Canadian Provinces Adopt Crowdfunding

By Jay Fishman, J.D.

The securities regulatory authorities of six Canadian provinces—British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick, and Nova Scotia—are adopting, by exemption orders, harmonized crowdfunding provisions to allow start-up and early stage companies to raise capital in these jurisdictions. The start-up crowdfunding exemptions are comprised of a prospectus requirement exemption called the “start-up prospectus exemption,” along with a dealer registration exemption called the “start-up registration exemption.” The start-up exemption orders expire on May 13, 2020.

Start-up prospectus exemption. The start-up prospectus exemption permits non-reporting issuers to issue eligible securities, subject to the following conditions:

• the head office of the issuer is located in a participating jurisdiction;
• the issuer distributes eligible securities of its own issue through an online funding portal;
• the issuer distributes eligible securities using an offering document in the form required that is made available through the online funding portal. The offering document includes basic information about the issuer, its management and the distribution, including how the issuer intends to use the funds raised and the minimum offering amount;
• the issuer group cannot raise aggregate funds of more than $250,000 per distribution and is restricted to not more than two start-up crowdfunding distributions in a calendar year;
• no person invests more than $1,500 per distribution;
• the distribution may remain open for up to a maximum of 90 days; 
• the distribution must be made through a funding portal that is either relying on the start-up registration exemption or is operated by a registered dealer. Registered dealers that operate funding portals must meet their existing registration obligations under securities legislation and confirm to issuers that they meet or will meet certain conditions provided in the start-up registration exemption; 
• the issuer provides each purchaser with a contractual right to withdraw their offer to purchase securities within 48 hours of the purchaser’s subscription or notification to the purchaser that the offering document has been amended; 
• none of the promoters, directors, officers and control persons (collectively, the principals) of the issuer group is a principal of the funding portal; and 
• the eligible securities are subject to an indefinite hold period and can only be resold under another prospectus exemption, or under a prospectus, or four months after the issuer becomes a reporting issuer. 

Start-up registration exemption. The start-up registration exemption permits funding portals to facilitate distributions under the start-up crowdfunding exemption, subject to the following conditions:

• the funding portal must deliver to the participating regulators a funding portal information form and individual information forms for each of its principals, at least 30 days before facilitating its first start‑up crowdfunding distribution;
• the head office of the funding portal is located in Canada;
• the majority of the funding portal’s directors are Canadian residents;
• the funding portal does not provide advice to a purchaser or otherwise recommend or represent that an eligible security is suitable, or about the merits of the investment;
• the funding portal does not receive a commission, fee or any other amount from a purchaser of eligible securities;
• the funding portal makes the issuer’s offering document and the risk warnings available online to purchasers and does not allow a subscription until the purchasers have confirmed that they have read and understood these documents;
• the funding portal receives payment for an eligible security electronically through the funding portal’s website;
• the funding portal holds the purchasers’ assets separate and apart from its own property, in trust for the purchasers and, in the case of cash, at a Canadian financial institution; 
• the funding portal maintains books and records at its head office to accurately record its financial affairs and client transactions, and to demonstrate the extent of the funding portal’s compliance with the start-up crowdfunding exemption orders for a period of eight years from the date a record is created; 
• the funding portal either releases funds to the issuer after the minimum offering amount has been reached and provided that the 48-hour right of withdrawal has elapsed, or returns the funds to purchasers if the minimum offering amount is not reached or if the start-up crowdfunding distribution is withdrawn by the issuer; and 
• a participating regulator has not notified the funding portal that it cannot rely on the start-up registration exemption because its principals or their past conduct demonstrate a lack of integrity, financial responsibility or relevant knowledge or expertise. 

Start-up crowdfunding exemption orders amended. Comments received about the 2014 proposed exemption orders led to amendment of the following provisions: (1) “issuer group” definition and “participating jurisdictions” list; (2) offering limits; (3) funding portal head office and residence conditions for directors, officers, promoters and control persons; (4) 48-hour right to withdraw investment; (5) funding portal’s handling of purchaser funds; (6) funding portal’s books and records; (7) funding portal’s operated by registered dealers; (8) issuer information and individual forms; (9) offering document; (10) risk acknowledgment form; (11) filing or delivery of offering document and issuer access agreement; (12) funding portal disclosure of contact information; and (13) availability of the registration exemption.