Two Equity Crowdfunding Specific Exemptions Taking Hold in Canada

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NCFA Canada | Alixe Cormick | March 21, 2014

Crowdfunding exemptions in CanadaOn March 20, 2014, seven securities regulators across Canada published for comment new private placement securities exemptions or amendments to existing exemptions in their jurisdictions.

Four of these exemptions may be used to crowdfund securities in Canada. Two of these exemptions are crowdfunding specific exemptions: the start-up crowdfunding exemption and the integrated crowdfunding exemption.

The start-up crowdfunding exemption is based on the Saskatchewan crowdfunding exemption adopted in that province in December of 2013.

The integrated crowdfunding exemption follows the concept release Ontario published in December of 2012.

The other two exemptions that may be used to crowdfund securities are new to Ontario: the offering memorandum exemption and the existing security holder exemption. Each of these exemptions are aimed at different segments of the financial markets.

The securities regulators are taking comments on these proposals until June 18, 2014. We strongly encourage you to let these regulators know if you support (or are against) any aspect of the proposed exemptions

The National Crowdfunding Association of Canada (NCFA Canada) will be holding events, consultations and submitting public comments for its national membership. Your inputs are highly valuable to the public consultation process and we encourage you to express your voice to NCFA Canada who will aggregate and represent group opinions in an open, transparent and balanced manner on your behalf.

There is no guarantee an exemption will be implemented if it receives no support from issuers, investors or industry professionals. We also encourage you send a letter to your local securities regulator to support the exemption even if your province or territory did not participate in proposing these four equity crowdfunding exemptions.

The chart below sets out the various existing and proposed private placement exemptions in Canada that can be used to crowdfund securities. A link to all applicable securities laws existing and proposed can be found in the endnotes to the chart.

EQUITY CROWDFUNDING IN CANADA TODAY

Securities Exemption Relied On

Accredited Investor Exemption.[1][2]

Offering Memorandum Exemption.[3][4][5]

Offering Memorandum Light Exemption.[6]

Existing Security Holder Exemption.[7]

Proposed Start-Up Crowdfunding Exemption

(SK model).[8][9][10]

Proposed Crowdfunding Exemption

(ON Model).[5][11]

Jurisdictions Adopted

BC, AB, SK, MB, ON, QU, NB, NS, NFL, PEI, NU, YK, & NWT.

BC, AB, SK, MB, QU, NB, NS, NFL, PEI, NU, YK, & NWT.

AB, SK, MB, QU, NB, NS, NFL, PEI, NU, YK, & NWT.

BC, AB, SK, MB, QU, NB, NS, PEI, NU, YK, & NWT.

SK.

Proposed

Minor amendment to exemption in all jurisdictions.

ON.

[12]

ON, & NFL.

BC, MB, NB, NS, & QU.

Amendment to SK model.

MB, NB, NS, ON, QU, & SK.

Offering Limit

Unlimited.

Unlimited.

12-month period cap of $500,000.

Unlimited.

$150,000 cap per offering with an aggregate 12-month period cap of $300,000 by issuers and their promoters, directors, officers and control persons.12-month period limit of two offerings using exemption.

$1,500,000 cap every 12-month period.

A concurrent offering under another exemption must have the same offering terms.

Type of Securities

All.

All.

AB, NB, ON, QU & SK proposes to exclude derivative type securities.

All but derivative type securities.

Must be class of equity securities listed on the TSX, TSXV or CSE consisting of the listed security and a warrant to acquire the listed security.

All but derivative type securities.

All but derivative type securities.

Issuer Restrictions

None. Available to reporting and non-reporting issuers involved in all business sectors.

None. Available to reporting and non-reporting issuers involved in all business sectors.

ON & NB propose the exemption not be available to investment funds or related to registrant involved in offering.

Not available if a reporting issuer, investment fund, mortgage investment entity or an issuer engaged in the real estate business.

Available to TSXV, TSX and CSE listed issuers only.

Must be current with all continuous disclosure requirements.

ON & NFL propose the exemption not be available to investment funds.

Not available if a reporting issuer or investment fund.

Must be resident in jurisdiction where exemption is adopted.

Available to reporting and non-reporting issuers involved in all business sectors except investment funds, issuers with a unstated business purpose (blind pools) and real estate issuers that are not a reporting issuer.

Must be incorporated or organized under the laws of a jurisdiction in Canada, have head office in Canada, and majority of directors resident in Canada.

