On March 20, 2014, the Ontario Securities Commission (OSC) published a Notice and Request for Comment proposing four new capital raising prospectus exemptions in Ontario.  As previously discussed in Timely Disclosure, the OSC initiated a consultation process in December 2013 to consider prospectus  exemptions to facilitate capital raising.

One of the new exemptions proposed is the crowdfunding exemption that would allow businesses to raise capital from a potentially large number of investors through an online portal registered with the securities regulators (Crowdfunding Exemption). The Crowdfunding Exemption, along with offering memorandum exemption, friends, family and business associates exemption, and existing securityholder exemption, were proposed by the OSC in an effort to provide startups and small and medium sized enterprises (SMEs) with greater access to capital markets.

The Crowdfunding Exemption

The Crowdfunding Exemption is the most novel of the OSC’s proposed exemptions as it is specially tailored to SMEs.  Under the Crowdfunding Exemption, both reporting issuers and non-reporting issuers and their affiliates would be able to raise up to $1.5 million during a 12 month period without the expense of a prospectus or other offering document.  Investors are limited to investing no more $2,500 in any single venture and no more than $10,000 per calendar year through the issuance of securities under the exemption.  In place of an offering document, the Crowdfunding Exemption proposes that the issuer prepare a written business plan and provide investors with a streamlined disclosure document setting out the terms of the offering.  The disclosure document would include the following financial information:

  • Disclosure of the issuer’s cash with third party confirmation if the issuer has not incurred any expenditures and its only asset is cash; or
  • Annual financial statements if the issuer has incurred expenditures; or
  • Audited annual financial statements if the issuer has raised more than $500,000 under the crowdfunding prospectus exemption or any other prospectus exemption since its formation and has expended more than $150,000 since that time.

The OSC has also proposed restrictions to ensure that the issuer has strong Canadian connections: the issuer must be incorporated or organized in Canada; the head office must be situated in Canada; and the majority of directors must be resident in Canada.

The Crowdfunding Portal

The OSC proposes to regulate the portal through which investments under the Crowdfunding Exemption are made.  Each portal must register as an exempt market dealer and comply with registrant requirements including minimum capital, insurance, regulatory reporting, record-keeping and record-retention requirements.

In additional to the registrant obligations, in an attempt to address concerns about fraud the crowdfunding portals will be required to:

  • conduct background checks on issuers, directors, officers, promoters and control persons,
  • understand the general structure, features and risks of a security offered,
  • review the information presented by the issuer on the portal’s website to confirm that the information adequately sets out the general features and structure of the security, issuer-specific risks, parties involved, any identified conflicts of interest, and the intended use of funds,
  • deny access to an issuer if it has reason to believe that the issuer or its offering is fraudulent, and
  • provide investor education materials in plain language and obtain a signed risk acknowledgement form from investors.

Crowdfunding portals are prohibited from providing investment advice, holding investor funds or securities, and investing in or underwriting offerings.

Proposals for similar crowdfunding exemptions were also published for comment in Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia (CSA Participating Jurisdictions) and in British Columbia, on March 20, 2014.

The OSC and other regulators are accepting comments on crowdfunding and other prospectus exemptions until June 18, 2014.