Equity Crowdfunding for Portals

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NCFA Canada | Alixe Cormick | Feb 2016

The National Crowdfunding Association of Canada (NCFA Canada) does not offer legal advice, and nothing in this frequently asked questions webpage should be construed as offering advice legal or otherwise. You are strongly encouraged to consult a securities attorney regarding any equity crowdfunding opportunity you are considering as an entrepreneur, investor, or funding portal.  In addition to the standard FAQs available below a set of ‘add value’ premium FAQs (content) will be made available via eBook (link to be provided shortly).

Prior to submitting a question, please review all FAQ sections including Equity Crowdfunding RegulationsGeneral, For Entrepreneurs, For Investors and For Portals.

Please note that some of these points are being updated to reflect the new start-up crowdfunding exemptions


FAQ QUESTIONS FOR CROWDFUNDING PORTALS (PLATFORMS)

I would like to operate an equity crowdfunding portal. As a funding portal, am I required to register or provide notice in Canada before doing so? Answer

Yes, you must either register or provide notice prior to commencing operations as an equity-funding portal in Canada.  What you must do depends on the jurisdiction(s) you plan to operate and what securities law prospectus exemption you and the entrepreneurs using your portal will rely on to distribute their securities.

How do I register or provide notice in Canada as a funding portal? Answer

Becoming an Equity Funding Portal in Canada
Registration or Notice
Funding Portal Registration Jurisdictions Securities Exemption Relied On Details
Investment Dealer BC, AB, SK, MB, ON, QU, NB, NS, NFL, PEI, NU, YK, NWT Accredited Investor; Offering Memorandum Exemption(1); Offering Memorandum Light Exemption(1);

Integrated Crowdfunding Exemption(2); Start-up Crowdfunding Exemption(3);

Existing Security Holder Exemption; and Investment Dealer Exemption(4)

The securities regulators of AB, NFL and SK have delegated the registration of investment dealers to the Investment Industry Regulatory Organization of Canada (IIROC). IIROC has not been delegated the authority to register investment dealers in BC, NB, NS, NWT, NU, ON, PEI, QU, or YK.

Parties interested in registering as an investment dealer must file National Instrument Form 33-109F6 - Firm Registration along with the following documents must be submitted through the National Registration Database (NRD)

·        Schedule B – Submission to Jurisdiction and Appointment of Agent for Service for each jurisdiction where the firm is seeking registration;

·        Business plan, policies and procedures manual, and client agreements (BC, AB and MB only);

·        Constating documents;

·        Organization chart;

·        Ownership chart;

·        Calculation of excess working capital;

·        Directors’ resolution approving insurance;

·        Audited financial statements; and

·        Letter of direction to auditors

The proficiency requirements for investment dealers are set out in National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations and its Companion Policy.

Exempt Market Dealer BC, AB, SK, MB, ON, QU, NB, NS, NFL, PEI, NU, YK, NWT Accredited Investor; Offering Memorandum Exemption; Offering Memorandum Light Exemption(1); Integrated Crowdfunding Exemption(2); Start-up Crowdfunding Exemption(3) Parties interested in becoming an exempt market dealer must file the same documents as an investment dealer.  Parties must use the NRD to file with each securities jurisdiction registration is desired.

The proficiency requirements exempt market dealers are set out in National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations and its Companion Policy.

Start-up Crowdfunding Exemption Portal Start-up Crowdfunding Exemption(3) Funding portals relying on the Start-up Crowdfunding Exemption do not need to register as a registered dealer or in any other capacity in the participating jurisdictions.  Portals are required however, to provide 30 days advance notice of their intent to act as a Start-up Equity Crowdfunding portal by filing the following forms:

·        Form 3 Start-up Crowdfunding Funding Portal Information Form (9 page PDF Form); and

·        Form 4 - Start-up Crowdfunding – Funding Portal Individual Information Form for each promoter, director, officer and control person of the owner of the portal (10 page PDF Form).

Restricted Dealer BC, AB, SK, MB, ON, QU, NB, NS, NFL, PEI, NU, YK, NWT Accredited Investor; Integrated Crowdfunding Exemption(2); Start-up Crowdfunding Exemption(3) Exemption order application and National Instrument Form 33-109F6 - Firm Registration must be submitted individually to each regulator.  Regulator(s) decides on a case-by-case basis whether to grant registration and requirements and what securities restricted dealer may sell. For more information on restricted dealers, see Part 7 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

Notes:

  • The offering memorandum light exemption is only available in AB and SK.
  • The Integrated Crowdfunding Exemption is only available in MB, ON, QU, NB, and NS, with SK pending.
  • The Start-up Crowdfunding Exemption is only available in BC, SK, MB, QU, NB and NS.          Restricted dealers are not eligible to offer securities under the Start-up Crowdfunding Exemption in BC.
  • The Investment Dealer Exemption is only available in BC, AB, MB and NB.

All applications for registration as an investment dealer and exempt market dealer undergo an extensive review.  It takes a minimum of four months from submission for an application for registration to be approved.

