NCFA Canada | Alixe Cormick | Feb 2016

The National Crowdfunding Association of Canada (NCFA Canada) does not offer legal advice, and nothing in this frequently asked questions webpage should be construed as offering advice legal or otherwise. You are strongly encouraged to consult a securities attorney regarding any equity crowdfunding opportunity you are considering as an entrepreneur, investor, or funding portal.  In addition to the standard FAQs available below a set of 'add value' premium FAQs (content) will be made available via eBook (link to be provided shortly).

Prior to submitting a question, please review all FAQ sections including Equity Crowdfunding Regulations, General, For Entrepreneurs, For Investors and For Portals.

 

STATUS IN CANADA (as of February 2016)

Equity Crowdfunding Regulations

Why is equity crowdfunding regulated in Canada and not other forms of crowdfunding? [expand title="Answer" swaptitle="Close"]

Equity crowdfunding involves the issuance of securities whereas the other forms of crowdfunding do not.  Almost every country in the world regulates the selling and issuance of securities.  Studies have shown that countries with strong securities regulation, extensive disclosure requirements and strict enforcement mechanisms have significantly lower costs of raising capital than countries lax in these areas.

In Canada, securities and those offering securities to the public must be registered unless there is an exemption available from registration and/or the preparation of a prospectus. This includes securities offered in a crowdfunding campaign.  The underlying policy for the need for registration and the preparation of a prospectus ensures investors obtain the information they need to make an informed decision and issuers are put on notice they will be held accountable for this disclosure and any misrepresentations, manipulation or fraud in the offering.

Canadian securities regulators also conduct "merit review" through securities laws and their application by not allowing companies whose organization, plan of business or material contracts are deemed "unfair, unjust, inequitable or oppressive" or whose investment offered does not "promise a fair return". History dating back to the 13th century and King Edward of England has shown these types of securities laws are necessary to avoid unscrupulous sales representatives fleecing the public by hocking worthless investments.

Three policy assumptions underlie the various exemptions from the need to register and prepare a prospectus when selling securities:

• The class of securities is low risk (ex. government and bank bonds);
• The investor can participate in the offering due to his or her wealth, sophistication or pre-existing relationship to the insiders of the issuing company (e.g. accredited investor exemption and close friends, family and business associate exemption); or
• A lesser level of disclosure is warranted given the risk, size of the company and the ability to impose suitability investment caps (e.g. the offering memorandum exemption and related eligible investor requirements).

Entrepreneurs will need to rely on an exemption from the registration and prospectus requirements of Canadian securities laws if they intend to issue securities through crowdfunding.  [/expand]

What is the status of equity crowdfunding in Canada? [expand title="Answer" swaptitle="Close"]

Canada now has two crowdfunding specific exemptions: the Start-Up Crowdfunding Exemption (May 14, 2015 – BC, SK, MB, QU, NB, and NS), and the Integrated Crowdfunding Exemption (Jan. 25, 2016 - MB, ON, QU, NB, and NS, with SK pending).

As of February 15, 2016, there are six portals which list Start-up Crowdfunding Exemption deals. Five of these funding portals operate on reliance of the Start-up Registration Exemption for Start-up Crowdfunding portal operators. One of these funding portals is a registered dealer.

There are no portals which are currently authorized to list deals under the Integrated Crowdfunding Exemption, but this is not a surprise as the rule only came into force on Jan. 25, 2016. We anticipate registered dealer funding portals will be the first to offer securities under this exemption as they need only file a Form 33-109F5 Change of Registration Information to indicate they plan on offering this service as part of their business. Restricted dealer portals operating on reliance of the Integrated Crowdfunding Exemption will have to go through a more robust review before being authorized.

Entrepreneurs can also conduct equity crowdfunding campaigns in Canada relying on other exemptions from the prospectus and registration requirements of Canadian securities laws such as the accredited investor exemption, and offering memorandum exemption (both exemptions available across Canada). There are eight online funding platforms offering deals relying on these two exemptions. One of these funding portals is a restricted dealer and seven are registered dealers.

Reporting issuers in Canada, can also raise capital under the Existing Security Holder Exemption (available across Canada under various blanket and local orders) and the Investment Dealer Exemption (BC, AB, SK, MB and NB) through an online funding platform operated by an investment dealer. There are currently no funding platforms operated by investment dealers in Canada.

