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Equity Crowdfunding Regulations in Canada FAQs
NCFA Canada | Alixe Cormick | Feb 2014
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 OF EQUITY CROWDFUNDING REGULATIONS IN CANADA
Why is equity crowdfunding regulated in Canada and not other forms of crowdfunding? Answer 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: 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. What is the status of equity crowdfunding in Canada? Answer Saskatchewan is the only province in Canada that has a crowdfunding specific prospectus exemption. No equity funding portals are yet operational in Saskatchewan. The exemption only came into force on December 6, 2013 (view). In a press release on December 4, 2013, the Ontario Securities Commission (OSC) announced they intend to publish a crowdfunding specific prospectus exemption, including a registration framework for portals, for public comment before the end of Q1-2014 (view). Entrepreneurs can conduct equity crowdfunding campaigns in Canada relying on other exemptions from the prospectus and registration requirements of Canadian securities laws in National Instrument 45-106 - Prospectus and Registration Exemptions. Funding portals similarly can and do operate in Canada if they register as an investment dealer, exempt market dealer, restricted dealer or obtain an exemption from registration under National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations. 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 2014) Available Now Pending Securities Exemption Relied On Accredited Investor Exemption[1] Offering Memorandum Exemption[2] Offering Memorandum Light Exemption[3] Saskatchewan Crowdfunding Exemption[4] Proposed Ontario Crowdfunding Exemption[5] Proposed Existing Security Holder Exemption[6] Jurisdictions 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 SK ON BC, AB, SK, MB, QU, NB, NS, PEI, NU, YK, NWT Offering Limit Unlimited. Unlimited. 12-month period cap of $500,000. $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. Unlimited. Type of Securities All. All. All but derivative type securities. All but derivative type securities. All but derivative type securities. Must be class of equity securities listed on the TSX Venture Exchange or units consisting of the listed security and a warrant to acquire the listed security. 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. 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. Must be resident in SK. 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. Available to TSX Venture Exchange listed issuers only. Must be current with all continuous disclosure requirements. 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). 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. 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 resident in SK and over the age of 18. 12-month investment cap of $1,500 per issuer by an investor. Must be resident in ON. 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. 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. Financial Statements Optional. IFRS audited. PE-GAAP unaudited. Optional. IFRS audited if offering is greater than $500,000 or issuer is a reporting issuer. Unaudited financial statements if offering $500,000 or less and issuer is non-reporting for one year or if newly formed stub period. It is not clear if IFRS or PE-GAAP will be allowed. No requirement to supply. Must be current with SEDAR filings. Document Requirements Subscription Agreement and Investor Questionnaire. 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; or Form 45-106F3 for Qualifying Issuers); subscription agreement and Form 45-106F4 – Risk Acknowledgement. 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).
Information statement; subscription agreement; and 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. 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.[7] Statutory or contractual right of action for rescission or damages if misrepresentation in offering memorandum.
None. Two-day right of withdrawal. Statutory right of action against issuer if misrepresentation in information statement. Contractual right of action against issuer for rescission or damages if misrepresentation in continuous disclosure record and offering document if one voluntarily provided. 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. 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 GO 45-925F4 Report of Trades within 30 days of closing offering. 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 maintain books and records available for inspection by investors and OSC that include: (1) information about the offering; (2) investors names and size of holdings; and (3) use of funds raised under the exemption. File Form 45-106F1 (Form 45-106F6 in BC) within 10 days of closing offering. 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. 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 SK equity crowdfunding portal 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.
Portal operator needs to be registered as a funding portal operator in Ontario and 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. 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) Can sell to anyone in SK; (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 ON; (2) Limited offering document obligation; and (3) Unaudited financial statements allowed if raising $500,000 or less and not a reporting issuer. (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. 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) 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 SK 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 ON resident investors; (3) Not available if an investment fund; (4) No derivative type securities allowed; (5) Offering must be made through a funding portal; and (6) Statutory right of action attached. (1) Not available in ON and NFL; (2) Only available to TSX Venture Exchange 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. 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] 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. [3] See 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. Each of the adopting jurisdictions will have adopted the policy in different formats. [4] See 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. [5] See OSC Staff Consultation Paper 45‐710 – Considerations for New Capital Raising Prospectus Exemptions. The Ontario Securities Commission has signaled it intends to release draft crowdfunding rules for comment before the end of Q1 in 2014. We expect the rules to look similar to the rules contained in the Consultation Paper except for perhaps the requirement for funding portals to register as an exempt market dealer or registered investment dealer. There has been heavy lobbying for funding portals to be subject only to a registration requirement and treated more like Social Venture Connexion/MaRs SVX. We won’t know for certain what requirements a funding portal must meet until the final rules are implemented. [6] See Multilateral Instrument 45-312 Proposed Prospectus Exemption for Distributions to Existing Security Holders and related instrument proposed 45-5XX Exemption from Prospectus Requirement for Certain Trades to Existing Security Holders. This proposed exemption is a natural fit for an online funding campaign. Issuers must find some way to reach out to existing security holders who hold their shares in brokerage accounts and therefore do not appear on a registered shareholder list. A press release is a start but utilizing social media and other crowdfunding tools will make the process more efficient to issuers and provide investors with a place to interact with the issuer and other existing security holders