Written By Jon C. Truswell and Jordan L. Primeau
Effective October 31, 2016, the Alberta Securities Commission (ASC) adopted Multilateral Instrument 45-108 Crowdfunding (MI 45-108) which provides Alberta-based issuers with a crowdfunding prospectus exemption. MI 45-108 is designed to be complementary to ASC Rule 45-517 Prospectus Exemption for Start-up Businesses (Rule 45-517), however, MI 45-108 provides streamlined investments on a larger scale than Rule 45-517.
MI 45-108 was introduced to facilitate moderate amounts of fundraising by Alberta-based small or start-up issuers, while providing protection for investors. Issuers in Manitoba, Quebec, New Brunswick and Nova Scotia (the Participating Jurisdictions) will already be familiar with the new rules as each of the Participating Jurisdictions adopted MI 45-108 earlier this year.
The Crowdfunding Prospectus Exemption
Eligible crowdfunding issuers, which includes both reporting and non-reporting issuers that meet the Canadian residency requirements set out in MI 45-108, may raise up to $1,500,000 through the crowdfunding prospectus exemption within a given 12-month period. An issuer must complete Form 45-108F1 Crowdfunding Offering Document (PDF) and post it to a funding portal's online platform before an investor is able to purchase any of the offered eligible securities. Any other distribution materials that an issuer wishes to make available to investors must also be made available only through the funding portal's online platform.
Under MI 45-108, "eligible securities" include:
- common shares;
- non-convertible preference shares;
- securities convertible into common or preference shares;
- non-convertible debt securities;
- units of limited partnerships; and
- flow-through shares under the Income Tax Act.
To be eligible for the crowdfunding prospectus exemption, specific compliance requirements for non-reporting issuers are set-out in MI 45-108, while reporting issuers must be in compliance with their reporting obligations under all other applicable securities legislation.
Both accredited and non-accredited investors may purchase securities under the new regime. Accredited investors are able to purchase up to $25,000 per offering and up to $50,000 per calendar year, while non-accredited investors may purchase eligible securities up to $2,500 per offering and up to $10,000 per calendar year. A permitted client (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (PDF)) who purchases securities through crowdfunding is not subject to any limits.
The Funding Portal: Registration
Issuers are required to use a single, registered funding portal for each crowdfunded distribution. A funding portal is a person or a company that is registered as an investment dealer, exempt market dealer, or restricted dealer under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registration Obligations (PDF). Under MI 45-108, the funding portal's role is to act as an intermediary in the distribution of eligible securities through an online platform. Funding portals must not advertise a crowdfunded distribution or solicit investors under the crowdfunding prospectus exemption.
The Funding Portal: Information Review
Before a funding portal grants an issuer access to the online platform, the funding portal must:
- enter into an agreement with the issuer;
- obtain a personal information form from each director, officer and promoter of the issuer; and
- arrange for background and criminal checks.
The funding portal will review the foregoing information, along with any other related distribution materials, and require the issuer to correct any incorrect, incomplete or misleading disclosure. The funding portal must ensure that information about the issuer that is displayed on the online platform is fair, balanced and reasonable. Issuers will not be granted access if the funding portal makes a good faith determination that the issuer's business is not conducted with integrity, the issuer is not in compliance with its obligations under MI 45-108, or the materials provided by the issuer contain a misrepresentation or an untrue statement of a material fact that has not been corrected.
Liability and Ongoing Disclosure
Investors have a right of action against reporting issuers for misrepresentations and non-reporting issuers for untrue statements of material fact contained in a crowdfunding offering document, regardless of whether an investor has relied on any such representation or statement.
As a result of completing a distribution under MI 45-108, non-reporting issuers will incur certain ongoing disclosure and record-keeping obligations which may not have been required prior to the crowdfunding distribution, including:
- providing annual financial statements to the ASC and purchasers of the securities within 120 days of the issuer's fiscal year-end;
- providing details of the use of the proceeds received by the issuer to the ASC and purchasers of the eligible securities; and
- maintaining specified books and records relating to the distribution for eight years following the closing of the distribution.
Issuers must not use crowdfunding distribution proceeds to invest in, merge with or acquire an unspecified business.
The new rules provide a prospectus exempt avenue for Alberta-based businesses to raise capital, while also opening the door to non-accredited investors to purchase eligible securities of such businesses. Bennett Jones is pleased to assist clients in meeting the crowdfunding prospectus exemption, operating a crowdfunding portal or addressing any questions or concerns with the new crowdfunding regime.