Understanding the Crowdfunding Prospectus Exemption
Entrepreneurs can have a tough time raising money in Alberta.
To issue debt or equity above the Start-up Business Exemption’s maximum amount of $250,000, companies have to file a prospectus, a lengthy document that can cost anywhere from $50,000 to $500,000.
Luckily, the provincial securities commissions in Alberta allows for innovative fundraising techniques that are completely exempt from filing a prospectus.
If you need fresh capital to build a business in Canada, crowdfunding can be your golden ticket, especially if your business is in a creative industry like design, art video games, film, or tech. Kickstarter surpassed $5.6 billion in pledges in 2021 – living proof that crowdfunding is still alive and well.
The Crowdfunding Prospectus Exemption
Alberta’s Crowdfunding Prospectus Exemption, also known as Multilateral Instrument 45-108, was enacted in 2016 to help small and medium-sized businesses overcome the barriers that tend to arise during traditional debt and equity offerings.
The Crowdfunding Prospectus Exemption operates through a registered online funding portal, making offerings above $250,000 possible across Canada. Multilateral Instrument 45-108 was also enacted in provinces like Ontario to give businesses a new way to get early-stage capital without the restriction of provincial boundaries.
Eligibility and Limits
If they meet the exemption’s Canadian residency requirements, both reporting and non-reporting issuers are eligible to act as crowdfunding issuers and raise a maximum of $1,500,000 per calendar year.
Issuers also need to complete a Crowdfunding Offering Document via the funding portal prior to investors purchasing any of the eligible securities.
While anyone can invest under this exemption, unaccredited investors (anyone whose net income before taxes exceeds $200,000 for the previous two years or has less than $1,000,000 in financial assets) are limited to $2,500 per offering and $10,000 per calendar year.
Accredited investors can purchase up to $25,000 per offering and up to $50,000 per year
The Funding Portal Process: Registration, Documentation, and Background Checks
Using a funding portal is a requirement in the Crowdfunding Exemption. The online portal acts as a person or company that registers as an investment dealer, exempt market dealer, or restricted dealer. The role of this portal is to act as an intermediary and create a more streamlined distribution process.
To comply with the Crowdfunding Exemption, businesses have to complete a set of documents. After posting the offering documents to the portal, issuers can start the online registration process. Every time a business creates a crowdfunded distribution, they are required to create a registered funding portal and each distribution must have its own portal.
After registering, the funding portal enters into an agreement with the issuer, obtains a personal information form completed by each director, officer & issue promoter, then arranges background checks.
Once these actions are complete, the funding portal may grant an eligible issuer access to the online platform; however, if the funding portal makes a reasonable judgement that the issuer’s information is not conducted with integrity, they may choose to deny access.
Crowdfunding Exemption rules are far more restrictive than Start-up Business Exemption rules. Issuers can inform the public of a potential distribution through an online funding portal, but neither the issuer or the online funding portal may directly or indirectly advertise a distribution or solicit purchasers.
Effects of the Exemptions
The Crowdfunding Prospectus Exemption and the Start-up Business Exemption have enabled cost-effective, streamlined methods of winning investors and raising capital.
As a business owner, it’s good to have options when handling the investment and purchase of securities in Alberta, but knowing how to navigate the mechanics of each exemption is critical to benefiting from them.
Contact us to discuss the optimal fundraising method for your unique business needs.