The chart below illustrates where equity crowdfunding is today in Canada from a regulation and operational status. Not everyone will agree that all of these forms of raising capital online are equity crowdfunding. This is a debate that will unfold as raising equity online evolves over the next five years.

EQUITY CROWDFUNDING IN CANADA TODAY (February 2016)
	Available Now					Pending
Securities Exemption Relied On	Accredited Investor Exemption[1]	Offering Memorandum Exemption[2]	Offering Memorandum Light Exemption[3]	Start-Up Crowdfunding Exemption[4]	Integrated Crowdfunding Exemption[5]	AB/NU Start-Up Business Exemption[6]
Jurisdictions	BC, AB, SK, MB, ON, QU, NB, NS, NFL, PEI, NU, YK, NWT	BC, AB, SK, MB, ON, QU, NB, NS, NFL, PEI, NU, YK, NWT	AB, SK	BC, SK, MB, QU, NB, NS	MB, ON, QU, NB, NS Pending: SK	AB, NU
Offering Limit	Unlimited.	Unlimited.	$500,000 cap every 12-month period.	$250,000 cap per offering   $500,000 aggregate cap every 12-month period.   Limit of two offerings using exemption per 12 month period	$1,500,000 cap every 12-month period.	$1,000,000 lifetime cap.
Type of Securities	All.	All but securitized products and in AB, SK, ON, QU, NB and NS[8] specified derivatives and structured finance products.	All but derivative type securities.	All but derivative type securities.	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.	Available to reporting and non-reporting issuers involved in all business sectors, except not available to investment funds in AB, NS, SK, NB, ON and QU[8], unless if offering is in AB, NS, SK issuer is a non-redeemable investment fund or mutual fund that is a reporting issuer.	Not available if a reporting issuer, investment fund, mortgage investment entity or an issuer engaged in the real estate business.	Not available if a reporting issuer or investment fund. Head office must be resident in a participating jurisdictions.	Available to reporting and non-reporting issuers involved in all business sectors except investment funds. Must be incorporated or organized under the laws of a jurisdiction in Canada and have head office in Canada.	Not available if a reporting issuer or investment fund. Head office must be resident in a AB or NU or in participating jurisdiction of the Start-up Crowdfunding Exemption.
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). No limits on investment amount.	If investing $10,000 or more and from MB, 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 accredited investor, or have obtained the advice from an eligible adviser on suitability. Eligible investors resident in AB, NB, NS, ON, QU and SK[8] have a 12 month investment cap of $30,000 unless investor receives suitability advice from registered dealer than cap of $100,000 for all distributions under exemption in 12 month period.	12 month investment cap of $2,000 in all securities of issuer group. No 12 month investment cap for all distributions under exemptions.	Must be resident in one of the participating jurisdictions and over the age of 18. 12-month investment cap of $1,500 per distribution by an investor.	Must be resident in one of the participating jurisdictions. 12-month investment cap of $2,500 per distribution and $10,000 for all distributions under exemption, unless an accredited investor who is not a permitted client, than $25,000 per distribution and $50,000 for all distributions under exemption, issuers. No cap for permitted clients.	Must be resident in AB or NU or in participating jurisdiction of the Start-up Crowdfunding Exemption. 12-month investment cap of $1,500 per investment or $3,000 per issuer group unless investor receives suitability advice from registered dealer than cap of $5,000 per investment or $10,000 per issuer group.
Financial Statements	Optional.	IFRS audited.	PE-GAAP unaudited.	Optional. If included may be   audited or unaudited and use either IFRS or PE-GAAP.	IFRS audited if amount raised under   all prospectus exemptions $750,000 or more or issuer is a reporting issuer. Unaudited IFRS financial statements with review report if non-reporting issuer and amount raised under all prospectus exemptions is more than $250,000 and less than $750,000.Unaudited financial statements if a non-reporting issuer and amount raised from all prospectus exemptions is under $250,000.	Optional. If included may be   audited or unaudited and use either IFRS or PE-GAAP.
