Six Canadian provinces adopt crowdfunding exemption – but not yet Alberta or Ontario

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Crowdfunding Mashup

Mainstream, legal and tech news all covered the announcement.

Crowdfunding has become an innovative new method for Canadians to raise capital through the internet. It has been used to raise money for specific projects that do not generally involve the issuance of securities. However, in some foreign jurisdictions, equity crowdfunding is emerging as a way for businesses, particularly start-ups and small issuers, to raise capital.

In May 2015, the securities regulators of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (the “Crowdfunding Jurisdictions“) adopted prospectus and registration exemptions (together, the “Crowdfunding Exemptions“) that will allow start-up and early-stage companies to raise capital through crowdfunding.

The Crowdfunding Exemptions are comprised of an exemption from the prospectus requirement (the “Prospectus Exemption“) and an exemption from the dealer registration requirement (the “Registration Exemption“). The Prospectus Exemption permits non-reporting issuers to issue eligible securities, subject to a number of conditions. We would like to highlight for you some of the key conditions:

  • the head office of the issuer is located in a Crowdfunding Jurisdiction;
  • the issuer distributes eligible securities using a prescribed form of offering document that is made available through an online funding portal; examples are Kickstarter, Indigogo, LegUp.ca and SeedUps Canada. The offering document includes basic information about the issuer, its management and the distribution, including how the issuer intends to use the funds raised and the minimum offering amount;
  • the issuer cannot raise funds of more than $250,000 per distribution and is restricted to two such distributions per year;
  • no person invests more than $1,500 per distribution;
  • the distribution may remain open for a maximum of 90 days;
  • the distribution must be made through an online funding portal that either relies on the Registration Exemption or is operated by a registered dealer; and
  • the issuer provides each purchaser with a contractual right to withdraw their offer to purchase securities within 48 hours of the purchaser’s subscription or notification to the purchaser that the offering document has been amended.

Since the Prospectus Exemption is only available to non-reporting issuers, the eligible securities are subject to an indefinite hold period and can only be resold under a prospectus, another prospectus exemption or four months after the issuer becomes a reporting issuer.

The Registration Exemption permits funding portals to facilitate distributions under the Crowdfunding Exemptions, subject to a number of conditions. Some of the key conditions are:

  • the head office of the funding portal is located in Canada;
  • the funding portal must deliver a funding portal information form and individual information forms for each of its principals to the participating regulators at least 30 days prior to facilitating its first start-up crowdfunding distribution;
  • the majority of the funding portal’s directors are Canadian residents;
  • the funding portal does not provide advice to a purchaser or otherwise recommend or represent that an eligible security is suitable, or about the merits of the investment; and
  • the funding portal does not receive a commission, fee or any other amount from a purchaser of eligible securities.

The Crowdfunding Exemptions were enacted by way of local blanket orders in each Crowdfunding Jurisdiction, and will expire on May 13, 2020. The blanket orders of each Crowdfund Jurisdiction should be reviewed for the precise terms and conditions of the Crowdfunding Exemptions in such province.

Ontario and Alberta

The Ontario Securities Commission (“OSC“) is expected to announce its own equity crowdfunding rules this fall. The OSC has said that it will follow the framework that it proposed in March 2014. This framework would allow issuers to raise funds of up to $1,500,000 per year and would permit persons to invest up to $2,500 per investment and up to a maximum of $10,000 per year. The OSC would also require funding portals to register with the OSC.

Alberta is noticeably absent from the Crowdfunding Jurisdictions. To date, the Alberta Securities Commission has not proposed any rules for equity crowdfunding. This leaves start-up and early stage companies with head offices located in Alberta at a significant disadvantage to companies located in the Crowdfunding Jurisdictions when it comes to raising capital.

The Du Plooy Law team will be monitoring Ontario and Alberta for regulatory changes and provide you with updates as they are made available.