Investor Restrictions

Must be an accredited investor based on annual income ($200,000 individually or $300,000 with spouse) or net financial assets ($1 million excluding home) or net assets ($5 million).ON proposes to allow fully managed accounts to purchase investment fund securities in ON (all other jurisdictions already allow).

If investing $10,000 or more and from AB, SK, MB, QU, PEI, NU, YK or NWT, must be an eligible investor based on annual income ($75,000 individually or $125,000 with spouse) or net assets ($400,000), or a close friend, family or business associate, or have obtained the advice from an eligible adviser on suitability.

AB, QU & SK propose an annual investment cap of $10,000 per investor who is not an eligible investor; and $30,000 per investor who is an eligible investor but not an accredited investor or a close personal friend, family or business associates.

ON & NB propose different net asset test for individuals ($250,000 excluding home) and removal of net income test for non-individuals.

Annual investment cap of $2,000 per investor. No limit on the number of offering memorandum offerings by different issuers an investor can invest under the rule.

Must be an existing security holder of the issuer on the record date set-out in the press release announcing the offering.

12-month investment cap of $15,000 per issuer by an investor unless obtains suitability advice from a registered investment dealer.

ON & NFL propose the issuer be required to offer the securities on a pro rata basis.

Must be resident in one the jurisdictions the exemption is adopted and over the age of 18.

12-month investment cap of $1,500 per issuer by an investor.

Must be resident in one the jurisdictions the exemption is adopted and over the age of 18.

12-month investment cap of $2,500 per issuer by an investor.

An investor may invest a maximum of $10,000 in a rolling 12-month period in all equity crowdfunding issuers.

Financial Statements

Optional.

IFRS audited.

AB, NB, ON, QU & SK propose ongoing annual audited financial statements and disclosure on use of proceeds.

PE-GAAP unaudited.

No requirement to supply. Must be current with SEDAR filings.

Optional.

Audited if offering is greater than $500,000 raised under this or any other prospectus exemption since formation and have expended more than $150,000 since formation; or issuer is a reporting issuer.

Accountant reviewed unaudited financial statements if $500,000 or less raised under this or any other prospectus exemption since formation and have expended less than $150,000 since formation and issuer.

Non-reporting issuers may use IFRS or PE-GAAP. SEC issuers may use US GAAP.

Document Requirements

Subscription Agreement and Investor Questionnaire.

Amendment proposed in all jurisdictions to include a risk acknowledgement for individuals.

Offering memorandum in prescribed form (Form 45-106F2 for Non-Qualifying Issuers; or Form 45-106F3 for Qualifying Issuers); subscription agreement and Form 45-106F4 – Risk Acknowledgement.

AB, NB, ON, QU & SK propose to deem all marketing material part of offering memorandum attracting right of action coverage.

ON & NB propose a different form of risk acknowledgement from individuals who are not permitted clients.

Offering memorandum in prescribed form (Form 45-106F2 for Non-Qualifying Issuers; or Form 45-106F3 for Qualifying Issuers); subscription agreement and Form 45-106F4 – Risk Acknowledgement.

Must issue and file on SEDAR a press release announcing offering and terms.Subscription agreement; existing security holder certification; certificate signed by CFO & CEO.

Must file 10 business days before offering: Form GO 45-925F1 Issuer Information; Form GO 45-925F3 Offering Document; and Form GO 45-925F2 Individual Information (for each promoter, director, officer and control person of the issuer).

BC, MB, NB, NS, QU & SK propose name, numbering and minor changes to reflect all participating jurisdictions in forms.

Offering document (Form 45-108F1); subscription agreement; Certificate signed by CEO and CFO in required form, and risk acknowledgement (Form 45-108F2).

Mining issuer are subject to NI 43-101.

Statutory or Contractual Right of Action

None.

Two-day right of withdrawal.

Statutory or contractual right of action for rescission or damages if misrepresentation in offering memorandum.

Two day right of withdrawal.

Statutory or contractual right of action for rescission or damages if misrepresentation in offering memorandum.

Contractual right of action against issuer for rescission or damages if misrepresentation in continuous disclosure record and offering document if one voluntarily provided.

None.

48 hour right of withdrawal.

Statutory right of action against issuer if misrepresentation in offering document, or any document or video made available to purchaser.

Post Offering Requirements

File Form 45-106F1 (Form 45-106F6 in BC) within 10 days of closing offering. No annual report or other continuous disclosure requirements because of offering.

File Form 45-106F1 (Form 45-106F6 in BC) and offering memorandum within 10 days of closing offering.

If a mining company must also file a Form 43-101 Technical Report.

If an oil and gas company must also file a Form 51-101F1 or Form 51-101F2 statement or report.

