Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
OSC | May 1, 2014
In a relatively short period of time, crowdfunding has become an important new method of raising capital through the internet for a broad range of purposes. To date, it has been used to raise money for a specific project and does not generally involve the issuance of securities. However, in some foreign jurisdictions, crowdfunding is emerging as a way for businesses, particularly start-ups and SMEs, to raise capital through the issuance of securities.
We think that crowdfunding through an appropriately regulated crowdfunding portal can be a viable method for start-ups and SMEs to raise capital.
The proposed crowdfunding securities regulatory framework has two main components:
• the Crowdfunding Prospectus Exemption, and
• a set of Crowdfunding Portal Requirements.
To facilitate harmonization, we have worked closely with staff of the AMF, the Manitoba Securities Commission, the Financial and Consumer Services Commission (New Brunswick), the Financial and Consumer Affairs Authority (Saskatchewan) and the Nova Scotia Securities Commission in formulating both the Crowdfunding Prospectus Exemption and the Crowdfunding Portal Requirements, and all of these jurisdictions are also publishing the Crowdfunding Prospectus Exemption and the Crowdfunding Portal Requirements. We understand that each of these jurisdictions (other than Saskatchewan) will also concurrently publish for comment a local crowdfunding prospectus and registration exemption. The Financial and Consumer Affairs Authority (Saskatchewan) implemented General Order 45-925 Saskatchewan Equity Crowdfunding Exemption on December 6, 2013 and is not republishing this exemption for comment. The Financial and Consumer Affairs Authority (Saskatchewan) will publish the local crowdfunding exemptions for comment with a view to harmonization with other CSA jurisdictions publishing this exemption.
1) Should the availability of the Crowdfunding Prospectus Exemption be restricted to non-reporting issuers?
2) Is the proposed exclusion of real estate issuers that are not reporting issuers appropriate?
3) The Crowdfunding Prospectus Exemption would require that a majority of the issuer's directors be resident in Canada. One of the key objectives of our crowdfunding initiative is to facilitate capital raising for Canadian issuers. We also think this requirement would reduce the risk to investors. Would this requirement be appropriate and consistent with these objectives?
4) The Crowdfunding Prospectus Exemption would impose a $1.5 million limit on the amount that can be raised under the exemption by the issuer, an affiliate of the issuer, and an issuer engaged in a common enterprise with the issuer or with an affiliate of the issuer, during the period commencing 12 months prior to the issuer's current offering. Is $1.5 million an appropriate limit? Should amounts raised by an affiliate of the issuer or an issuer engaged in a common enterprise with the issuer or with an affiliate of the issuer be subject to the limit? Is the 12 month period prior to the issuer's current offering an appropriate period of time to which the limit should apply?
5) Should an issuer be able to extend the length of time a distribution could remain open if subscriptions have not been received for the minimum offering? If so, should this be tied to a minimum percentage of the target offering being achieved?
6) Are the proposed restrictions on general solicitation and advertising appropriate?
7) The Crowdfunding Prospectus Exemption would prohibit an investor from investing more than $2,500 in a single investment under the exemption and more than $10,000 in total under the exemption in a calendar year. An accredited investor can invest an unlimited amount in an issuer under the AI Exemption. Should there be separate investment limits for accredited investors who invest through the portal?
8) The Crowdfunding Prospectus Exemption would require that, if a comparable right were not provided by the securities legislation of the jurisdiction in which the investor resides, the issuer must provide the investor with a contractual right of action for rescission or damages if there is a misrepresentation in any written or other materials made available to the investor (including video). Is this the appropriate standard of liability? What impact would this standard of liability have on the length and complexity of offering documents?
9) How should the disclosure documents best be made accessible to investors? To whom should the documents be made accessible?
10) Would it be appropriate to require that all non-reporting issuers provide financial statements that are either audited or reviewed by an independent public accounting firm? Are financial statements without this level of assurance adequate for investors? Would an audit or review be too costly for non-reporting issuers?
11) The proposed financial threshold to determine whether financial statements are required to be audited is based on the amount of capital raised by the issuer and the amount it has expended. Are these appropriate parameters on which to base the financial reporting requirements? Is the dollar amount specified for each parameter appropriate?
12) Are there other requirements that should be imposed to protect investors?
13) The Crowdfunding Portal Requirements provide that portals will be subject to a minimum net capital requirement of $50,000 and a fidelity bond insurance requirement of at least $50,000. The fidelity bond is intended to protect against the loss of investor funds if, for example, a portal or any of its officers or directors breach the prohibitions on holding, managing, possessing or otherwise handling investor funds or securities. Are these proposed insurance and minimum net capital amounts appropriate?
