JDSupra Business Advisor |Richard Stobbe | Sep 24, 2014

A Canadian company, Vrvana, Inc. is seeking $350,000 through Kickstarter, to finance its development of a virtual reality headset marketed as the Totem. Vrvana has elected to pursue a reward-based crowdfunding model. For example, minimal donations of $15 come with a newsletter subscription and event invitations. The top end contribution of $8,000 will net a Totem VR headset and a dinner date with the team of engineers.

Crowdfunding attracts headlines and cash, but in Canada the rules and laws surrounding equity crowdfunding are still in development. The securities or equity-based model of crowdfunding refers to small investments in exchange for securities - which has a broad definition meant to capture shares in the start-up company, including pref shares or convertible securities, non-convertible debt securities, or units of a limited partnership. In plain terms, a company could use this method of crowdfunding to raise money by selling a piece of the company, rather than selling products or services.

Related:  NCFA Canada's Response to the Proposed Crowdfunding Exemption in Ontario (Multilateral Instrument 45-108)

In Canada, a number of provinces are considering some variation of crowdfunding rules, either for a “Crowdfunding Exemption” or a “Start-up Exemption” or both. Ontario, B.C., Manitoba, Quebec, New Brunswick and Nova Scotia are considering the exemptions. Alberta is considering the public comments, but has not formally published any proposed rules.

Here are the highlights of the proposed Start-up Exemption for crowdfunding in a number of Canadian provinces.

• There is a cap. The start-up can only raise a  maximum of $150,000 under each offering.
• The distribution cannot remain open for more than 90 days.
• There is a limit on the number of times the company can go back to the trough each year - the exemption only be used twice each calendar year.
• The offering document must disclose the minimum and maximum offering size.
• One crowdfunding offering at a time. A start-up cannot have two concurrent offerings.
• The offering materials must be made available to potential investors through a regulated portal (like Kickstarter), which will also be subject to rules.
• Investor are restricted on what they can contribute - there is a cap of $1,500 for each investment under the exemption.
• Securities are subject to an indefinite hold period.
• There are other restrictions, such as the requirement for the start-up to file a report of distribution within 30 days of the closing of the distribution.

View:  Saskatchewan first Canadian province to approve equity crowdfunding

The proposed Crowdfunding Exemption is a variation, with a few notable differences: it would have higher thresholds and would be open to both reporting issuers and non-reporting issuers:

• The company would be able to raise up to $1.5 million during every 12 month period.
• Investors could invest up to $2,500 per single investment, with an aggregate cap of $10,000 per calendar year.

Remember this is currently proposed, but not yet “legal”. The comment period closed in June, 2014, and Canadian securities regulators are considering comments. Rule changes will not likely come into effect until 2015. However, Saskatchewan has already launched its Equity Crowdfunding Exemption which is similar to the Start-up Exemption summarized above.

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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.