Saskatchewan Getting Ready to Legalize Equity Crowdfunding
Cassels Brock | Brian Koscak | October 16, 2013
On October 7, 2013, the Saskatchewan Financial and Consumer Affairs Authority (the FCAA) published a framework for a proposed Saskatchewan-only equity Crowdfunding exemption1 (the Proposed Exemption) and requested public feedback with a comment period ending on November 6, 2013. Although the FCAA originally published a concept equity Crowdfunding proposal in July 13, 2013, it has now been fine-tuned with the publication of the Proposed Exemption. The purpose of the Proposed Exemption is to help bridge the funding gap for start-ups and entrepreneurs while adequately protecting investors. If implemented, the FCAA stated the Proposed Exemption would have a three-year sunset clause when it expires.
The key features of the Proposed Exemption are set out below.
- Saskatchewan investors only - Only available to investors who have an address in Saskatchewan.
- Investment limit per offering - Maximum purchase of $1,500 per offering.
- Annual investment limit - None.
- Risk warning - Investors must confirm online that they have read and understood a prescribed form of document called Important Risk Warnings.
- Right to sue for a misrepresentation - Subject to certain limitation periods, investors have a right to sue for a misrepresentation in the issuer’s advertising or sales materials or if a verbal statement was made in connection with the investment that contained a misrepresentation. Investors also have a right to cancel the subscription agreement and recover the purchase price if the investment is sold in breach of a decision of the FCAA or the Saskatchewan Securities Act.
- Saskatchewan issuers only - Only available to issuers who have an address in Saskatchewan.
- Type of issuer - Any type of issuer can use the Proposed Exemption except a reporting issuer or an investment fund.
- Type of securities - Any type of security can be issued except derivatives. The trade can only involve a trade by the issuer in its own securities facilitated by the portal.
- Form filing - An issuer must file Form GO45-925F1 Issuer Information 10 days prior to beginning to trade.
- Maximizing offering size - $150,000.
- Minimum offering size - The minimum offering size must be set out in the offering document which must equal the amount needed to carry out the purpose for which the funds are sought. The minimum offering size may be reduced by any other amount available for the purpose set out in the offering document, as long as the offering document states that these other funds are unconditionally available to the issuer.
- Annual limit - The issuer and its promoters, directors, officers and control persons cannot use the Proposed Exemption more than two times per calendar year.
- Offering period - No longer than six months.
- Offering Document - The issuer must use an offering document following Form GO45-925F3 Offering Document to be made available to investors through the portal and file the offering document 10 business days prior to beginning to trade.
- No other concurrent offering - There can be no other concurrent offering by the issuer or other issuer for the same project.
- Background checks - The FCAA will be doing background checks on individuals involved with the offering who must submit Form GO45-925F2 Individual Information Form.
- No commissions - There can be no commissions or other amounts paid to the issuer or its promoters, directors, officers, control persons, employees or agents in respect to the trade.
- Report of trade - The issuer must file a report of trade in Form GO45-925F4 Report of Trades within 30 days after the offering closes.
- Resale restriction - Securities can only be resold under a prospectus exemption unless the issuer becomes a reporting issuer and if so, then subject to certain conditions.
- Ongoing disclosure requirement - None.
- Portal requirement - In order to rely on the exemption, all trades must be carried out through the portal and payment for the securities must be made through the portal.
- Registration - The portal is not required to be registered with the FCAA as a dealer provided if complies with certain filings, conditions and that it provides no advice to investors.
- Compensation - The portal can be paid a commission or earn a fee.
- Portal – the portal must file Form GO45-925F5 Portal Information within 30 days of facilitating Crowdfunded trades.
- Key people – each promoter, director, officer and control person of the portal must file a Form GO45-925F6 Portal Individual Information Form within 30 days of facilitating Crowdfunded trades. The FCAA will be doing background checks on individuals involved with the portal.
- Conditions: - In order to rely on the Proposed Exemption, the portal must ensure that:
- It makes the Important Risk Warnings document and the offering document separately available to investors electronically online.
- It does not allow the investment until the investor confirms online that they have read and understood the offering document and the Important Risk Warnings.
- It does not release any funds until the minimum offering amount has been raised and, until that time, all funds received for the offering are held in trust for investors.
- When the offering is closed, the portal provides the issuer with the details of the investor (e.g., name, address, e-mail etc.) within 15 days of the closing of the offering.
- Issuers and investors have an address in Saskatchewan.
The Proposed Exemption is a ‘regulatory-lite’ approach for equity Crowdfunding since portals are not required to be registered as a dealer or adviser with the FCAA, there are no financial statement requirements and small dollar amounts are at risk which limits the extent of any potential for fraud and loss.
However, some market participants may be concerned that the Proposed Exemption does not impose any liability on the portal since it is unregistered. This would be particularly concerning if a fraud occurs on its platform. Moreover, the public may incorrectly believe the FCCA has passed on the merits of the offering and the people involved since the FCCA: (a) will perform background checks on key individuals involved with the issuer; and (b) reviews the issuer’s offering document prior to posting it on the portal’s website.
Regardless of one’s view, if the Proposed Exemption is adopted, Saskatchewan will be the first jurisdiction in Canada to have a specific equity Crowdfunding exemption. Saskatchewan would then join the ranks of certain states, such as Kansas and Georgia, who have similarly adopted an equity Crowdfunding exemption, albeit an intra-state equity Crowdfunding exemption.
A copy of the Proposed Exemption is available here.
For further information regarding this e-LERT, please contact Brian Koscak or any member of our Securities Group.
1General Order 42-925 Saskatchewan Equity Crowdfunding Exemption.