Christopher Charlesworth, CEO and Co-founder of HiveWire, Joins National Crowdfunding Association of Canada’s Advisory Board
March 24th, 2017
Prepared by Brian Koscak | October 30, 2013
Brian Koscak, (Partner, Cassels Brock) is one of the expert contributors to the “Review of Crowdfunding Regulation 2013″ published by the European Crowdfunding Network (ECN) on October 30, 2013. Brian authored the “Canada” chapter of this report which aims to provide interpretations of existing regulations concerning Crowdfunding in Europe, North America, and Israel.
Crowdfunding is divided into Non-Equity and Equity Crowdfunding platforms in Canada.(1) Non-Equity platforms, as it name implies, do not involves the issuance of securities and are not regulated by Canadian securities laws. In contrast, equity Crowdfunding platforms involve the issuance of securities and consist of peer-to-peer (P2P) lending platforms and equity platforms.
There are three types of Non-Equity Crowdfunding Models that operate on Crowdfunding platforms in Canada, the Donation Model, the Rewards Model and the Pre-Purchase Model. A directory of various Non-Equity Crowdfunding platforms is publicly available on the website of the National Crowdfunding Association of Canada.(2)
The Donation Model is where an individual or entity donates or makes a financial contribution to a project or cause without any expectation of receiving a financial return on that contribution. An individual is motivated to make a donation based on their personal desire to support a project or campaign that is in some way meaningful or important to them. The Donation Model has its roots in philanthropy and is commonly used by on-line charities.
The Reward Model is where an individual or entity makes a financial contribution to a project or cause in return for a reward or perk. The types of rewards or perks offered by a project sponsor or entrepreneur vary considerably and are often quite imaginative and interesting and may not necessary involve something tangible. For example, a film project could reward contributors with special recognition in the film credits or provide branded merchandise depending on the amount they contribute.
The Pre-Purchase Model is where an individual or entity provides an up-front payment in exchange for a pre-order of a product. This model provides validation of a need or want for a product by providing a project sponsor or entrepreneur with up-front capital often at a discount to the anticipated retail price.
Equity Crowdfunding in Canada consists of P2P Lending and Equity Crowdfunding platforms.
P2P lending involves matching borrowers with lenders where individuals or entities lend money to an individual, company or project in return for the repayment of the principal amount of the loan plus interest on their original investment. P2P lending is considered a ‘security’ under Canadian securities law, therefore, lenders are considered to be investors. Accordingly, any P2P portal would be a regulated entity under applicable Canadian securities law.
Canadian securities laws do not have an express prospectus or registration exemption to permit the operation of an on-line P2P lending platform. Therefore, in order for a P2P lending platform to operate in Canada, it would have to obtain exemptive relief from the prospectus and registration requirements from the various Canadian securities regulatory authorities as one company did in 2009.(3) This company operated a P2P lending platform for accredited investors only. This company has since changed its business model and is no longer engaged in P2P lending. We are not aware of any other P2P lending platform operating in Canada.
Canada consists of 10 provinces and three territories and the regulation of securities is within the jurisdiction of the provinces and territories and not the federal government of Canada as a matter of constitutional law. Therefore, Canada does not presently have a national securities regulator or any national securities legislation, although plans are in place to create a national securities regulatory authority.(4) The Ontario Securities Commission (the OSC) is the largest securities commission in Canada while other significant provincial securities regulators are the British Columbia Securities Commission (BCSC) , the Alberta Securities Commission and the Autorité des marchés financiers (Québec).
Although there are 13 jurisdictions in Canada, the various provincial and territorial securities regulators work together through an umbrella organization called the Canadian Securities Administrators (CSA). Through the CSA, Canada’s provincial and territorial securities regulators promulgate national and multilateral instruments, guidelines, notices and other regulatory pronouncements in order to improve, coordinate and harmonize the regulation of the capital markets in Canada. The CSA has published national Instrument involving prospectus exemptions that includes the offering memorandum (OM) exemption (the OM exemption)(5) which is used by registered dealers to sell securities on the internet to the public which is discussed below.
There is no express Equity Crowdfunding prospectus and registration exemption in Canada but two proposed frameworks have been published by the Provinces of Ontario and Saskatchewan and are receiving serious consideration. However, some registered dealers in Canada have established websites where they sell securities to the public under the OM exemption. The OM exemption is available in all jurisdictions in Canada, except Ontario, and has been in place for many years.(6) Some CSA members believe this prospectus exemption provides an existing securities framework for Equity Crowdfunding and existing registered dealers are taking advantage of it.(7)
The CSA members are still considering whether Equity Crowdfunding should occur under the OM exemption or a specific Equity Crowdfunding exemption as proposed by Ontario and Saskatchewan. Regardless, if a foreign entity desires to engage in Equity Crowdfunding today, it could do so in all jurisdictions in Canada except Ontario under the OM exemption as discussed below.