Document Requirements	Subscription Agreement , Investor Questionnaire and Form45-106F9 Form for Individual Accredited Investor.	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.	Offering memorandum in prescribed form (Form 45-106F2 for Non-Qualifying Issuers; subscription agreement and Form 45-106F4 – Risk Acknowledgement.	Offering document prescribed form: Form 1 - Start-up Crowdfunding - Offering Document; subscription agreement and Form 2 Start-up Crowdfunding Risk Acknowledgement.	Offering document prescribed form: Form 45-108F1 Crowdfunding Offering Document; subscription agreement, Form 45-108F2 Risk Acknowledgement ; and Form 45-108F3 Confirmation of Investment Limits.	Offering document prescribed form: Form 1 - Start-up Crowdfunding - Offering Document; subscription agreement and Form 2 Start-up Crowdfunding Risk Acknowledgement..
Statutory or Contractual Right of Action	None.	Two-day right of withdrawal.[7] Statutory or contractual right of action for rescission or damages if misrepresentation in offering memorandum.	Two-day right of withdrawal. Statutory right of action against issuer if misrepresentation in offering document.	None. 48 hour right of withdrawal after subscription and after notification of a material amendment to the offering.	None. 48 hour right of withdrawal after subscription and after notification of a material amendment to the offering. Contractual right of action against reporting issuer if misrepresentation in offering document. Statutory right of action against private issuer if misrepresentation in offering document.	Two-day right of withdrawal. Statutory right of action against issuer if misrepresentation in offering document. 48 hour right of withdrawal after subscription and after notification of a material amendment to the offering.
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. If offering made in AB, SK, ON, QU, NB, or NS[8] subject to continuous disclosure requirements: (1) annual audited financial statements within 120 days from fiscal year end; (2) annual disclosure of use of proceeds; (3) material change like reports in NB, NS and ON; and (4) deemed to be a market participant in ON and NB subject to record-keeping requirements and compliance review.	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. Not clear if on April 30, 2016, issuers will be subject to continuous disclosure requirements,	File Form 45-106F1 (Form 45-106F6 in BC) and offering document within 30 days of closing offering.	File Form 45-106F1and offering document within 10 days of closing offering. Subject to continuous disclosure requirements: (1) annual financial statements within 120 days from fiscal year end review report or auditor's report if amount raised under exemption is $250,000 or more but less than $750,000 and audited report if amount raised is more than $750,000; (2) annual disclosure of use of proceeds; (3) material change like reports in NB, NS and ON; and (4) must maintain books and records available for inspection by investors and ON and NB regulators.	File Form 45-106F1 (Form 45-106F6 in BC) and offering document within 30 days of closing offering.
Portal Requirements	Direct sales by issuer on their website or offline, or portal operator needs to be registered as an exempt market dealer, investment dealer or a restricted market dealer.	Direct sales by issuer on their website or offline, or portal operator needs to be registered as an exempt market dealer, investment dealer or a restricted market dealer	Direct sales by issuer on their website or offline, or portal operator needs to be registered as an exempt market dealer, investment dealer or a restricted market dealer	·        Portal operator must provide 30 days advance notice of intent to act as a Start-up Crowdfunding portal. ·        Cannot be related to an issuer of securities on portal.   OR:   Registered as an exempt market dealer, investment dealer or a restricted market dealer.[9]	Portal operator needs to be registered as an exempt market dealer, investment dealer or a restricted market dealer	Direct sales by issuer on their website or offline, or portal operator needs to be registered as an exempt market dealer, investment dealer or a restricted market dealer.
