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. What crowdfunding is, the legalities around it, and the reason for the recent attention from securities regulators.
- Proposed Crowdfunding Exemptions. NS and NB have proposed creating two new exemptions which, if applicable, would relieve companies raising capital through crowdfunding from the requirement to file a prospectus. The proposal is available for public comment until June 18, 2014.
- Crowd Pleaser. If adopted, the proposed framework should facilitate regulatory compliance by SMEs and start-ups when accessing this growing source of capital.
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:
- reporting and non-reporting issuers formed in Canada;
- with their head office located in Canada; and
- with a majority of directors resident in Canada.
Some key features of this proposed exemption are:
- An issuer cannot have raised more than $1.5M under the exemption in the 12 months before the current offering
- The offering can only remain open for up to 90 days
- An investor can only invest a maximum of $2,500 in any single investment under the exemption, and a maximum of $10,000 total during a calendar year
- Issuers must give investors an offering document identifying the minimum offering size, and must provide ongoing financial and other disclosure
- Crowdfunding portals:
- must be registered in the restricted dealer category and comply with the requirements applicable to exempt market dealers, with certain exceptions
- would be prohibited from providing specific recommendations and advice to investors or soliciting purchases or sales of securities; and
- would be required to deny access to an issuer if there was reason to believe the issuer or offering was fraudulent
Start-up Exemption. This exemption would be available to:
- non-reporting issuers; and
- with their head office in one of the participating jurisdictions (NS, NB, Manitoba, Saskatchewan and Québec),
- but not to investment funds.
Some key features of this proposed exemption are:
- The offering can’t exceed $150K
- The distribution can remain open for only 90 days
- An investor may invest a maximum of $1,500 in any single investment under the exemption
- The exemption can be used a maximum of twice in a calendar year
- Crowdfunding portals would not be subject to a registration requirement under securities law if they meet certain criteria, including:
- their head office must be in one of the participating jurisdictions and their promoters, directors, officers and control person must be Canadian residents
- they can’t provide investment advice or be related to the issuer of the securities being offered
- they can only allow an investment once the investor confirms online having read and understood the issuer’s offering document and important risk warnings
Public Comment. The proposed exemptions are open for comment until June 18, 2014:
- Click here to read the Proposal (PDF).
- Click here to read the NB Financial and Consumer Services’ Press Release about the Proposal.
- Click here to read the NS Securities Commission’s request for comments on the Proposal.
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.
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