Offering securities for sale on the internet triggers registration under Canadian securities law. Crowdfunded offerings under the OM exemption must be conducted by a registered dealer under Canadian securities law. In Canada, there is a category of dealer called an ‘exempt market dealer’ (an EMD) that can act as a registered dealer in connection with Crowdfunded offering.(8)
An EMD is required to satisfy a number of regulatory obligations and requirements under Canadian securities law including its ‘know your product‘ obligation, ‘know your client‘ obligation and suitabilty obligation (which requires an EMD to ensure that an investment is a suitable investment for each investor). An EMD can act as an intermediary in any type of prospectus-exempt offering in Canada.where it is registered provided that the prospectus exemption relied upon is available in a that jurisdiction.
In Ontario, the OSC has published an Equity Crowdfunding framework in December 2012 (the Ontario Proposal).(9, 10) The OSC Proposal states that an Equity Crowdfunding platform operating in Ontario would have to register in the appropriate category of dealer or advisor category since the activities of platforms will generally be considered registerable trading or advising activity under Ontario securities law. The Ontario Proposal does not set out the registration requirements for a platform; however, it will likely be a type of ‘restricted dealer’ which means it will not be subject to all of the registration requirements of an EMD. For example, it is unlikely that a portal will be required to assess whether a Crowdfunded investment is suitable for an investor which is required by an EMD as a matter of law.
In Saskachewan, the Financial and Consumer Affairs Authority (the FCAA), the Saskatchewan securities regulatory authority, published a proposed Equity Crowdfunding framework for start-ups in July 2013(11) and a followed up with a proposed Equity Crowdfunding prospectus exemption in October 2013.(12) The FCAA does not require an Equity Crowdfunding platform to be registered as a dealer or as an adviser under Saskatchewan securities law; however, it does require the platform operator and each promoter, director, officer and control person of the platform operator to file certain application forms 30 days before engaging in Crowdfunded offerings.
In order to rely on the Equity Crowdfunding exemption described in the Saskatchewan Proposal, the platform must ensure that:
1. it makes an Important Risk Warnings document and the offering document separately available to investors electronically online;
2. 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;
3. 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;
4. when the offering is closed, the platform 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; and
5. issuers and investors have an address in Saskatchewan.
A platform that is a registered as an EMD would be permitted to receive or hold investor funds in trust. This is what EMDs presently do when they engage in any type of private placement in Canada including a Crowdfunded offering under the OM exemption.
It is not clear whether a platform that may be registered as restricted dealer would also be permitted to receive or hold funds under the Ontario Proposal, however, it is expressly contemplated under the Saskatchewan Proposal.
This section examines the OM exemption and the proposed Equity Crowdfunding prospectus exemptions being considered by Ontario and Saskatchewan.
There are two models of the OM exemption in Canada; the ‘British Columbia model’ and the ‘Alberta model’. The British Columbia model is followed by the provinces of British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador, while the Alberta model is followed by the provinces of Alberta, Manitoba, Prince Edward Island, Québec, Saskatchewan and the Northwest Territories, Nunavut and the Yukon.(13)
Under both models, a purchaser purchases a security as principal and at the same time, or before the purchaser signs the agreement to purchase a security, the issuer: (a) delivers a prescribed form of OM to the purchaser; (b) obtains a signed risk acknowledgement form from the purchaser; and (c) satisfies such other requirements as discussed below. Under both models, issuers can sell securities to the public with no limit on the amount of capital that can be raised by an issuer or invested by an investor, except the Alberta model only permits investors to invest up to $10,000 unless they are an “eligible investor”(14) and if so, then there is no investment limit.
Generally, reliance on the OM exemption is subject to the following requirements:
The key elements of the Ontario Proposal are set out below:
On October 7, 2013, the FCAA published the Saskatchewan Proposal(16) and has requested public feedback by November 6, 2013.(17)
The key features of the Saskatchewan Proposal are set out below.
Canada is not required to adopt the AIFMD since it is not part of the EU. However, to the extent that a Canadian-based portfolio advisor markets AIFs in the EEA, manages or sub-advises EEA domiciled AIFs, or is outside the safe harbour for “reverse solicitation” in a jurisdiction, it may need to comply with the local rules and requirements.
Canada currently permits Equity Crowdfunding under the OM exemption in all jurisdictions in Canada, except Ontario where it is presently unavailable, provided that it is undertaken by registered dealers such as an EMD. EMDs sell securities in the exempt market (i.e., exempt from the prospectus requirement) and are much easier to become registered than a full investment dealer.