No annual report or other continuous disclosure requirements as a result of offering.

AB, NB, ON & SK propose two new exempt distribution reports. One of investment funds (Form 45-106F10) and one for other issuers (Form 45-106F11).

ON & NB propose notice to holders of certain significant events within 10 days of occurrence.

No requirement to file offering memorandum with exempt distribution report.

AB, NB,ON, QU, & SK propose requirement to file marketing material within 10 days of being disclosed to prospective investors.

File Form 45-106F1 and offering memorandum within 10 days of closing offering.

If a mining company must also file a Form 43-101 Technical Report.

If an oil and gas company must also file a Form 51-101F1 or Form 51-101F2 statement or report.

No annual report or other continuous disclosure requirements as a result of offering.

File Form 45-106F1 (Form 45-106F6 in BC) within 10 days of closing offering.ON & NFL propose issuers must file Form 45-106F11 within 10 days of closing offering.

File Form GO 45-925F4 Report of Trades within 30 days of closing offering.

BC, MB, NB, NS, QU & SK propose name, numbering and minor changes to reflect all participating jurisdictions in forms.

SK, ON or NB file Form 45-106F11 and if in MB, NS or QU file Form 45-106F1 within 10 days of closing offering.Must provide security holders with annual financial statements within 120 days from fiscal year end indefinitely.

Must notice to holders of certain significant events within 10 days of occurrence.

Must maintain books and records available for inspection by investors and OSC that include: (1) information about the offering; (2) risk acknowledgement form; (3) investors names and size of holdings; and (4) use of funds raised under the exemption.

Funding portal must provide quarterly reports to principal regulator on funds raised through portal, and other information related to who did and did not raise capital on the portal.

Portal Requirements

Direct sales by issuer on their website or portal operator needs to be registered as an exempt market dealer or investment dealer or received an exemption as a restricted market dealer.

Direct sales by issuer on their website or portal operator needs to be registered as an exempt market dealer or investment dealer.

AB, NB,ON, QU, & SK propose selling agents, including portals, cannot be related to an issuer of relying on the exemption.

Direct sales by issuer on their website or portal operator needs to be registered as an exempt market dealer or investment dealer.

Direct sales by issuer on their website or portal operator needs to be registered as an exempt market dealer or investment dealer.

Portal operator must provide 30 days advance notice of intent to act as a an equity crowdfunding portal in jurisdiction where exemption is adopted by filing: Form GO 45-925F5 Portal Information; and Form GO 45-925F6 Portal Individual Information for each promoter, director, officer and control person of the owner of the portal.Cannot be related to an issuer of securities on portal.

BC, MB, NB, NS, QU & SK propose portal must have head office in one of the jurisdictions where exemption is adopted and majority Canadian directors, officers and control persons.

BC, MB, NB, NS, QU & SK propose name, numbering and minor changes to reflect all participating jurisdictions in forms.

Portal operator needs to be registered as a restricted dealer funding portal operator in jurisdictions where they intend to operate.

Registered exempt market dealer and investment dealers cannot operate a funding portal.

Cannot be related to an issuer of securities on portal.

Advantages

(1) No limit to offering size; (2) Available across Canada; (3) No financial statement requirement; (4) No offering document obligation; (5) Available to all issuers; (6) No annual report or other continuous disclosure requirements as a result of offering; (7) All types of securities may be sold; and (8) No statutory or contractual right of action.

(1) No limit to offering size; (2) Can sell to anyone in jurisdictions recognizing exemption; (3) Available to all issuers; (4) No annual report or other continuous disclosure requirements because of offering; and (5) All types of securities may be sold.

(1) Can sell to anyone in jurisdictions recognizing exemption; (2) Unaudited financial statement prepared using PE-GAAP allowed; and (3) No annual report or other continuous disclosure requirements as a result of offering.

(1) No limits to offering size; (2) Can sell to all existing security holders in jurisdictions recognizing exemption; (3) Limited offering document obligation; and (4) Can rely on investor certification they are an existing security holder.

(1) Can sell to anyone in jurisdiction where exemption is adopted; (2) Limited offering document obligation; (3) No financial statement requirement; (4) No annual report or other continuous disclosure requirements as a result of offering; and (5) No statutory or contractual right of action.

(1) Can sell to anyone in jurisdiction where exemption is adopted; (2) Offering document obligation is less rigorous than offering memorandum; and (3) Reviewed unaudited financial statements allowed if issuer has raised $500,000 or less under all exemptions since formation and less than $150,000 has been expended, and not a reporting issuer.

