February 16th, 2017
BCSC Request for Comments (Expires Jun 18, 2014): Startup Crowdfunding Exemption
BCSC | Brenda M. Leong | May 1, 2014
“Crowdfunding” is a term that describes raising small amounts of money from many people, usually over the internet. Charities and some businesses who offer pre-sales already use the concept.
In April 2012, the US adopted a new crowdfunding exemption that would allow companies to sell securities to anyone over the internet through either a registered broker- dealer or a registered portal. The US exemption will not be available until the SEC adopts certain rules to support it. In Canada, Saskatchewan adopted a crowdfunding exemption allowing the sale of securities late last year.
Today some members of the Canadian Securities Administrators published a proposed crowdfunding exemption, modelled on the Saskatchewan exemption (the start-up crowdfunding exemption). We request comment on whether BCSC should consider adopting a similar exemption in British Columbia.
The start-up crowdfunding exemption would allow an issuer to distribute securities without a prospectus provided the issuer complies with certain conditions, including the following:
• the issuer raises no more than $150,000 per offering and offers no more than twice per year
• no investor invests more than $1,500 per offering
• the issuer is not a reporting issuer or an investment fund
• the offering must go through an on-line funding portal
• the issuer provides a streamlined offering document to investors through the portal
The start-up crowdfunding exemption would allow a portal to operate without being registered under securities legislation provided the portal complies with certain conditions, including the following:
• the portal is prohibited from providing investment advice
• the portal must ensure investors confirm online that they have read and understood the issuer’s offering document and the risk warnings required under the exemption
• the portal must ensure that all funds are held in trust for investors until the issuer raises the minimum amount required to close the offering
• the portal must provide advance notice of its intention to use the exemption
We provide further information on the start-up crowdfunding exemption in Appendix A.
Crowdfunding for small and early-stage businesses in British Columbia
We understand that many small and early-stage businesses believe the current regime is too expensive, relative to the amount of capital they need. We would like to know whether a start-up crowdfunding exemption would fill a funding gap in the current regime.
The start-up crowdfunding exemption would be directed at small and early-stage businesses, designed to allow them to raise a defined amount of money in a more cost effective way. Investors in these start-ups would accept the risks of investing in early- stage businesses with some protection through limits on their investments.
As the business grows and requires more capital, it could look to other sources of funds, through the accredited investor exemption or the offering memorandum exemption.
Request for comments
We welcome all comments on the start-up crowdfunding exemption. We have the following specific questions on the proposal:
1. Is there a funding gap that prevents small and early-stage businesses from raising sufficient capital under our existing prospectus exemptions? If so, please describe where you think the gap exists and what causes it?
2. Will the start-up crowdfunding exemption address this funding gap? Why or why not?
3. Although the start-up crowdfunding exemption is intended to assist start-up and early stage businesses, it is not restricted to those issuers. Should we restrict the exemption to issuers that have raised less than a certain amount since their formation? Should we limit the total amount an issuer can raise under this exemption?
Under the start-up crowdfunding exemption, portals will not be registered. This will mean they will not be subject to the same regulatory oversight as registrants. The start-up crowdfunding exemption includes elements designed to protect investors.
4. Do the requirements of the start-up crowdfunding exemption adequately protect investors?
5. Should we require the portal to do due diligence on issuers and their principals? If so, what level of due diligence should we require?
6. Should we impose any additional conditions on portals that rely on this exemption?
Limits on investing
Under the start-up crowdfunding exemption, investors are limited to investing no more than $1,500 per offering. Because of this limit, issuers may end up having many security holders holding small numbers of securities of the issuer.
7. Should we impose an investment limit based on a percentage of the investor’s net assets or net income, instead of a fixed dollar amount? Would having this type of investment limit add complexity to the start-up crowdfunding exemption?
Related: CSA Request for Comments Equity Crowdfunding Draft Regulation 45-108 (expires June 18, 2014)
8. Should we add a requirement that issuers give investors a “cooling-off” period similar to the two-day right of rescission under the offering memorandum exemption?
Improvements on offering memorandum exemption
9. The offering memorandum exemption is not widely used by small and early-stage
businesses. We have heard that the costs of complying with the financial statement requirements in the offering memorandum form may be prohibitive and we welcome suggestions on ways to adjust those requirements. Are there other issues with the offering memorandum exemption that we should reconsider in order to make it a more useful exemption for small businesses?
PLEASE SEND COMMENTS TO
Please send us your comments about this proposal in writing on or before June 18, 2014. Deliver your comments and refer your questions to:
British Columbia Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, British Columbia V7Y 1L2
Attention: Leslie Rose
Senior Legal Counsel, Corporate Finance
Email: firstname.lastname@example.org and
Senior Legal Counsel, Capital Markets Regulation
The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Learn more About Us or contact us at email@example.com.