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) Available across Canada; (3) Available to all issuers but investment funds in certain jurisdictions; (4) No annual report or other continuous disclosure requirements because of offering in BC, MB, PEI, NFL, NU, YK and NWT ; and (5) All types of securities may be sold other than securitized products and in AB, SK, ON, QU, NB and NS[8] specified derivatives and structured finance products.	(1) Can sell to anyone resident in AB and SK; (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) Can sell to anyone in participating jurisdictions; (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 participating jurisdictions; (2) Limited offering document obligation; and (3) Unaudited financial statements allowed if non-reporting issuer and total amount raised under all prospectus exemptions to date less than $750,000 (audit review letter required if amount raised is more than $250,000).	(1) Can sell to anyone in participating jurisdictions; (2) Limited offering document obligation; (3) No financial statement requirement; and (4) No annual report or other continuous disclosure requirements as a result of offering.
Disadvantages	(1) Accredited investors only; and (2) Must confirm accredited investor status.	(1) Rule is complicated; (2) Requires IFRS audited financial statements; (3) Must provide detailed offering memorandum; (4) Not available to investment funds in AB, NS, SK, NB, ON and QU[8], unless if offering is in AB, NS, SK issuer is a non-redeemable investment fund or mutual fund that is a reporting issuer; (5) $10,000 investment limit per 12 month period by investors in MB, PEI, NU, YK or NWT unless accredited investors, friends, family or business associate, or receives suitability advice from eligibility advisor. $30,000investment limit per 12 month period by investors in AB, NB, NS, ON, QU or SK unless eligible investor obtains suitability advice than $100,000 cap for all investments under exemption in 12 month period; (6) Statutory or contractual right of action attached; (7) Continuous disclosure requirements including audited financial statements indefinitely if offering securities in AB, NB, NS, ON, QU or SK.	(1) Offering size limited to $500,000 every 12 month period; (2) Must provide detailed offering memorandum; (3) Only available in AB and SK; (4) Not available if a reporting issuer, investment fund, mortgage investment entity or an issuer engaged in real estate as a business; (5) No derivative type securities allowed; (6) 12 month investment cap of $2,000 in all securities of issuer group; and (7) Statutory or contractual right of action attached.	(1) Offering size limited to $250,000 per offering to a maximum of $500,000 in two offerings every 12 month period; (2) Only available to participating jurisdiction resident issuers and investors; (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 participating jurisdiction resident issuers and investors; (3) Not available if an investment fund; (4) No derivative type securities allowed; (5) Offering must be made through a funding portal; (6) 12-month investment cap of $2,500 per distribution and $10,000 for all distributions under exemption, unless an accredited investor who is not a permitted client, than $25,000 per distribution and $50,000 for all distributions under exemption; and (7) Statutory right of action attached.	(1) Offering lifetime limit of $1,000,000; (2) Only available to issuers and investors in AB, NU and in participating jurisdictions of the Start-up Crowdfunding Exemption; (3) Not available if a reporting issuer or investment fund; and (4) No derivative type securities allowed.
Active Portal Examples	Exempt Market Dealer: FrontFundr (AB, BC, MB, SK, QU, MB, NS, NB); NexusCrowd (AB, BC, ON); Optimize Capital Markets (AB, BC, MB, QU)   Restricted Market Dealer: Social Venture Connexion/MaRs SVX (ON, QU)   Exempt Market Dealers Through Registered 3rd Party: Exempt Capital Markets (AB, BC, ON, QU via Waverley); InvestX (AB, BC, ON, QU via Waverley); SeedUps Canada (AB, BC, ON, QU via Waverley)	Exempt Market Dealer: FrontFundr (AB, BC, MB, SK, QU, MB, NS, NB)   Exempt Market Dealers Through Registered 3rd Party: SeedUps Canada (AB, BC, ON, QU via Waverley)	Exempt Market Dealer: FrontFundr (AB, BC, MB, SK, QU, MB, NS, NB)   Exempt Market Dealers Through Registered 3rd Party: SeedUps Canada (AB, BC, ON, QU via Waverley)	Exempt Market Dealer: FrontFundr (BC, SK, QU, MB, NS, NB)   Start-up Crowdfunding Portals: GoTroo (BC, QU, NS, NB); InvestLocal (BC); SmallStarter (BC, SK, MB, QU, NS, NB); StellaNova (QU, NS, NB); Vested (BC)	No Portals.	No Portals.

