Lexology by Gowling Lafleur Henderson LLP | November 6, 2015

After a long wait and much anticipation, securities regulators in five Canadian provinces have announced a new crowdfunding regime. It includes two components, a crowdfunding prospectus exemption and a registration framework for funding portals. This new capital raising regime will be available in Ontario, Quebec, Manitoba, New Brunswick and Nova Scotia.

Unlike the earlier start-up crowdfunding exemption that is only available to non-reporting issuers in select provinces, this new crowdfunding is comprehensive and is available to both reporting issuers and non-reporting issuers. While not restricted to larger issuers, the new crowdfunding regime is aimed primarily at small and medium-sized businesses looking to raise capital online from a large number of investors.

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

Crowdfunding Prospectus Exemption

There are many requirements an issuer will need to meet to take advantage of the crowdfunding prospectus exemption in raising capital. Key elements include the following:

• Simple securities only: an issuer may only distribute eligible securities which consist of common shares, preference shares, securities convertible into common shares or preference shares, non-convertible debt securities linked to a fixed or floating interest rate, limited partnership units and flow-through shares.
• Limits on capital raised: an issuer may raise no more than $1.5 million in any 12 month period in reliance upon the crowdfunding prospectus exemption.  However, this restriction will not limit an issuer from raising capital in reliance upon other prospectus exemptions during the same period.
• Issuer restrictions: to take advantage of the exemption an issuer must be incorporated or organized in Canada and have its head office in Canada, a majority of its directors must be resident in Canada and its principal operating subsidiary, if any, must be incorporated or organized in Canada or the United States.  The exemption is not available to investment funds.
• Investor limits: for a non-accredited investor there is a limit of no more than $2,500 per investment and for accredited investors the limit is $25,000 per investment.  An investor in Ontario is subject to an additional restriction on the aggregate amount that may be invested in any calendar year, being $10,000 for a non-accredited investor and $50,000 for an accredited investor, with no investment limit applicable to a permitted client (an accredited investor with net financial assets in excess of $5 million).
• Funding portal: an issuer must distribute securities through a registered funding portal and may not use more than one funding portal.
• Offering document: all material information about an issuer’s offering must be contained in a prescribed form of crowdfunding offering document, that is made available solely through the registered funding portal.
• Additional marketing materials: in addition to the prescribed form of crowdfunding offering document, an issuer may make available a term sheet, a video and other materials summarizing the offering document provided these materials are only made available through the registered funding portal.  An issuer may not advertise or solicit investors directly or indirectly other than to inform them of the proposed distribution of securities and refer them to the registered funding portal.
• Liability for misrepresentations or untrue statements of a material fact: a reporting issuer will be subject to statutory or contractual rights for rescission and damages if its offering document or additional marketing materials contain a misrepresentation.  A non-reporting issuer will be subject to similar obligations if its offering document or additional marketing materials contain an untrue statement of a material fact.
• Right of withdrawal: an issuer must provide each investor with a right to withdraw a subscription to purchase securities within 48 hours by notification to the funding portal.
• Risk acknowledgement form: all investors must complete a risk acknowledgement form confirming they have read and understand the risk warnings and information in the offering document.
• Hold period: securities issued in reliance upon the exemption will be subject to a four-month hold period if the issuer is a reporting issuer and to an indefinite hold period for a non-reporting issuer.

In addition, non-reporting issuers that take advantage of this new crowdfunding prospectus exemption must meet certain ongoing disclosure requirements which include providing annual financial statements and notices disclosing use of proceeds, and in New Brunswick, Nova Scotia and Ontario, notices of specified events such as a discontinuation of the issuer’s business and a change of control of the issuer.

View: 2015 Canadian Crowdfunding Directory

Registered Funding Portals

The new crowdfunding regime establishes a registration framework for funding portals (an online platform that allows potential investors access to crowdfunding offering materials). Funding portals must be registered with applicable Canadian securities regulatory authorities under the category of investment dealer, exempt market dealer or restricted dealer. Investment dealers and exempt market dealers that register as funding portals must meet applicable existing registration obligations under securities legislation, including know-your-client, know-your-product and suitability obligations. A funding portal registered under the category of restricted dealer will be subject to additional limitations.

Related: Selling Equity and Accessing the “Crowd”: Opportunities for Canadian Issuers to Access Capital in The United States

Regardless of its category of registration, a funding portal must:

• fulfill certain gatekeeper responsibilities prior to allowing an issuer access to its online platform, including review of disclosure in the issuer’s crowdfunding offering document and other materials; and
• review information and obtain background checks on an issuer and its directors, officers and promoters, and deny an issuer access to the funding portal in certain circumstances.

Comparison with the Start-up Crowdfunding Exemption

The start-up crowdfunding exemption adopted by six provinces on May 14, 2015 remains in place (see our earlier article here). There are a few notable differences between the new crowdfunding regime and the existing start-up crowdfunding exemption:

View: Start-up Crowdfunding Guide for Investors, Businesses and Funding Portals

• There are limitations on where the exemptions are available:
  • Both the start-up crowdfunding exemption and the new crowdfunding regime will be available in Quebec, Manitoba, New Brunswick and Nova Scotia.
  • In Ontario, only the new crowdfunding regime will be available.
  • In British Columbia and Saskatchewan, only the start-up crowdfunding exemption will be available (provided in Saskatchewan the new crowdfunding regime has been republished for an additional 60 day comment period)
• The new crowdfunding regime will be available to both reporting issuers and non-reporting issuers, unlike the start-up crowdfunding exemption which is available only to non-reporting issuers.
• The new crowdfunding regime provides a higher offering limit, up to $1.5 million in any 12 month period as compared to a limit of $500,000 under the start-up crowdfunding exemption.
• Under the start-up crowdfunding exemption there is a limited dealer registration exemption for funding portals, whereas under the new crowdfunding regime all investments must be made through a registered crowdfunding portal.
• There are no ongoing disclosure obligations under the start-up crowdfunding exemption.

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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.