On October 31, 2016, the Alberta Securities Commission (ASC) adopted Multilateral Instrument 45-108 Crowdfunding (MI 45-108) which will allow small or medium sized businesses (Target Businesses) to raise more capital through crowdfunding offerings across multiple jurisdictions in Canada than is possible under ASC Rule 45-517 Prospectus Exemption for Start-up Businesses (ASC Rule 45-517) which was adopted by the ASC on July 29, 2016. Both MI 45-108 and ASC Rule 45-517 (collectively, the Growth Initiatives) provide Target Businesses with an exemption from prospectus requirements. The Growth Initiatives are in place of proposed MI 45-109 Prospectus Exemption for Start-up Businesses published by the ASC and the Nunavut Securities Office.
The Growth Initiatives are aimed at addressing Target Businesses’ need for a cost effective and simple way to raise capital in a difficult economic environment by raising small amounts of money from a large number of people, commonly referred to as crowdfunding. The Growth Initiatives offer different avenues that Target Businesses can use to overcome the hurdle of attracting investment without the high transactional costs of completing a prospectus offering.
ASC Rule 45-517 is available to an issuer that is not: (i) an investment fund or a reporting issuer; and (ii) subject to reporting obligations similar to those of a reporting issuer in a foreign jurisdiction. ASC Rule 45-517 allows an investment of $1,500 per investor for every distribution unless a registered dealer provides the purchaser with “suitability advice”, in which case the maximum investment per investor for a distribution is $5,000. Under ASC Rule 45-517, Target Businesses may make a maximum of two distributions with an aggregate limit of $250,000 in a calendar year. The maximum amount that may be raised by a Target Business under ASC Rule 45-517 is $1,000,000.
MI 45-108 is already available in Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia with certain restrictions in specific jurisdictions. MI 45-108 is available to non-investment fund issuers organized and with a head office in a jurisdiction in Canada, with a majority of Canadian residents on their board of directors. MI 45-108 provides for increased thresholds for investment, allowing for investment of $2,500 for non-accredited investors or $25,000 for accredited investors for every distribution. Investors are capped at $10,000 of investments in the same calendar year unless they are accredited investors, in which case the threshold increases to $50,000. Under MI 45-108, Target Businesses may raise up to $1,500,000 every 12 months.
MI 45-108 vs ASC Rule 45-517
MI 45-108 includes a requirement that the distribution of securities occurs through an online funding portal that is registered by either a registered dealer or a restricted dealer (Funding Portal). ASC Rule 45-517 has less onerous obligations as it can be used with or without a funding portal or registered dealer.
The Funding Portal operates as a regulation mechanism in that it imposes obligations on an issuer. Alberta-based Target Businesses should factor in these compliance costs when making a determination whether the need for access to additional capital through MI 45-108 would be practically realized, or if their needs are better served under the less onerous and less costly ASC Rule 45-517.
The adoption of MI 45-108 in Alberta provides Target Businesses with the optionality when choosing an appropriate capital-raising strategy that best suits their financial needs while accessing small amounts of capital from a wide range of investors. The determination of whether a Target Business should use MI 45-108 instead of ASC Rule 45-517 to raise capital requires a contextual analysis. Target Businesses should closely assess whether they have the appropriate infrastructure in place to handle the additional requirements of a Funding Portal in circumstances where more capital is required. Conversely, the cost/benefit analysis of the additional requirements of the Funding Portal should be considered in light of the potential availability of greater capital investment through the portal. Target Businesses may consider taking a long term view of their capital needs because once the Funding Portal is in place, it becomes less cumbersome and costly to update an already existing infrastructure for subsequent distributions.