The Ontario Securities Commission offers a useful “Guide to Getting Registered” on its website. IIROC also offers extensive information on this topic on its website page “Becoming a Regulated Dealer”.

We recommend you engage the service of a securities lawyer familiar with registration matters to assist with any application you pursue as a funding portal.

As funding portal, do I have to belong to a self-regulatory organization like the Investment Industry Regulatory Organization of Canada (IIROC)? Answer

It depends on your registration category under the applicable securities laws in Canada:

  • If you are registered as an investment dealer, you must be a member of IIROC;
  • If you are registered as an exempt market dealer, you are not required to be a member of IIROC or one of the national exempt market dealer associations;
  • If you have provided notice you are acting as a funding portal under the Saskatchewan crowdfunding exemption, you are not required to be a member of IIROC; or
  • If you are registered as a restricted dealer through an exemption order like Social Venture Connexion/MaRs SVX, you are not required to be a member of IIROC.

At this time, the registration requirements for funding portals that wish to operate in reliance on the proposed Ontario crowdfunding exemption are not clear.  Whether funding portals relying on the proposed Ontario crowdfunding exemption will need to belong to a self-regulatory organization like IIROC will depend on the final rules.

Are associated persons of a funding portal required to obtain a license or register with securities regulators in Canada? Answer

It depends on the registration category of the funding portal in Canada.

Registration Requirements of Associated Persons
Acting on Behalf of an Equity Funding Portal in Canada
Funding Portal Registration Registration Required Details
Investment Dealer Yes. Proficiency requirements set by the Investment Industry Regulatory Organization of Canada

Each director, chief executive officer, chief financial officer, chief operating officer or control person (holding 10% or more interest in funding portal), dealing representative, advising representative, associate advising representative, ultimate designated person, chief compliance officer,  use the National Registration Database (NRD) to complete and file their registration forms electronically.  Main form is Form 33-109F4 - Registration Of Individuals and Review of Permitted Individuals.

Investors must also complete and file with IIROC a 10% or Greater Investor Application Form  or 10% and under Investor Notification Form based on their holdings.

Exempt Market Dealer Yes. Proficiency requirements set by National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations and its Companion Policy.

Each director, chief executive officer, chief financial officer, chief operating officer, or control person (holding 10% or more interest in funding portal), dealing representative, and chief compliance officer must use the NRD to complete and file their registration forms electronically. Main form is Form 33-109F4 - Registration of Individuals and Review of Permitted Individuals.

Start-up Crowdfunding Exemption Portal No. No proficiency requirements.

Each promoter, director, officer, and control person of funding portal must complete Form 4 - Start-up Crowdfunding – Funding Portal Individual Information Form and file with the applicable participating jurisdiction. This is considered a notification and not a registration.

Integrated Crowdfunding Exemption Portal No. Portal may be operated by a restricted dealer or registered dealer.

 

No proficiency requirements set-out in instrument for associated persons, but it is likely each associated person will be required to provide disclosure similar to those required by exempt market dealers.

Restricted Dealer No (generally). Regulator determines on case-by-case basis. Regulator decides on a case-by-case basis what education and experience are required for registration as a dealing representative or chief compliance officer of a restricted dealer. A firm applying to register as a restricted dealer cannot use the passport and interface system.

 

Should I build my funding portal from scratch or should I use a white label solution? Answer

This is a business decision.  Funding portals must comply with all applicable laws in Canada.  There is no requirement you build your equity-funding portal from scratch or that you use one or another particular white label solution.

There are number of benefits and limitations to using a white label solution to build a funding portal or any online business for that matter.

The benefits include:

  • Reduced upfront development costs as someone else has already created the solution and sorted out functional issues;
  • Reduced time to market as you only need to “skin” the white label solution to match your branding; and
  • Low-cost back-end technical support and upgrades without the need for a robust tech team in-house.

The limitations include:

  • Technological features and functions may not work the exact way you want them to or be non-compliant with Canadian securities, privacy, money laundering or other laws;
  • Updates to the software in the future may be limited or fail to keep up with industry innovation or market expectations in industry;
  • Technical support may be limited or non-existent;
  • White label company may cease to exist or provide services at a price too high for your business to be profitable; and
  • White label provider may share analytics from your business and clients with competitors.

White label providers vary considerably in what they provide.  Some are provider hosted, do it yourself solutions where you choose the features and skin you want.  The provider handles all back end services and analytics. Some are strictly software solutions you download, install and configure onto your own server with or without the assistance of the providers’ technical team.  Others start with a template of sort and customize it based on your particular needs as a funding portal and act more as a software development team.

 

Source:
Alixe_Cormick picAlixe Cormick is the founder of Venture Law Corporation in Vancouver, BC. Alixe concentrates her legal practice in the areas of initial public offerings, follow-on offerings, reverse takeovers, capital pool corporations, qualifying transactions, mergers & acquisitions, secondary listings and exempt market financings (more).

 

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. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization’s profile and gain access to a dynamic group of industry front runners. Learn more About Us | Prezi or contact us at casano@ncfacanada.org.

 

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