International Law Office by Stephen P Robertson and Pascal de Guise | December 2, 2015

Introduction

On November 5 2015 the securities regulatory authorities in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia published, in final form, Multilateral Instrument (MI) 45-108 – Crowdfunding. The instrument includes a crowdfunding prospectus exemption and a registration framework for funding portals to allow start-up and early-stage companies to raise capital.

The final form of the crowdfunding exemption resulted from consultations following publication of proposed MI 45-108 on March 20 2014.

The crowdfunding regime under MI 45-108 will coexist with the start-up crowdfunding exemptions implemented by way of harmonised blanket orders in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia.(1) As a result, two different crowdfunding regimes in Canada will apply to varying groups of issuer, some of which will overlap. Promoters of crowdfunding may be disappointed by the coexistence of two different crowdfunding regimes, given the Canadian consensus on the need for harmonised private placement rules.

Related: 

• Regulators including OSC Publish Crowdfunding Exemption and Registration Framework for Funding Portals

• ASC and Nunavut Securities Office Publish Proposed Start-up Business Exemption for Comment

• New “Start-up” Crowdfunding Exemptions Adopted in Some Canadian Jurisdictions

Provided that all necessary ministerial approvals are obtained, MI 45-108 will come into force in the participating jurisdictions on January 25 2016. The Financial and Consumer Affairs Authority of Saskatchewan is to republish MI 45-108 for a 60-day comment period.

Crowdfunding

'Crowdfunding' generally refers to a method of funding a project or venture through small amounts of money raised from a large number of people, typically through an internet portal acting as intermediary. The securities-based model of crowdfunding is the practice of the crowd investing in an issuer in exchange for the issuer's securities, which are often equity securities but may include other types of securities, including debt securities. The objective of the crowdfunding regime under MI 45-108 is to enable businesses to raise capital online, through a registered funding portal, while maintaining an appropriate level of investor protection and regulatory oversight.

Crowdfunding exemption

The crowdfunding exemption is available to reporting issuers and non-reporting issuers that are incorporated or organised under the laws of Canada or a jurisdiction of Canada. To be an eligible crowdfunding issuer, MI 45-108 permits the principal operating subsidiary of an issuer to be incorporated or organised under the laws of Canada, a jurisdiction of Canada, the laws of the United States or a jurisdiction of the United States.

Type of security
Issuers can offer only non-complex securities, including:

• common shares;
• non-convertible preference shares;
• securities convertible into common shares or non-convertible preference shares;
• non-convertible debt securities;
• units of a limited partnership; and
• flow-through shares under the Income Tax Act.

Investment limit
In the participating jurisdictions, a purchaser that is not an accredited investor is subject to an investment limit of C$2,500 per distribution, and in Ontario such purchaser is also subject to an annual investment limit of C$10,000 for all distributions made in reliance on the crowdfunding exemption in the same calendar year. In all participating jurisdictions, an accredited investor is subject to an investment limit of C$25,000 per distribution, and in Ontario an accredited investor is also subject to an annual investment limit of C$50,000 for all distributions made in reliance on the crowdfunding exemption in the same calendar year. In Ontario, an investor that is a 'permitted client' (as defined in National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations) is not subject to an investment limit.

Issuer group limit
Issuers are not permitted to raise more than C$1.5 million under the crowdfunding exemption within the 12-month period ending on the last day of the distribution period.

Offering documents and advertising
Issuers must prepare an offering document, based on the form prescribed in MI 45-108, that contains certain information about the issuer, the issuer's business and management, the distribution and the funding portal, and informs potential investors of their rights. An issuer cannot, directly or indirectly, advertise a distribution or solicit purchasers under the crowdfunding exemption. However, the issuer may inform purchasers that it proposes to distribute securities under the crowdfunding exemption and may refer purchasers to the funding portal facilitating the distribution.

Liability for materials
Issuers are subject to liability for misrepresentations or untrue statements of material facts contained in the crowdfunding offering document and other permitted materials, and investors are provided with a related right of action.