 

[1] See section 1.1 of National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106) for the full definition of who is an accredited investor. Definition in table only sets-out requirements for an individual to be considered an accredited investor. Section 2.3 of the Companion Policy to NI 45-106 provides guidelines on how to apply the financial tests to determine if someone is an accredited investor.

[2] See section 2.9 of NI 45-106 for the offering memorandum exemption and section 3.8 of the Companion Policy to NI 45-106 for guidelines as to various matters concerning using the offering exemption. See also Multilateral CSA Notice of Amendments to National Instrument 45-106 Prospectus Exemptions Relating to the Offering Memorandum Exemption.

[3] See: AB Blanket Order 45-15 Exemption from certain financial statement requirements of Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers, 2014 ABASC 499; SK General Order 45-922 Exemption from Certain Audit and Financial Statement Related Requirements in the Offering Memorandum Exemption; and  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 of the adopting jurisdictions have adopted the policy in different formats.

[4] See Start-up Crowdfunding Registration and Prospectus Exemptions. Each of the adopting jurisdictions have adopted the policy in different formats. Go to one the participating jurisdiction's  Start-up Crowdfunding webpage for links to information bulletins and all forms related to equity crowdfunding under the Start-up Crowdfunding Exemption.

[5] See Multilateral Instrument 45-108 - Crowdfunding. Each of the adopting jurisdictions have adopted the policy in different formats. Go to one the participating jurisdiction's Integrated Crowdfunding Exemption webpage for links to information bulletins and all forms related to equity crowdfunding under the Start-up Crowdfunding Exemption.

[6] See Multilateral CSA Notice of Publication and Request for Comment Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses.

[7] See article “Changing Your Mind: Part I – Two Day Cancellation Right under the Offering Memorandum Exemption” by Alixe Cormick and Brian Koscak for a chart on which provinces have a statutory or contractual cancellation right.

[8] AB, NB, NS, QU and SK will not be amending their version of the offering memorandum until April 30, 2016. Until that date eligible investors in AB, SK and QU do not have any caps on their investment amount and non-eligible investors who obtain advice regarding suitability from an eligible investor do not have an investment cap. See Multilateral CSA Notice of Amendments to National Instrument 45-106 Prospectus Exemptions Relating to the Offering Memorandum Exemption.

[9] Multilateral CSA Notice 45-317 - Amendments to Start-up Crowdfunding Registration and Prospectus Exemptions. In BC restricted dealers under the Integrated Crowdfunding Exemption may not offer securities under the Start-Up Crowdfunding Exemption.

 

[/expand]

Are other Canadian securities regulators considering a crowdfunding specific exemption like Saskatchewan and Ontario?  [expand title="Answer" swaptitle="Close"]

On October 19, 2015, Alberta and Nunavut published for comment Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses. This exemption has a number of things in common with the Start-up Crowdfunding Exemption adopted in other provinces, but there are some major differences as well.

 

Similarities to the Start-up Crowdfunding Exemption

Like the Start-up Crowdfunding Exemption the Start-up Business Exemption is not available to reporting issuers or investment funds.

The issuer's head office must be located in a jurisdiction that has adopted the rule or in a corresponding jurisdiction with a corresponding exemption (e.g. Start-up Crowdfunding Exemption).

Securities that may be offered are identical to those that may be offered under the Start-up Crowdfunding Exemption: common shares; non-convertible preference shares; securities convertible into common shares or non-convertible preference shares; non-convertible debt securities linked to a fixed or floating interest rate; units of a limited partnership, and in Alberta, an investment share that is a non-convertible preference share issued by a cooperative organized under the Cooperatives Act (Alberta).

Minimum offering must be raised within 90 days.

Offering document and forms identical to Start-up Crowdfunding Exemption offering document and forms.

Financial statements are not required but if provided may be unaudited or audited and prepared using either IFRS or PE-GAAP.

 

Differences to the Start-up Crowdfunding Exemption

The exemption as proposed has a lifetime capital raising limit of $1,000,000. There are no restrictions on the number of offerings in a 12 month period, or other restrictions on the amount that may be raised in any one offering or in a 12 month period.

Issuers are not required to use a funding portal.

The exemption provides a prospectus exemption but does not provide a registration exemption.

The offering document is deemed an offering memorandum in AB and NU and therefore provides a statutory two-day right of withdrawal and statutory civil liability for any misrepresentations included in an offering document.

Twelve-month investment cap of $1,500 per investment or $3,000 per issuer group unless investor receives suitability advice from registered dealer than cap of $5,000 per investment or $10,000 per issuer group.

Funding portal not required but if funding portal used it must be registered as an exempt market dealer or an investment dealer.

[/expand]

 

The Start-up Crowdfunding Exemption

What kind of businesses can raise funding under the Saskatchewan crowdfunding exemption?  [expand title="Answer" swaptitle="Close"]

Any business resident in a participating jurisdiction (BC, SK, MB, QU, NB, NS) that is not a reporting issuer or an investment fund can raise funding under the Start-up Crowdfunding Exemption. [/expand]

Can businesses resident outside of a participating jurisdiction raise funding under the Start-up Crowdfunding Exemption?

[expand title="Answer" swaptitle="Close"]

No. Only businesses resident in a participating jurisdiction (BC, SK, MB, QU, NB, NS) may raise capital under the Start-up Crowdfunding Exemption.  [/expand]

How much capital can I raise for my company through the Start-Up Crowdfunding exemption? [expand title="Answer" swaptitle="Close"]

You can raise up to $250,000 per offering under this exemption. Your company, and all promoters, directors, officers and control persons related to the company, may not use this exemption more than twice in a calendar year. This means your group can raise an aggregate total of up to $500,000 in a calendar year utilizing this exemption in two separate offerings for either the same issuer or two separate issuers. There cannot be any concurrent offering by you or any other company for the same project under this exemption.

