Canada: Ontario's Proposed Prospectus Exemptions: Crowdfunding Exemption

In its March 20, 2014 proposals for four new prospectus exemptions intended to facilitate capital raising for businesses in Ontario, the Ontario Securities Commission (OSC) proposed a crowdfunding prospectus exemption (the "Crowdfunding Exemption") aimed at facilitating greater access to capital through the exempt market, particularly for start-ups and small and medium-sized enterprises.

The securities regulatory authorities in each of Quebec, Saskatchewan, New Brunswick, Manitoba and Nova Scotia have also published for comment a crowdfunding exemption substantially similar to the proposed exemption in Ontario. In addition, these regulators, other than Saskatchewan, have published a separate crowd-funding exemption for start-ups, which would provide both a prospectus and registration exemption (the "Start-up Exemption") as an alternate source of capital for non-reporting issuers in early phases of growth. In these jurisdictions, it is expected that both the Crowdfunding Exemption and the Start-up Exemption will coexist. These regulators believe that the Crowdfunding Exemption and the Start-up Exemption are complementary as they are targeted at issuers at different stages of development. The Start-up Exemption is currently available in Saskatchewan, and is substantially similar to what has been proposed by the other jurisdictions.

British Columbia has not published for comment a Crowdfunding Exemption, but did request comments on whether it should consider a Start-up Exemption. Although the Alberta Securities Commission is not publishing the Crowdfunding Exemption or the Start-up Exemption for comment, it will be considering the public comments in respect of these proposals.

Crowdfunding Exemption

As we discussed in a post last month, the proposed Crowdfunding Exemption would be available to both reporting and non-reporting issuers incorporated or organized in Canada. This exemption would not available to investment funds, "real estate issuers" that are not reporting issuers, or issuers without a written business plan. The type of securities that could be offered pursuant to this exemption could not be novel or complex, and would be limited to certain types of securities including, among others, common shares, non-convertible preference shares and non-convertible debt securities.

Under the Crowdfunding Exemption, issuers could raise no more than $1.5 million in the 12-month period immediately preceding the offering. Any offering under the Crowdfunding Exemption could not be completed unless the minimum offering is fully subscribed and the issuer, at the time of completion of the offering, has financial resources sufficient to achieve the next milestone in its written business plan or, if no milestones, to carry out the activities set out in its business plan.

Investors would be limited to investing up to $2,500 per single investment under the Crowdfunding Exemption, and could not invest more than an aggregate of $10,000 under the Crowdfunding Exemption in a calendar year. Each investor would be required to sign a risk acknowledgement form confirming, among other things, that they fall within the prescribed investment limits and acknowledging the key risks associated with the investment.

Issuers would be required to provide a disclosure document, which includes basic information about the issuer, the offering, the funding portal through which the offering is made and certain financial information of the issuer, including, in the  case of a reporting issuer, the most recent annual financial statements filed with the securities regulatory authority, and, in the case of a non-reporting issuer, audited annual financial statements if an issuer has crossed certain prescribed thresholds. Issuers, both reporting and non-reporting, would also be subject to certain ongoing disclosure requirements.

Securities issued in reliance on the Crowdfunding Exemption by a reporting issuer would generally be subject to a four-month hold period and, in the case of a non-reporting issuer, could not be resold until the issuer becomes a reporting issuer, unless the sale is made under another prospectus exemption (other than the Crowdfunding Exemption).

Following an offering, a report of exempt distribution would be required to be filed within 10 days of the distribution.

Any offering under the Crowdfunding Exemption would be required to be carried out through a funding portal registered under applicable securities laws. Portals would be required to comply with general registrant requirements applicable to exempt market dealers, and would be required to, among other things, conduct background checks on issuers and their directors, officers, promoters and control persons, and review disclosure documents of issuers. A portal could not provide advice to investors about the securities offered on their platform.  

Start-up Exemption

The proposed Start-up Exemption (which is not being proposed in Ontario) would be available to non-reporting issuers only, other than investment funds, whose head office is located in a participating jurisdiction. Under this exemption, an issuer would not be allowed to raise more than $150,000 per offering, and the exemption could only be used twice in a calendar year. Investors would be limited to investing no more than $1,500 per single investment under the Start-up Exemption. Similar to the Crowdfunding Exemption, each investor would be required to sign a risk acknowledgment form, and issuers would be required to file a report of exemption distribution following the closing of any distribution.

Unlike the Crowdfunding Exemption, companies relying on the Start-up Exemption would not be required to file financial statements, nor would they be subject to ongoing disclosure. Additionally, there would be no requirement for a portal to be registered as a dealer provided it complies with the requirements applicable to portals set out in the Start-up Exemption.

Since the exemption is only available to non-reporting issuers, securities sold pursuant to the Start-up Exemption would be subject to an indefinite hold period, and could only be resold under another prospectus exemption or after the issuer becomes a reporting issuer.

Conclusion

The introduction of a Crowdfunding Exemption and Start-up Exemption in certain jurisdictions in Canada would broaden the capital raising alternatives for many start-ups and small and medium-sized businesses. Although the regulatory regime as currently proposed would vary somewhat by province, crowdfunding may lower the cost of raising funds for many businesses encountering capital raising difficulties, create opportunities for non-accredited investors to participate in the exempt market, and provide issuers with access to a larger group of investors from whom to raise capital.

The Crowdfunding Exemption and related portal would be given effect through the introduction of Multilateral Instrument 45-108 Crowdfunding and related Companion Policy 45-108CP Crowdfunding, along with proposed Form 45-108F1 Crowdfunding Offering Document and Form 45-108F2 Risk Acknowledgement Form for Crowdfunding Investors. The Start-up Exemption would be given effect in the relevant jurisdictions by way of a blanket order.

The comment period for the Crowdfunding Exemption and Start-up Exemption will close on June 18, 2014.

This article is the second in a series of posts discussing the prospectus exemptions proposed in Ontario. Our first post on the existing security holder exemption can be found here.

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.