Christopher Charlesworth, CEO and Co-founder of HiveWire, Joins National Crowdfunding Association of Canada’s Advisory Board
March 24th, 2017
AUM Law | Paul Hayward | June 5, 2015
On May 14, 2015, the securities regulatory authorities of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (the participating jurisdictions) announced that they were adopting substantially harmonized registration and prospectus exemptions (the start-up crowdfunding exemptions) to allow start-up and early-stage companies in these jurisdictions to raise up to $500,000 per calendar year through online funding portals.
As explained in the related notice, Multilateral CSA Notice 45-316 Start-up Crowdfunding Registration and Prospectus Exemptions, the exemptions are being implemented by way of local blanket orders on or shortly after the publication of the CSA notice, and will be in effect until May 13, 2020.
The start-up crowdfunding exemptions consist of an exemption from the prospectus requirement (the start- up prospectus exemption) and an exemption from the dealer registration requirement (the start -up registration exemption).
The start-up prospectus exemption allows non-reporting issuers (but not reporting issuers) to issue eligible securities, subject to a number of conditions, including the following:
The eligible securities are subject to an indefinite hold period and can only be resold under another prospectus exemption, under a prospectus or four months after the issuer becomes a reporting issuer.
The conditions to the start-up registration exemption include the following:
- financial responsibility, or
- relevant knowledge or expertise.
- release funds to the issuer after the minimum offering amount has been reached and the 48 - hour right of withdrawal has elapsed, or
- return the funds to purchasers if the minimum offering amount is not reached or if the start-up crowdfunding distribution is withdrawn by the issuer.
Although it may seem unusual to provide an exemption from the registration requirement, but then reimpose many registration-like requirements as conditions of the exemption, this approach arguably reduces the registration requirement to a very “light touch” regime and allows the portal to avoid many additional obligations that ordinarily apply to registered firms. On the other hand, this approach may also result in some uncertainty, such as whether a regulator’s decision to remove the registration exemption is subject to the same “fitness for registration” criteria and protections as a decision to refuse, suspend or revoke a registration, and may result in some additional risks to investors, such as in relation to the portal’s ability to handle investor funds.
Nevertheless, on balance, the approach reflected in the start-up crowdfunding exemptions represents an attempt to tailor a regulatory regime that is sensitive to concerns about regulatory burden and principles of proportionate regulation, and allows issuers and portals a measure of choice over the regulatory regime under which they wish to operate.
As explained in our first nutshell of this series, Equity Crowdfunding Portals, we may soon see a number of different crowdfunding models operating in Canada, including the following:
In this regard, it is particularly welcome that the start-up crowdfunding exemption has been amended from the original March 2014 proposal to allow offerings to be made through portals operated by registered dealers. In view of this change, registered dealers that are subject to higher regulatory requirements may also add start-up crowdfunding offerings to their activities. This may make it easier for the remaining jurisdictions, such as Ontario and Alberta, to introduce a similar start-up prospectus exemption in the future.
At a time when there appears to be little apparent movement south of the border on the crowdfunding proposals published by the SEC in October 2013, the choice of models being made available to Canadian issuers and investors is very welcome.
Please contact a member of our Regulatory Compliance Group for guidance on any of the topics in this nutshell.
This nutshell is an overview only and it does not constitute legal advice. It is not intended to be a complete statement of the law or an opinion on any matter. No one should act upon the information in this nutshell without a thorough examination of the law as applied to the facts of a specific situation.
The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support and networking opportunities to over 950+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more About Us or visit www.ncfacanada.org.