You can however, rely on other private placement exemptions such as the accredited investor or offering memorandum exemption during the year to raise additional capital if required. [/expand]

What type of securities can I offer investors under the Start-Up Crowdfunding exemption? [expand title="Answer" swaptitle="Close"] You can offer common shares, preferred shares, debentures, convertible debentures, bonds, partnership units, limited partnership units, promissory notes and any other security instrument other than derivative type securities. [/expand]

Who can invest in a Start-up equity crowdfunding campaign? [expand title="Answer" swaptitle="Close"]

Anyone resident in a participating jurisdiction (BC, SK, MB, QU, NB, NS) and over the age of eighteen (18). [/expand]

How much can I invest in a company using the Start-up crowdfunding exemption to raise funds? [expand title="Answer" swaptitle="Close"] 

You may invest up to $1,500 in an offering under the Start-up Crowdfunding Exemption.  You can invest in an unlimited number of different equity crowdfunding offerings, as there is no limit imposed under the rule. [/expand]

If I participate in a Start-Up crowdfunding offering and later move outside of the province of a participating jurisdiction, will I lose the securities I purchased? [expand title="Answer" swaptitle="Close"] 

No, you will not lose the securities sold to you in a Start-up Crowdfunding offering if you later decide to move outside of a participating jurisdiction province. What is important is that you were resident of a participating jurisdiction at the time the securities were sold to you. Where you live subsequent to that sale does not matter. You will still own those securities. [/expand]

As an entrepreneur, what must I do or provide to rely on the Start-Up crowdfunding exemption? [expand title="Answer" swaptitle="Close"]

To use the Start-up Crowdfunding Exemption you must:

• Use an online funding portal to sell your securities;
• Prepare an offering document using the format, and providing the information in, Form 1 - Start-up Crowdfunding - Offering Document;
• Not pay a commission or other amounts to your promoters, directors, officers, control persons, employees or agents for the offering  (you may however pay a fee or a commission to the online funding portal); and
• Report your sales in each participating jurisdictions where you sold securities and the jurisdiction where your head office is located on Form 45-106F1, or Form 45-106F6 if in BC, within 30 days of the offering’s close and file a copy of the offering document; and
• Provide a confirmation notice to each investor who purchased securities including the following information:

• The date of subscription and the closing date of the distribution;
• The quantity and description of securities purchased;
• The price paid per security; and
• The total commission, fee and other amount paid by the issuer to the funding portal in respect of the start-up crowdfunding distribution.

All of the Start-up Crowdfunding forms are set-up to be easily understood without the need of the assistance of a lawyer or other professional to complete them.  These forms are short and require only the minimum information necessary for accurate disclosure.

The participating jurisdictions expects that issuers and portals will expand on the minimum disclosure necessary as investors request more information and best practice norms emerge organically from the equity crowdfunding community.  [/expand]

What are the requirements for an online funding portal to be recognized in Participating jurisdiction to offer Securities under the Start-up Crowdfunding Exemption? [expand title="Answer" swaptitle="Close"]

Funding portals offering securities of issuers under the Start-up Crowdfunding Exemption may be operated by either:

• funding portals operated by persons relying on the start-up registration exemption;
• funding portals operated by restricted dealers under the Integrated Crowdfunding Exemption; or
• funding portals operated by registered dealers

A funding portal intending to rely on the start-up registration exemption must deliver certain forms to regulators at least 30 days before starting operations. These forms are:

• Form 3 Start-up Crowdfunding Funding Portal Information Form (8 page PDF Form); and
• Form 4 - Start-up Crowdfunding – Funding Portal Individual Information Form for each promoter, director, officer and control person of the owner of the portal (8 page PDF Form).
• other documents regulators may request

Documents that may be requested include organizing documents of the funding portal (articles and certificate of incorporation or partnership agreement), business

registration numbers, and documents that support the funding portal’s process and

procedure for handling of funds and meeting other conditions of the Start-up

Crowdfunding Exemption.