14) Do you think an international background check should be required to be performed by the portal on issuers, directors, executive officers, promoters and control persons to verify the qualifications, reputation and track record of the parties involved in the offering?
15) The Crowdfunding Portal Requirements would allow portal fees to be paid in securities of the issuer so long as the portal's investment in the issuer does not exceed 10%. Is the investment threshold appropriate? In light of the potential conflicts of interest from the portal's ownership of an issuer, should portals be prohibited from receiving fees in the form of securities?
16) The Crowdfunding Portal Requirements restrict portals from holding, handling or dealing with client funds. Is this requirement appropriate? How will this impact the portal's business operations? Should alternatives be considered?
17) Are there other requirements that should be imposed on portals to protect the interests of investors?
18) Will the regulatory framework applicable to portals permit a portal to appropriately carry on business?
Issuers that rely on certain prospectus exemptions are currently required to file a report of exempt distribution and pay an activity fee of $500 at the time they file the report under OSC Rule 13-502. We are proposing that issuers that rely on the Proposed Prospectus Exemptions must file a report of exempt distribution and pay activity fees. We are also proposing two new exempt distribution report forms, as further described below.
With the exception of the OM Prospectus Exemption, the activity fee for a report of exempt distribution will remain $500. In the case of the OM Prospectus Exemption, we propose that the activity fee will be the greater of:
• $500, and
• 0.025% of the proceeds raised in Ontario under the distribution.
The purpose of requiring an activity fee for filing an exempt distribution report is cost recovery for compliance programs. We think that, for most prospectus exemptions, an activity fee of $500 is appropriate. However, we think that the OM Prospectus Exemption will likely result in a significant increase in capital raising activity by non-reporting issuers targeted at retail investors. We therefore will need to significantly enhance existing exempt market compliance review programs when the OM Prospectus Exemption is implemented.
In proposing the activity fees, we were guided by the following:
• We are sensitive to the concerns of start-ups and SMEs regarding the cost of capital raising.
• We believe that it is important that we monitor capital raising activity under any new prospectus exemptions.
• We do not want to create any disincentives for raising capital in the public market by making the activity fee for a prospectus significantly higher than the activity fee for exempt market activity under the OM Prospectus Exemption.
1) Are the proposed activity fees appropriate? Do they address the objectives and concerns by which were guided?
2) Should we consider any other activity fees for exempt market activity?
We invite interested parties to make written submissions on the Proposed Prospectus Exemptions (and the related guidance), the Proposed Reports and the Consequential Amendments. You must submit your comments in writing by June 18, 2014. If you are sending your comments by email, you should also send an electronic file containing the submissions in Microsoft Word.
Please note that, as part of the consultation process, we will also take into account the comments received on the Consultation Paper.
Please address and send your comments to the address below:
Please note that all comments received during the comment period will be made publicly available. We will post all comments received during the comment period to the OSC website at www.osc.gov.on.ca to improve the transparency of the policy-making process.
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Please refer your questions to any of the following staff:
Jo-Anne Matear Elizabeth Topp Manager, Corporate Finance Senior Legal Counsel, Corporate Finance Branch 416-593-2323 416-593-2377 jmatear@osc.gov.on.ca etopp@osc.gov.on.ca Winnie Sanjoto Rick Whiler Senior Legal Counsel, Corporate Finance Branch Senior Accountant, Corporate Finance Branch 416-593-8119 416-593-8127 wsanjoto@osc.gov.on.ca rwhiler@osc.gov.on.ca Stephanie Tjon Jennifer Jeffrey Senior Legal Counsel, Corporate Finance Law Student, Corporate Finance 416-593-3655 416-595-8934 stjon@osc.gov.on.ca jjeffrey@osc.gov.on.ca Maria Carelli Paul Hayward Senior Accountant, Compliance and Registrant Senior Legal Counsel, Compliance and Registrant Regulation Branch Regulation Branch 416-593-2380 416-593-3657 mcarelli@osc.gov.on.ca phayward@osc.gov.on.ca Kevin Yang Paul Redman Senior Research Analyst, Strategy and Operations Branch Principal Economist, Strategy and Operations Branch 416-204-8983 416-593-2396 kyang@osc.gov.on.ca predman@osc.gov.on.ca Melissa Schofield Frederick Gerra Senior Legal Counsel, Investment Funds Branch Legal Counsel, Investment Funds Branch 416-595-8777 416-204-4956 mschofield@osc.gov.on.ca fgerra@osc.gov.on.ca Michael Balter Senior Legal Counsel, General Counsel's Office 416-593-3739 mbalter@osc.gov.on.ca
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