Both Ontario and Saskatchewan are considering adopting a specific Equity Crowdfunding framework. It is believed that Ontario is waiting for the United States to come out with its draft rules and regulations before finalizing any framework in Ontario, if at all, while many anticipate Saskatchewan will likely adopt its framework by the end of 2013.
The tension in Canada is that some CSA members believe the OM exemption should be used as our only Canada-wide Equity Crowdfunding exemption, while Ontario believes there should be a less burdensome framework. This is being debated among the CSA members. Saskatchewan is looking at the OM exemption, as are other CSA members as the preferred framework, but believes it needs a different approach for start-ups with is Saskatchewan Proposal.
1. The information in this note is current as of October 14, 2013.
3. See the exemptive relief order provided to Communitylend Inc. on the website of the Ontario Securities Commission at:
4. On September 19, 2013, the Canadian Minister of Finance announced that the federal government has agreed in principle with the provinces of British Columbia and Ontario to move towards establishing a cooperative capital markets regulatory system. The proposed regulator will be a common regulator that will administer a single set of regulations designed to protect investors, support efficient capital markets and manage systemic risk. Although the other provinces and territories are not parties to the agreement in principle, the Canadian Minister of Finance has extended an invitation to all provinces and territories to participate.
5. See section 2.9 of National Instrument 45-106 – Prospectus and Registration Exemptions.
6. For various policy reasons, Ontario has not adopted the OM exemption; however, it is currently under review.
7. Although some EMDs are also selling securities over the internet on their websites to accredited investors, (e.g., wealthy individuals and large institutional and government investors), many do not view the accredited investor prospectus exemption which is available across Canada as true Equity Crowdfunding since it does not involve selling securities to the public. According to OSC statistics, accredited investors only comprise approximately 4% of the Ontario and Canadian population.
8. Although an ‘investment dealer’ under Canadian securities law can also sell securities on the internet under the OM exemption, we are not aware of any such investment dealers who are engaged in such activities.
9. See OSC Staff Consultation Paper 45-710 Considerations for New Capital Raising Prospectus Exemptions.
10. In August 2013, the OSC published a progress report where it summarized its work and the public comments it received and confirmed its interest in continuing to develop an Equity Crowdfunding framework that seeks to balance investor protection without imposing excessive regulatory burdens on issuers and platforms.
11. See “Saskatchewan Begins Preliminary Exploration of Equity Crowdfunding” on the FCCA’s website at:
12. General Order 42-925 Saskatchewan Equity Crowdfunding Exemption.
13. Ontario is presently considering adopting the Alberta model of the OM exemption but considering additional investor protection meansures.
14. An “eligible investor” means, among other things, a person whose: (a) net assets, alone or with a spouse, in the case of an individual, exceed $400,000, (b) net income before taxes exceeded $75,000 in each of the two most recent calendar years and who reasonably expects to exceed that income level in the current calendar year, or net income before taxes, alone or (c) with a spouse, in the case of an individual, exceeded $125,000 in each of the two most recent calendar years and who reasonably expects to exceed that income level in the current calendar year.
15. On December 20, 2012, the CSA members(other than British Columbia and Ontario) published Multilateral CSA Notice
45-311 Exemptions from Certain Financial Statement-Related Requirements in the Offering Memorandum Exemption to Facilitate Access to Capital by Small Businesses. Each CSA member (other than British Columbia and Ontario) issued a harmonized interim local order (the Order) that provides an exemption from certain financial requirements set out in the OM exemption. The Order remains in force until December 14, 2014. The Order provides relief from the audited financial statement requirement and the requirement for issuers to prepare financial statements using Canadian GAAP applicable to publicly accountable enterprises provided that: (a) the issuer and related issuers raise no more than $500,000; (b) no investor invests more than $2,000 in any 12-month period; (c) the issuer is not a reporting issuer, investment fund, mortgage investment entity or real estate issuer; (d) the issuer does not distribute complex securities; and (e) the OM contains a bold warning on the front page.
In February 2013, the BCSC published a Notice and Request for comment on National Instrument 45-106 Prospectus and Registration Exemptions Proposed Prospectus Exemption to Assist Capital Raising by Small Businesses (the BC Proposal).The BC Proposal is the same as the Order except that it requires an issuer to identify the use of the exemption in a report of trade and it is not yet legal. Unlike the Order it is only a request for comment which comment period has closed and there has been no further update by teh BCSC on this matter. The BC Proposal can be found onteh BCSC’s website at: http://www.bcsc.bc.ca/policy.aspx?id=16540.
16. General Order 42-925 Saskatchewan Equity Crowdfunding Exemption.
17. The stated purpose of the Saskatchewan Proposal is to help bridge the funding gap for start-ups and entrepreneurs while adequately protecting investors. If implemented, the FCAA stated the Saskatchewan Proposal would have a three- year sunset clause when it expires.