Portals who are licensed to operate under the Start-up Crowdfunding Exemption are not subject to the “know your client” and “client suitability” rules imposed on registered dealers. They are however subject to certain other requirements such as:

• the head office of the portal is in Canada;
• a majority of the portal’s directors are Canadian residents;
• the portal is not registered under Canadian securities legislation;
• The portal cannot be related to businesses making offerings through them;
• The portal must ensure that both the issuer and the investor have an address in a participating jurisdiction;
• The portal must not allow an investment until the investor acknowledges it is accessing the website of a funding portal that is not registered under Canadian securities legislation and provides no advice about the suitability or the merits of an investment, and that they have read and understood the offering document and risk warning available on the funding portal;
• The portal must not provide advice to potential investors;
• Funds received for an offering through the portal must be held separate from the funding portal's property, in trust for the investors until the close or abandonment of the offering;
• The portal must not release funds to the issuer until the minimum amount to close the offering has been reached; and
• The portal must provide the issuer with each investor's name, address, telephone number, email address and the details of the purchase within 15 days of closing the offering.

Portals may receive a fee or a commission based on the amount raised for their services. [/expand]

The Integrated Crowdfunding Exemption

What kind of businesses can raise funding under the Integrated Crowdfunding Exemption? [expand title="Answer" swaptitle="Close"]

Reporting and non-reporting issuers involved in all business sectors may use the Integrated Crowdfunding Exemption except for investment funds. [/expand]

Can businesses resident outside of a participating jurisdiction raise funding under the Integrated Crowdfunding Exemption? [expand title="Answer" swaptitle="Close"]

Yes, as long as the business is incorporated or organized under the laws of a jurisdiction in Canada and has its head office and the majority of its directors are in Canada. [/expand]

How much capital can I raise for my company through the Integrated Crowdfunding Exemption? [expand title="Answer" swaptitle="Close"]

Entrepreneurs can raise a maximum of $1,500,000 in a rolling 12-month period.  [/expand]

What type of securities can I offer investors under the Integrated Crowdfunding Exemption? [expand title="Answer" swaptitle="Close"]

You can offer common shares, non-convertible preferred shares, debentures, convertible debentures, bonds, partnership units, limited partnership units, promissory notes and any other security instrument other than derivative type securities.  [/expand]

Who can invest in an Integrated Equity Crowdfunding campaign? [expand title="Answer" swaptitle="Close"]

Anyone resident in a participating jurisdiction and over the age of eighteen (18).  [/expand]

How much can I invest in a company using the Integrated Crowdfunding Exemption to raise funds? [expand title="Answer" swaptitle="Close"]

If you are not an accredited investor you may invest up to $2,500 in any one offering under the Integrated Crowdfunding Exemption with a maximum aggregate amount of $10,000 in a 12-month period in all equity crowdfunding offerings by different issuers.

If you are an accredited investor you may invest up to $25,000 in any one offering under the Integrated Crowdfunding Exemption with a maximum aggregate amount of $50,000 in a 12-month period in all equity crowdfunding offerings by different issuers.  [/expand]

If I participate in an Integrated Crowdfunding Exemption offering and later move outside of a participating jurisdiction province, will I lose the securities I purchased? [expand title="Answer" swaptitle="Close"]

No, you will not lose the securities sold to you in an Integrated Equity Crowdfunding offering if you later decide to move outside of a participating jurisdiction province. What is important is that you were resident of a participating jurisdiction at the time the securities were sold to you. Where you live subsequent to that sale does not matter. You will still own those securities.  [/expand]

As an entrepreneur, what must I do or provide to rely on the Integrated Crowdfunding Exemption? [expand title="Answer" swaptitle="Close"]

To use the Integrated Equity Crowdfunding exemption you must prepare an offering document containing financing, issuer and registrant facts:

“Financing facts” (i.e. basic information about the offering) include:

• The type/nature of the securities being offered;
• The price of the securities;
• The rights attached to the securities (including the impact on those rights if your operations and/or assets are located outside of Canada);
• Whether there is a minimum and maximum subscription, and if so, the deadline to reach the minimum subscription;
• The use of the proceeds from the offering (including whether any directors, officers, promoters or related parties to you will receive any of the proceeds);
• Resale restrictions;
• Statutory rights in the event of a misrepresentation ; and
• A 48 hour right of withdrawal;

“Issuer facts” (i.e. basic information about you as issuer) include:

• A description of your business or proposed business, and your anticipated business plan;
• One year of annual financial statements, if any;
• A description of your directors, officers and control persons;
• Limited executive compensation disclosure; and
• Principal risks of you business;

“Registrant facts” (i.e. basic information about the registrant) include (where applicable):

• The name of the funding portal; and
• The name of any other registrant involved and the relationship between that registrant and you as issuer, if any.