to discuss the offering and issuer. [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. Are other Canadian securities regulators considering a crowdfunding specific exemption like Saskatchewan and Ontario? Answer Other Canadian securities regulators are looking at whether a crowdfunding specific exemption is right for their jurisdictions. In December of 2012, all of the Canadian jurisdictions that have the offering memorandum exemption other than British Columbia adopted 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 (see: 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). This exemption eliminates the need for issuers to provide IFRS audited financial statements under the offering memorandum exemption when an issuer is raising $500,000 or less under the offering memorandum exemption. Because of this change, the issuer disclosure requirements under Canada's offering memorandum exemption looks similar to that required in the proposed crowdfunding rules under the Job's Act in the United States. Few issuers have taken advantage of this offering memorandum change. What kind of businesses can raise funding under the Saskatchewan crowdfunding exemption? Answer Can non-Saskatchewan businesses raise funding under the Saskatchewan crowdfunding exemption? Answer How much capital can I raise for my company through the Saskatchewan crowdfunding exemption? Answer You can raise up to $150,000 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 $300,000 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. What type of securities can I offer investors under the Saskatchewan crowdfunding exemption? Answer Who can invest in a Saskatchewan equity crowdfunding campaign? Answer How much can I invest in a company using the Saskatchewan crowdfunding exemption to raise funds? Answer If I participate in a Saskatchewan crowdfunding offering and later move outside of the province of Saskatchewan, will I lose the securities I purchased? Answer As an entrepreneur, what must I do or provide to rely on the Saskatchewan crowdfunding exemption? Answer All of the Saskatchewan equity crowdfunding filing 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 FCAA 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. What are the requirements for an online funding portal to be recognized in Saskatchewan? Answer Portals are not subject to the “know your client” and “client suitability” rules imposed on all other registrants. They are however subject to certain other requirements such as: Portals may receive a fee or a commission based on the amount raised for their services. Portals are not required to be residents of Saskatchewan. This section reflects the rules proposed in Ontario Securities Commission Consultation Paper 45-710 Considerations for New Capital Raising Prospectus Exemptions issued December 14, 2012. The actual rules released for comment and the final rules adopted, if any, may not conform to the original proposal from 2012. When do you expect Ontario's proposed crowdfunding exemption to be released for comment? Answer What kind of businesses can raise funding under the Ontario crowdfunding exemption? Answer Can non-Ontario businesses raise funding under the proposed Ontario crowdfunding exemption? Answer How much capital can I raise for my company through the Ontario crowdfunding exemption? Answer What type of securities can I offer investors under the Ontario crowdfunding exemption? Answer Who can invest in an Ontario equity crowdfunding campaign? Answer How much can I invest in a company using the Ontario crowdfunding exemption to raise funds? Answer If I participate in an Ontario crowdfunding offering and later move outside of the province of Ontario, will I lose the securities I purchased? Answer As an entrepreneur, what must I do or provide to rely on the Ontario crowdfunding exemption? Answer “Financing facts” (i.e. basic information about the offering) include: “Issuer facts” (i.e. basic information about you as issuer) include: “Registrant facts” (i.e. basic information about the registrant) include (where applicable): It is unclear if entrepreneurs using the Ontario crowdfunding exemption will be required to prepare audited financial statements using IFRS or if PE-GAAP will be acceptable. What are the requirements for an online funding portal to be recognized in Ontario? Answer Funding portals must meet other requirements such as: A funding portal cannot: The exact rules for funding portals are still to be determined. 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 | Prezi or contact us at casano@ncfacanada.org.
THE SASKATCHEWAN CROWDFUNDING EXEMPTION
Any business resident in Saskatchewan that is not a reporting issuer or an investment fund can raise funding under the Saskatchewan crowdfunding exemption. No. Only businesses resident in Saskatchewan may raise capital under the Saskatchewan crowdfunding exemption.
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.
Anyone resident in Saskatchewan and over the age of 18.
You may invest up to $1,500 in an offering under the Saskatchewan crowdfunding exemption. You can invest in an unlimited number of different equity crowdfunding offerings, as there is no limit imposed under the rule.
No, you would retain your securities if you were a resident of Saskatchewan when the securities were sold to you.
To use the Saskatchewan equity crowdfunding exemption you must:
The Saskatchewan crowdfunding rules do not require portals to register as a broker dealer or in any other capacity in Saskatchewan. Portals are required however, to provide 30 days advance notice of their intent to act as a Saskatchewan equity crowdfunding portal by filing the following forms:
THE PROPOSED ONTARIO CROWDFUNDING EXEMPTION
The Ontario Securities Commission has signaled it intends to release draft crowdfunding rules for comment before the end of Q1 in 2014. We anticipate the rules to look similar to what those in the Consultation Paper except for perhaps the requirement for funding portals to be registered as an exempt market dealer or registered investment dealer. There has been heavy lobbying for funding portals to be subject only to a registration requirement and treated more like Social Venture Connexion/MaRs SVX. We will not know what requirements a funding portal must meet until the Ontario Securities Commission adopts the final rules.
Under the proposed exemption, reporting and non-reporting issuers involved in all business sectors may use the Ontario crowdfunding exemption except for investment funds.
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 in Canada.
Under the proposed exemption, entrepreneurs can raise a maximum of $1,500,000 in a rolling 12-month period.
Under the proposed exemption, 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.
Under the proposed exemption, anyone resident in Ontario and over the age of 18.
You may invest up to $2,500 in an offering under the Ontario crowdfunding exemption. You may invest a maximum aggregate amount of $10,000 in a 12-month period in all equity crowdfunding offerings by different issuers.
No, you would retain your securities if you were a resident of Ontario when the securities were sold to you.
To use the proposed Ontario equity crowdfunding exemption you must prepare an information statement containing financing, issuer and registrant facts:
The proposed Ontario crowdfunding rules anticipates that funding portals will need to be registered as an existing dealer or adviser category or in a restricted dealer or adviser category. This means funding portals will be subject to the “know your client” and “client suitability” rules imposed on all registrants.
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).
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