The Autorité des marchés financiers (Québec), the Financial and Consumer Affairs Authority of Saskatchewan, Financial and Consumer Services Commission of New Brunswick, the Manitoba Securities Commission and the Nova Scotia Securities Commission (CSA Participating Jurisdictions) published on March 20, 2014 for a 90-day comment period
- the integrated Crowdfunding Prospectus Exemption (Crowdfunding Exemption); and
- the draft blanket order relating to the Start-up Crowdfunding Prospectus and Registration Exemption (Start-up Exemption).
In line with the Crowdfunding Exemption and the Start-up Exemption, the CSA Participating Jurisdictions also published proposed registration rules and exemptions applicable to the funding portals participating in crowdfunding (Portal Requirements).
The Ontario Securities Commission concurrently published materials relating to, among other exemptions, a crowdfunding exemption and related portal requirements, by way of a local notice. The British Columbia Securities Commission also concurrently published a local notice soliciting comments on the Start-up Exemption. The Financial and Consumer Affairs Authority of Saskatchewan implemented an exemption for start-up and small businesses and their portals on December 6, 2013. No portals have yet been established in Saskatchewan. Although the Alberta Securities Commission has not published any material, it will be considering the public comments received in respect of the other published materials.
This bulletin focuses on the Crowdfunding Exemption, but you can read our reports on the Start-up Exemption and the Portal Requirements. Both the Crowdfunding Exemption and the Start-up Exemption will coexist as they target issuers at different stages of development.
The Crowdfuding Exemption is aimed at providing an alternative source of capital to issuers at a more advanced stage of development. The requirements for the issuers under the Crowdfunding Exemption are more onerous compared to those under the Start-up Exemption. It is a condition of the Crowdfunding Exemption that investments be made through a portal registered under applicable securities law that is in compliance with the Portal Requirements and that during the distribution period, an issuer may not use more than one registered funding portal.
Crowdfunding Exemption Summary
The following is a high-level summary of the proposed Crowdfunding Exemption:
Availability – The Crowdfunding Exemption will be available only to those reporting and non-reporting issuers that (i) are incorporated or organized in Canada, (ii) have their head office located in Canada, (iii) the majority of their directors are Canadian residents, and (iv) have a written business plan. The Crowdfunding Exemption will not be available to investment funds and real estate issuers that are not reporting issuers.
Offering – An issuer may raise up to $1.5 million under the Crowdfunding Exemption within a twelve-month period. The offering period will be limited to 90 days. The offering must provide for a minimum offering size. The offering will be completed only if (i) the minimum offering size has been fully subscribed, and (ii) the issuer has financial resources to achieve the next milestone indicated in its business plan or, if no milestone apply, to carry out the activities set out in its business plan.
Concurrent Offerings – If an issuer distributes a security under a prospectus exemption other than the Crowdfunding Exemption during the period starting on the first day of the distribution period and ending one month after the end of the distribution period, the security must have the same price, terms and conditions as the security distributed under the Crowdfunding Exemption.
Investors – Investors will be limited to $2,500 per single investment and to $10,000 in total investments under the Crowdfunding Exemption in a calendar year. An accredited investor that purchases securities under the Crowdfunding Exemption will subject to the same investment limits. Each investor will need to provide a risk acknowledgement form in the prescribed form, confirming, notably, that they meet the investment limits. Investors will have until 48 hours prior to the offering deadline to withdraw from any investment.
Offering Document – The offering materials can only be made available to potential investors on the portal’s website. Standardized disclosure documents must be provided and must include information about the offering, the issuer and the portal. The issuer must provide contractual right of action for rescission or damages in the event of a misrepresentation in any offering materials made available to the investors.
Financial Information – Issuers that have not incurred any expenditure and whose only asset is cash will need to disclose the amount of the issuer’s cash together with a third party confirmation (bank or trustee). Issuers that have incurred expenditures must provide annual financial statements. Such annual financial statements must be audited if the issuer has raised, since its formation, more than $500,000 and has expended more than $150,000. Under such thresholds, the annual financial statements will need to be reviewed by an independent public accountant firm.
Solicitation and Advertising – Limited to reference to the registered portal’s website through which the distribution will be made, by paper format or through the use of social media. Marketing materials are limited to the offering documents, the documents described within the offering documents and any term sheet or other summary, including a video, of the information that is included in the offering documents.
Offered Securities – The type of securities that the issuer may offer will be limited to common shares, non-convertible preferred shares, securities convertible into common shares or non-convertible preferred shares, non-convertible debt securities linked to a fixed or floating interest rate (e.g. promissory notes), units of a limited partnership and flow-through shares (under the Income Tax Act (Canada)). All securities distributed during the distribution period must have the same price, terms and conditions. This is also the case for any other securities distributed under another prospectus exemption up to one month after the end of the distribution period. The securities issued by a reporting issuer will be subject to a four-month hold period; while the securities issued by a non-reporting issuer will be subject to an indefinite hold period and may only be resold under a prospectus or another prospectus exemption.
Reporting – The issuer will need to deliver to the regulator the offering materials at the time that such are posted on the portal’s website. The issuer must file a “Report of Exempt Distribution” within 10 days of the closing of the offering.
Ongoing Disclosure – On an annual basis, non-reporting issuers will need to disclose their annual financial statements (audited or reviewed by an independent public accountant firm, as applicable) and a notice that discloses how the proceeds raised using the Crowdfunding Exemption were used. Non-reporting issuer will also be subject to other disclosure requirements relating to the occurrence of certain events such as a fundamental change in the nature, or a discontinuation of their business, a material change to their capital structure, a major reorganisation, amalgamation or merger, a change to their board of directors or executive officers. Reporting issuers will need to continue complying with their ongoing continuous disclosure requirements in accordance with securities law.
Maintenance of Books and Records – Non-reporting issuers that distribute securities pursuant to the Crowdfunding Exemption will also need to maintain books and records which will include the crowdfunding offering documents, the risk acknowledgement forms, the name of all securities holders together with the number and type of securities held by each such holder.
Comment Period Open until June 18, 2014
The CSA Participating Jurisdictions welcome all comments on the proposed exemptions on or before June 18, 2014.