Disadvantages

(1) Accredited investors only; and (2) Must confirm accredited investor status.

(1) Requires IFRS audited financial statements; (2) Must provide detailed offering memorandum; (3) Not available in ON; (4) $10,000 investment limit by investors in AB, SK, MB, QU, PEI, NU, YK or NWT unless eligible investor or obtains suitability advice; and (5) Statutory or contractual right of action attached.

(1) Offering size limited to $500,000 every 12 month period; (2) Must provide detailed offering memorandum; (3) Not available in ON or BC; (4) Not available if a reporting issuer, investment fund, mortgage investment entity or an issuer engaged in the real estate business; (5) No derivative type securities allowed; (6) $10,000 investment limit by investors in AB, SK, MB, QU, PEI, NU, YK or NWT unless eligible investor or obtains suitability advice; and (7) Statutory or contractual right of action attached.

(1) Not available in ON and NFL; (2) Only available to TSXV, TSX and CSE issuers; (3) May only offer listed securities and units consisting of the listed security and a warrant to acquire the listed security; and (4) Statutory right of action attached.

(1) Offering size limited to $150,000 per offering to a maximum of $300,000 in two offerings every 12 month period; (2) Only available to issuers and investors resident in one of jurisdiction where exemption is adopted; (3) Not available if a reporting issuer or investment fund; (4) No derivative type securities allowed; and (5) Offering must be made through a funding portal.

(1) Offering size limited to maximum of $1,500,000 every 12 month period; (2) Only available to issuers and investors resident in one of jurisdiction where exemption is adopted; (3) Not available if an investment fund, a real estate fund that is not a reporting issuer or an issuer without a business plan; (4) No derivative type securities allowed; (5) Offering must be made through a funding portal; (6) Statutory right of action attached; ongoing obligation to provide audited financial statements and other disclosure until securities no longer outstanding or issuer becomes a reporting issuer.

Active Portal Examples

Exempt Market Dealer: Optimize Capital Markets; and Exempt Capital Markets.

Restricted Market Dealer: Social Venture Connexion/MaRs SVX.

Exempt Market Dealer: SeedUps Canada.

Exempt Market Dealer: SeedUps Canada.

No Portals.

No Portals.

No Portals.


[1] Section 2.9 Accredited Investor, National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106).

[2] CSA Notice and Request for Comment Proposed Amendments to National Instrument 45-106 Prospectus and Registration Exemptions Relating to the Accredited Investor and Minimum Amount Investment Prospectus Exemptions

[3] Section 2.9 Offering Memorandum, NI 45-106.

[4] Multilateral CSA Notice of Publication and Request for Comment Proposed Amendments to National Instrument 45-106 Prospectus and Registration Exemptions Relating to the Offering Memorandum Exemption and in Alberta, New Brunswick and Saskatchewan, Reports of Exempt Distribution.

[5] Introduction of Proposed Prospectus Exemptions and Proposed Reports of Exempt Distribution in Ontario (ON Proposals). The Ontario Securities Commission (OSC) is proposing to adopt four new private placement exemptions in Ontario. These new offering exemptions include:

(1) offering memorandum exemption;

(2) family, friends and business associates exemption;

(3) integrated crowdfunding exemption, together with a registration framework for online funding portals; and

(4) the existing security holder exemption.

[6] 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 and ASC Blanket Order 45-512 Exemption from certain financial statement requirements of Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers, Re, 2012 ABASC 537.

[7] BC Instrument 45-534 - Exemption from prospectus requirement for certain trades to existing security holders. The numbering of instrument is different in each jurisdiction.

[8] General Order 45-925 Saskatchewan Equity Crowdfunding Exemption. Go to the Saskatchewan Equity Crowdfunding webpage for links to information bulletins and all forms related to equity crowdfunding in Saskatchewan.

[9] Proposed Blanket Order on Québec Start-up Crowdfunding Prospectus and Registration Exemption.

[10] Proposed BC Notice 2014/03 - Notice and Request for Commenton Start-Up Crowdfunding.

[11] MB, NB, QU & ON, proposed Regulation 45-108 Respecting Crowdfunding.

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Disclaimer

This blog is not intended to create, and does not create an attorney-client relationship. You should not act or rely on information on this blog post without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. For legal issues that arise, the reader should consult legal counsel.

Alixe Cormick 150 with borderAuthor: Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of the Advisory Board of the National Crowdfunding Association of Canada. You can reach Alixe by phone at 604-659-9188, by e-mail at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.

 

 

 

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 or contact us at casano@ncfacanada.org.

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