Ongoing disclosure requirements
Non-reporting issuers must make available to investors:

• annual financial statements;
• a notice of use of proceeds; and
• in New Brunswick, Nova Scotia and Ontario, notice of:
  • a discontinuation of the issuer's business;
  • a change in the issuer's industry; or
  • a change of control of the issuer.

Reporting issuers must continue to comply with their disclosure requirements, under National Instrument 51-102 – Continuous Disclosure Obligations.

Investor protections
Investors must complete a risk acknowledgment form requiring them to confirm positively that they have read and understood the risk warnings and information in the crowdfunding offering document before they may enter into an agreement to purchase securities.

Resale restrictions
Securities of a reporting issuer acquired under the crowdfunding exemption are subject to a four-month hold period. Securities of a non-reporting issuer cannot be resold in a jurisdiction:

• until the issuer becomes a reporting issuer and certain other conditions are met; or
• unless the sale is made under another available prospectus exemption.

Concurrent distributions
An eligible crowdfunding issuer may distribute securities under other prospectus exemptions (eg, the accredited-investor exemption or the offering-memorandum exemption) during the distribution period. Securities distributed under other prospectus exemptions need not have the same price, terms and conditions as those distributed under the crowdfunding exemption.

Related: Entrepreneurs turning to equity crowdfunding as provinces loosen rules

Funding portal requirements under MI 45-108

Issuers may distribute securities only through a single funding portal that is registered as an investment dealer, exempt market dealer or restricted dealer as outlined in MI 45-108.

A funding portal must fulfil certain gatekeeper responsibilities before granting an issuer access to its online platform, which include:

• reviewing the issuer's disclosure in the crowdfunding offering document and other permitted materials for completeness, accuracy and any misleading statements;
• conducting background checks on the issuer and its directors, executive officers and promoters; and
• denying an issuer access to the funding portal in certain circumstances.

Additional requirements are imposed on restricted dealer funding portals. In Ontario, a restricted dealer funding portal is only allowed to distribute securities under the crowdfunding exemption, as the start-up exemption is not currently available in this jurisdiction. In participating jurisdictions other than Ontario, this type of funding portal will be permitted to act as an intermediary in connection with securities offerings under both exemptions.

Funding portals are prohibited from offering securities of a related issuer and may not directly or indirectly advertise a distribution or solicit purchasers under the crowdfunding exemption. Issuers may post the offering document and other permitted materials solely on that funding portal's online platform.

Crowdfunding in the United States

On October 30 2015 the US Securities and Exchange Commission (SEC) adopted the final rules to permit equity crowdfunding in the United States. The SEC adopted Regulation Crowdfunding under the Securities Act 1933 and the Securities Exchange Act 1934 to implement the requirements of Title III of the Jumpstart Our Business Start-ups Act. Regulation Crowdfunding also provides a framework for the regulation of registered funding portals and broker dealers that issuers are required to use as intermediaries in reliance on the crowdfunding exemption. Non-US companies will not be eligible to use the Regulation Crowdfunding exemption. The final rules will be effective 180 days after publication in the Federal Register.

Related: SEC Approves Title III of JOBS Act, Equity Crowdfunding with Non-Accredited

The crowdfunding regime under MI 45-108 encompasses many of the investor protection elements of the crowdfunding exemption under Regulation Crowdfunding. The table below compares the key requirements under both MI 45-108 and Regulation Crowdfunding.

Funding portal requirements under Regulation Crowdfunding
Regulation Crowdfunding transactions must take place through an SEC-registered intermediary – either a broker dealer or a funding portal. Under Regulation Crowdfunding, offerings must be conducted exclusively through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant. The rules require these intermediaries to:

• provide investors with educational materials;
• take measures to reduce the risk of fraud;
• make available information about the issuer and the offering; and
• provide communication channels to permit discussions about offerings on the platform and facilitate the offer and sale of crowdfunded securities.

The rules prohibit funding portals from:

• offering investment advice or making recommendations;
• soliciting purchases, sales or offers to buy securities offered or displayed on its platform;
• compensating promoters and others for solicitations or based on the sale of securities; and
• holding, possessing or handling investor funds or securities.

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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 1300+ 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 ncfacanada.org.