June 11, 2014
Note: For an update on Crowdfunding, read: New Kid on the Block – Crowdfunding Joins Traditional Equity-Based Funding Options for Start-ups & SMEs
Crowdfunding is an increasingly popular way for small and medium-sized businesses and start-ups to raise capital – and it’s caught the attention of Canadian securities regulators. Recently, NS and NB securities regulators joined those of three other Canadian Provinces to propose a regulatory framework customized for crowdfunding:
CROWDFUNDING 101
Here’s what crowdfunding is, the legalities, and the reason for the recent attention from securities regulators:
Crowdfunding. Crowdfunding is a way for businesses to access capital. Individual investors – the members of the “crowd” – each provide a small amount of money to finance a project or business venture, typically through an internet platform or portal. Crowdfunding investors have traditionally received products or services in return for their contribution. However, crowdfunding is evolving with investors increasingly receiving an equity interest (such as shares) in the business they fund – and this means securities laws come into play.
Securities Laws. Every Canadian Province has securities laws regulating the issuance of equity securities (e.g. shares or units) to investors. One of the main purposes of this regulation is investor protection. Securities laws generally require an issuer to create and make available a prospectus – a detailed document describing security to be issued to potential investors and disclosing other specified information – to investors, unless the issuance fits within an exemption to the requirement. A prospectus is a time-consuming and costly document to prepare, especially for an SME or start-up, so issuers frequently seek to take advantage of prospectus exemptions available to them.
Crowdfunding Exemptions. Existing securities laws apply to securities issued in the crowdfunding context, but the prospectus exemptions currently available don’t work well for crowdfunding. With crowdfunding use growing and evolving to grants of equity, securities regulators are focusing their attention on developing a regulatory framework tailored to crowdfunding.
NS AND NB CROWDFUNDING EXEMPTION PROPOSAL
On March 20, 2014 securities regulators in NS and NB joined those in Manitoba, Québec and Saskatchewan in publishing proposed crowdfunding prospectus exemptions (Multilateral CSA Notice of Publication and Request for Comment in respect of, among other things, a proposed Multilateral Instrument 45-108 – Crowdfunding and associated Companion Policy). Saskatchewan had already adopted a crowdfunding exemption in December 2013 but participated in publishing this notice to harmonize its exemption with that of the other Provinces. Neither PEI nor NL has adopted any crowdfunding exemptions to date, and neither participated in this proposal.
The proposal would create two new exemptions from the requirement to file a prospectus:
Crowdfunding Exemption. This exemption would be available to:
Some key features of this proposed exemption are:
Start-up Exemption. This exemption would be available to:
Some key features of this proposed exemption are:
Public Comment. The proposed exemptions are open for comment until June 18, 2014:
A CROWD PLEASER
The details still need to be fleshed out, but generally, this is a positive development for SMEs and start-ups. The framework proposed by the regulators, if implemented, should help facilitate regulatory compliance by SMEs and start-ups when accessing this growing source of capital by creating a tailored set of rules balancing the needs of both issuers and investors.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Corporate Finance and Securities Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
© McInnes Cooper, 2014. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
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