Participating Jurisdictions”) in adopting a new crowdfunding regime which introduces a crowdfunding prospectus exemption for issuers as well as a registration framework for funding portals. “Crowdfunding” is an umbrella term used to capture many forms of capital and fund raising through many investors using an online platform, such as Kickstarter, Indiegogo and Crowdfunder. The new rules are set out in Multilateral Instrument 45-108 — Crowdfunding (“MI 45-108”) and are aimed at facilitating capital raising for start-ups, small and medium-sized enterprises. The MI 45-108 crowdfunding regime is intended to coexist and build on the existing startup crowdfunding exemptions (the “Startup Crowdfunding Exemptions”) adopted in Manitoba, Saskatchewan, Québec, New Brunswick and Nova Scotia in May 2015 (described in further detail in our earlier newsletter).
A key feature of MI 45-108 is that the new exemptions can be used both by reporting and non-reporting issuers. MI 45-108 will permit companies that are incorporated in a Canadian Province or who meet certain other Canadian domicile requirements to raise capital pursuant to a disclosure document called a “Crowdfunding offering document” published through a registered funding portal. Issuers may only distribute securities through a single funding portal, which is required to be registered as an investment dealer, exempt market dealer or restricted dealer. Crowdfunding portals will have various “gatekeeper” obligations with respect to the issuers using their site, including review of the issuer’s disclosure document and conducting background checks on the principals of the issuer. Also under the new rules, funding portals are prohibited from offering securities of a related issuer.
An offering under the new rules can be open for 90 days and an issuer can raise up to $1.5 million per year under the new crowdfunding exemption. Additional investment limits under MI 45-108 include the following:
- Non-accredited investors may invest up to $2,500 per investment (in Ontario only this is capped at $10,000 in a calendar year).
- Accredited investors may invest up to $25,000 per investment (in Ontario only this is capped at $50,000 in a calendar year).
- In Ontario only there is no investment limit for “permitted” clients (as such term is defined in National Instrument 31-103 — Registration Requirements, Exemptions and Ongoing Registrant Obligations).
- Issuers can only offer non-complex securities, including common shares, non-convertible preference shares, securities convertible into common shares, non-convertible debt securities, units of a limited partnership and flow-through shares.
Use of the MI 45-108 crowdfunding exemption will, in certain circumstances, impose ongoing disclosure requirements on non-reporting issuers, requiring annual financial statements and annual disclosure on the use of proceeds. Financial statements will need to be reviewed by an independent public accounting firm if the issuer has raised between $250,000 and $750,000 and audited if the issuer has raised over $750,000. Non-reporting issuers will also be required to circulate a prescribed notice within 10 days of certain events, including changes in the nature of the issuer’s business, industry or a change of control. MI 45-108 further limits the type of marketing materials that can be used, requires that the rights of withdrawal and rescission must be provided to investors and requires investors to sign a risk acknowledgement form.
Unfortunately as Canada does not yet have a national securities regulator, issuers wanting to take advantage of the new crowdfunding exemptions will have to be mindful of the various crowdfunding regimes currently in place in different provinces. Certain of the key differences between the Startup Crowdfunding Exemption and MI 45-108 regime include the following:
- MI 45-108 is available to both reporting and non-reporting issuers, whereas the Startup Crowdfunding Exemption is only available to non-reporting issuers.
- British Columbia still operates solely with the Startup Crowdfunding Exemption while MI 45-108 is the only regime available in Ontario.
- MI 45-108 has higher thresholds for funding: the new rules are capped at $500,000 in a calendar year with $250,000 limit in any individual offering and limits for individuals to invest $1,500 per deal and MI 45-108 allows up to $1.5 million subject to the restrictions on investment discussed above.
- In the Startup Crowdfunding Exemption there are exemptions that allow investors to bypass funding portal, while there is no such exemption in MI 45-108 where all investments must be made through a registered funding portal.
- No ongoing disclosure obligations are required under the Startup Crowdfunding Exemption, while MI 45-108 imposes ongoing disclosure requirements on non-reporting issuers, requiring annual financial statements and annual disclosure on the use of proceeds as further discussed above.
Underscoring the patchwork nature of Canada’s crowdfunding rules, the Alberta Securities Commission and the Nunavut Securities Office recently published for comment a third set of proposed crowdfunding rules under Multilateral Instrument 45-109 – Prospectus Exemption for Start-up Businesses (“MI 45-109”). MI 45-109 proposes slightly different investment limits from the other crowdfunding regimes. For example among other things, MI 45-109 proposes to allow a start-up or early stage business to raise up to $1 million. This $1 million would be a lifetime limit on the amount an issuer can raise under the proposal or any corresponding exemptions in corresponding jurisdictions. Given the complexities surrounding crowdfunding in Canada, both issuers and portals are encouraged to seek professional advice prior to undertaking a crowdfunding offering in Canada.
The Participating Jurisdictions anticipate that MI 45-108 will come into effect on January 25, 2016. Further details on the new MI 45-108 crowdfunding exemption are available here.
For further information on crowdfunding, please contact any member of Clark Wilson’s Corporate Finance & Securities Group.