Mondaq  |  Davis LLP  |  Article by Ted Maduri  | Last Updated: May 16 2013

Crowdfunding is "a method of funding a project or venture through small amounts of money raised from a large number of people [the crowd] over the internet via an internet portal intermediary."¹ Crowdfunding has been made popular by websites used to solicit and raise funds such as kickstarter.com and indiegogo.com; these sites are known as "portals." The funding of the "Pebble smart watch" is an example of a hugely successful crowdfunding campaign. Pebble Technology requested $10,000 in 2012 via kickstarter.com and raised over $10 million from approximately 65,000 investors. The asking price was $150, and those who funded the company would receive a watch once it was manufactured.

Common categories of crowdfunding include lending, reward and donation-based funding. Global crowdfunding volume almost doubled in 2012 to $2.7 billion as compared to 2011 and is expected to almost double again in 2013, according to an industry report by Massolution, a research and advisory firm specializing in the sector. Interest in crowdfunding has increased substantially after United States' President Barack Obama signed the Jumpstart our Business Startups Act (the "JOBS Act") over a year ago. The US Securities and Exchange Commission is currently drafting rules in order to allow small businesses to offer and sell securities to investors through crowdfunding. Once these rules are implemented, equity-based crowdfunding is expected to become more prominent, according to Carl Esposti, CEO of Massolution and Crowdsourcing.org.

What does the crowdfunding landscape look like in Ontario?

Currently in Ontario, equity crowdfunding is not permitted but there is a movement afoot to permit such a capital raising tool. In order for issuers to raise capital now, there is a need to find an exemption under the existing securities regulation regime and "crowdfunding" would add another capital raising option for start-ups and SMEs with limited access to capital or which have exhausted other lending options.

On December 14, 2012, the Ontario Securities Commission (the "OSC") released Staff Consultation Paper 45-710 Considerations for New Capital Raising Prospectus Exemptions (the "Consultation Paper"), which addressed, among other things, a proposed crowdfunding and OM exemption. The Consultation Paper was based on feedback received from interested stakeholders.

Proposed crowdfunding exemption

According to the Consultation Paper, three parties would be involved in a distribution under the crowdfunding model: the issuer, the investor and the portal. There would be a number of restrictions imposed on each of these parties.

Issuer:

The OSC has proposed four primary restrictions on the issuer. First, a qualification criteria would require that the issuer be incorporated under Canadian federal laws or the laws of a Canadian jurisdiction and have its head office in Canada. Second, there would limit on offerings prohibiting the issuer from raising more than $1.5 million in any 12-month period. Third, a security limit would mean that only specified securities could be issued and, fourth, an advertising limit would only permit the issuer to advertise an investment through a funding portal or on the issuer's website.

Investor:

Under the proposed exemption, investment limits of a maximum of $2,500 in a single investment and not more than $10,000 in a calendar year would be placed on investors. Further, disclosure at point of sale would be required (at the time of distribution, the investor must be provided with a streamlined information statement). As well, investors would be required sign a risk acknowledgement, there would be a two-business day "cooling off" period and the issuer would be required to provide ongoing disclosure.

Portal:

All investments made under the crowdfunding exemption would be required to be made through a registered funding portal. The OSC expects that funding portals which carry on business in Ontario will be required to register in an appropriate dealer or advisor category in Ontario. The OSC recognizes that registration is an important investor protection measure that addresses, among other things, the integrity, proficiency and solvency requirements applicable to funding portals.

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