On October 19 2015, the Alberta Securities Commission and the Nunavut Securities Office jointly published for comment Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses (Proposed Exemption). The Proposed Exemption is directed principally at small and early-stage non-reporting issuers and is designed to allow them to raise a defined amount of money in a cost effective manner while still providing appropriate investor protection. The Proposed Exemption is intended to eliminate certain costs arising from the use of the National Instrument 45 -106 Prospectus Exemptions, offering memorandum exemption and is designed to work with other start-up crowdfunding exemptions.
The Proposed Exemption requires that an offering document and report of exempt distribution be prepared and filed by an issuer through SEDAR. The offering document must contain prescribed information and each investor must sign a risk acknowledgement form. The information required in the offering document under the Proposed Exemption is more streamlined than that required under the offering memorandum exemption and financial statements are not required, which will make the Proposed Exemption more accessible to early stage issuers as they will no longer be required to rely on the offering memorandum exemption for raising capital. The Proposed Exemption provides a prospectus exemption but not a registration exemption. A person or company operating a crowdfunding portal will generally be considered a dealer and must still comply with the registration requirements.
The Proposed Exemption limits the amount of money investors can invest, which varies depending on whether a registered dealer is involved in the offering. If a registered dealer is not involved, an investor may invest, in a 12 month period, up to $1,500 in a single investment or up to $3,000 in the issuer and its affiliates, including issuers engaged in a common enterprise (Issuer Group). If a registered dealer is involved, purchasers may invest, in a 12 month period, up to $5,000 in a single investment and up to $10,000 per Issuer Group.
There is a $1,000,000 lifetime limit on the amount that may be raised in reliance on the Proposed Exemption. Once an issuer has raised $1,000,000, it is presumed that an issuer should have the capacity to prepare financial statements and comply with other disclosure requirements under the offering memorandum exemption, in which case it would no longer need to rely on the Proposed Exemption.
Apart from the Proposed Exemption and other start-up crowdfunding exemptions, Canadian and U.S. Regulators have recently introduced comprehensive crowdfunding exemptions which contemplate the use of a registered portal.
The crowdfunding rules found in the Proposed Exemption suggest that securities regulators are receptive to the financing needs of start-up businesses. The Proposed Exemption will be a welcome addition for many early stage companies who struggle to raise capital through traditional avenues.
Comments on the Proposed Exemption are due by December 18, 2015.