Advertising and Marketing Restrictions

• You cannot provide investors with any other marketing material other than the offering document;
• You cannot advertise except through the funding portal or your website.  You may only use social media to direct investors to the funding portal or your website;
• You must obtain a signed risk acknowledgement form from each investor;.

Financial Statements

The financial statement you are required to provide as an issuer varies depending on how much you are raising or if you are a non-reporting or reporting issuer. There are three requirement bands:

• IFRS audited if amount raised under all prospectus exemptions $750,000 or more or issuer is a reporting issuer;
• Unaudited IFRS financial statements with review report if non-reporting issuer and amount raised under all prospectus exemptions is more than $250,000 and less than $750,000.
• Unaudited financial statements if a non-reporting issuer and amount raised from all prospectus exemptions is under $250,000.

Post-Offering Requirements

• You must report all sales and file your offering document within 10 days of the offering’s close; and
• You must provide all investors with ongoing information after closing the offering:
• annual financial statements within 120 days from fiscal year end review report or auditor's report if amount raised under exemption is $250,000 or more but less than $750,000 and audited report if amount raised is more than $750,000;
• annual disclosure of use of proceeds;
• material change like reports in NB, NS and ON; and
• must maintain books and records available for inspection by investors and ON and NB regulators.

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What are the requirements for an online funding portal to be recognized in a participating jurisdiction to offer securities under the Start-up Crowdfunding Exemption? [expand title="Answer" swaptitle="Close"]

Funding portals offering securities of issuers under the Integrated Crowdfunding Exemption may be operated by either:

• by restricted dealers under the Integrated Crowdfundng Exemption; or
• by registered dealers.

National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations and its Companion Policy sets out the requirements for restricted dealers and registered dealers. [/expand]

What other requirements must funding portals must meet under the Integrated Crowdfunding Exemption? [expand title="Answer" swaptitle="Close"]

In addition to meeting the requirements under National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations and its Companion Policy and the requirements of any self-regulatory body, portals must meet the additional requirements set-out in Multilateral Instrument 45-108 - Crowdfunding, and it Companion Policy such as.

• Act as gatekeeper to reduce the risk of fraud by conducting background and regulatory checks on directors, officers and significant shareholders of issuers, review offering document, and monitoring purchaser communication;
• The portal must take reasonable steps prior to a person or entity entering the portal to confirm the investor understands the risk of investing in securities posted on the portal and is advised whether they will or will not receive suitability advice (dependent of dealer type);
• Prior to an investor purchasing securities a portal must obtain from the purchaser affirmative confirmation that they have read and understood the offering document and a signed risk acknowledgement form;
• Ensure all funds received in connection with the offering are held in escrow and only released to issuer if the minimum target amount of the offering or greater has been reached and investors have not exercised their 48 hour right of withdrawal to cancel their commitment;
• Ensure that no investor in a 12‐month period has purchased securities offered under this exemption have not exceeded their investment cap limits;
• protect privacy of information; and
• Meet any other requirements the participating jurisdictions may prescribe.

A funding portal cannot:

• If registered in the category of restricted dealer offer investment advice about the suitability of the purchase of a security;
• Solicit purchases, sales or offers to buy securities offered or displayed on its website or portal; or
• Be related to businesses making offerings through them.

Please refer to the rule for all terms and conditions that apply to funding portals.

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Source:

Alixe Cormick is the founder of Venture Law Corporation in Vancouver, BC. Alixe concentrates her legal practice in the areas of initial public offerings, follow-on offerings, reverse takeovers, capital pool corporations, qualifying transactions, mergers & acquisitions, secondary listings and exempt market financings (more).

 

The National Crowdfunding Association of Canada (NCFA Canada) is a national non-profit actively engaged with social and investment crowdfunding, alternative finance, fintech, peer-to-peer (P2P), initial coin offerings (ICO), and online investing stakeholders across the country. NCFA Canada provides education, research, industry stewardship, networking opportunities and services to thousands of community members and works closely with industry, government, academia and eco-system partners and affiliates to create a vibrant and innovative fintech and online financing industry in Canada.  For more information, please visit:  ncfacanada.org