The Canadian Securities Administrators (the "CSA") are seeking comment on proposed harmonized rules for start-up securities crowdfunding and have published CSA Notice and Request for Comment 45-110 - Proposed National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions (the "Notice") for a 90-day comment period expiring on May 27, 2020 for a proposed National Instrument 45-110 - Start-up Crowdfunding Registration and Prospectus Exemptions (the "Instrument") which would replace and enhance the requirements currently in effect in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia.
In an earlier Business Law Blog publication, Endeavor Law commented on the adoption of the existing, somewhat disjointed, crowdfunding regime (which can be found here) in which we outlined several concerns that we thought would limit the effectiveness and use of the existing prospectus and registration exemption relief.
Enhancements from the current requirements include:
Increasing to $1 million (from $500,000) the maximum total amount that could be raised by a business under the crowdfunding prospectus exemption per year;
Increasing to $2,500 (from $1,500) the maximum investment a purchaser can make in an offering, with a higher limit of $5,000 if the purchaser obtains advice from a registered dealer that the investment is suitable for the purchaser;
Requiring funding portals to annually certify that they have sufficient working capital to continue operations for the following year.
Securities crowdfunding is an emerging way for businesses, particularly start-ups and early stage issuers, to raise capital. With securities crowdfunding, a business raises funds through the Internet by issuing securities (such as shares or debt instruments) to many people. This form of financing is intended to provide an alternative source of capital to non-reporting issuers at an earlier stage of development. On May 14, 2015, the securities regulatory authorities of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia adopted substantially harmonized registration and prospectus exemptions that allow start-ups and early stage issuers to raise capital in these jurisdictions under a tailored framework for securities crowdfunding. On October 2, 2019, the securities regulatory authority of Alberta adopted a substantially harmonized registration and prospectus exemption.
Since the adoption eleven funding portals have relied on the registration exemption in order to establish platforms and a total of 70 distributions have been completed in reliance on the prospectus exemption by 62 different issuers with aggregate proceeds of $3,470,754.
The CSA have proposed the Instrument to improve the harmonization of the regulatory framework for securities crowdfunding by start-ups and early stage issuers.
Although the Instrument shares key features with the existing start-up crowdfunding relief, the CSA is considering targeted amendments to improve the effectiveness of crowdfunding as a capital raising tool for start-ups and early stage issuers, while maintaining adequate investor protection.
The Instrument provides both:
an exemption from the prospectus requirement (the start-up crowdfunding prospectus exemption) that allows a non-reporting issuer to distribute eligible securities through an online funding portal; and
an exemption from the dealer registration requirement (the start-up crowdfunding registration exemption) for funding portals that facilitate online distributions by issuers relying on the start-up crowdfunding prospectus exemption.
Start-up Crowdfunding Prospectus Exemption
The start-up crowdfunding prospectus exemption is available to issuers that meet a number of conditions, including:
the distribution of, and payment for, the security is facilitated through a funding portal that is relying on the start-up crowdfunding registration exemption or operated by an exempt market dealer or investment dealer;
the aggregate gross proceeds raised by the issuer group during the 12-months before the closing of the start-up crowdfunding distribution does not exceed $1,000,000;
each purchaser invests no more than $2,500 or, if the purchaser has obtained advice from a registered dealer that such investment is suitable for the purchaser, $5,000;
the issuer prepares an offering document disclosing information about the business and the start-up crowdfunding distribution and makes it available to each purchaser through the funding portal's platform;
the closing of the start-up crowdfunding distribution does not occur unless the issuer raises the minimum offering amount stated in the offering document within the 90-day period after the date the offering document is made available on the funding portal’s platform; and
the issuer provides the purchaser with a two-day contractual right to withdraw from an agreement to purchase the security by delivering a notice to the funding portal.
The issuer is not required to provide financial statements to investors in connection with a start-up crowdfunding distribution. No continuous disclosure requirements are tied to the start-up crowdfunding prospectus exemption.
The prospectus exemption is not available if the issuer intends to use the proceeds of the distribution to invest in, merge with, amalgamate with, or acquire an unspecified business. Investors in issuers that propose raising capital for these purposes are better protected in regimes other than start-up crowdfunding, such as the TSX Venture Exchange capital pool company program.
Start-up Crowdfunding Registration Exemption
The start-up crowdfunding registration exemption is available to funding portals that meet a number of conditions, including:
at least 30 days prior to the first date the funding portal facilitates a start-up crowdfunding distribution in a jurisdiction, the funding portal delivers to the securities regulatory authority or regulator in each jurisdiction a completed Form 45-110F3 Funding Portal Information and, for each principal of the funding portal, a completed Form 45-110F4 Portal Individual Information;
the funding portal or any of its principals must not be, or have been, the subject of certain proceedings in the last 10 years as specified in the Instrument, including claims related to fraud, theft, breach of trust, illegal distributions, or allegations of similar conduct;
the funding portal holds each purchaser's assets separate and apart from the funding portal's own property, in trust for the purchaser, and in the case of cash, in a designated trust account at a Canadian financial institution;
the funding portal provides the necessary disclosures (such as the issuer’s offering document and any amendments) and obtains the necessary risk acknowledgement from purchasers under the Instrument in connection with a distribution of eligible securities;
the funding portal is not registered under securities legislation; and
the funding portal does not provide advice to a purchaser about the merits of the investment or otherwise recommend or represent that an eligible security is suitable, or receive a commission, fee or other similar payment from a purchaser under a start-up crowdfunding distribution.
A funding portal cannot rely on the start-up crowdfunding registration exemption if it is insolvent. A funding portal relying on the start-up crowdfunding registration exemption must deliver to the securities regulatory authority or regulator in each jurisdiction a completed Form 45 110F5 - Annual Working Capital Certification within 10 days of each calendar year-end. As part of its obligation to deliver a completed Form 45 110F5 - Annual Working Capital Certification, the funding portal must certify that it has sufficient working capital to continue its operations for at least the next 12 months. If the funding portal becomes insolvent or discontinues operations, it must promptly notify the securities regulatory authority or the regulator, and any purchasers for which it holds assets, of the process the funding portal will use to return the assets to these purchasers.
Under the Instrument, a firm registered in the category of exempt market dealer or investment dealer may operate a funding portal that facilitates the distribution of securities under the start-up crowdfunding prospectus exemption provided that it meets the requirements set out in the Instrument.
The CSA issued the Notice to solicit written comments on the Instrument and related matters set out in the Notice and has also included specific questions in the Comments section of the Notice. The comment period is open for 90 days, expiring on May 27, 2020.
Does not constitute legal or other advice and must not be used as a substitute for legal advice from a qualified legal professional in your jurisdiction who has been fully informed of your specific circumstance. Information may not be up-dated subsequent to its initial publication and may therefore be out of date at the time it is read or viewed. Always consult a qualified legal professional in your jurisdiction.