Written by Bruce A. Hibbard, Gary S.A. Solway, Michael N. Melanson and Usman M. Sheikh
On May 14, 2015, the securities regulators of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia (the Crowdfunding Jurisdictions) announced that they have implemented, or expect to implement, exemptions that will allow Canadian start-ups and early-stage companies to raise capital through crowdfunding. The Ontario Securities Commission (OSC) expects to announce its own crowdfunding rules in the Fall of 2015.
The New Crowdfunding Regime
Under the new rules, eligible securities can be sold without the need for a prospectus on certain conditions. Notably, Canadian issuers may only conduct two crowdfunding distributions per calendar year and raise no more than $250,000 per distribution. Although a prospectus is not required, issuers must use a prescribed offering document to distribute the securities which requires them to disclose basic information about their business, its management and the distribution, including the use of proceeds of the distribution. Each investor is limited to investing a maximum of $1,500 per distribution. Investors would also have a 48-hour cooling off period to change their minds. The maximum distribution period using the exemption is 90 days.
Unlike shares of a public company, the securities will not be freely tradable when issued. They can only be resold under another prospectus exemption, under a prospectus, or four months after the issuer becomes a reporting issuer.
The securities must also be issued through a Canadian-based online funding portal. The funding portals are exempt from the registration requirements if the portals meet certain requirements, including a requirement that they not provide advice to, or receive fees from, investors. A portal's registration exemption can be removed by a participating regulator if it determines that that portal's principals or their past conduct demonstrate a lack of integrity, financial responsibility or relevant knowledge or expertise.
The crowdfunding exemptions are being adopted by the participating regulators by way of local blanket orders for a period of five years, expiring on May 13, 2020. The local blanket orders will be available on the website of the respective participating securities regulator. Further details of the crowdfunding regime are contained in Multilateral CSA Notice 45-316 – Start-up Crowdfunding Registration and Prospectus Exemptions.
The Ontario Crowdfunding Regime
The OSC is not yet participating in the new crowdfunding regime. It is expected to announce its own rules in the Fall of 2015.
In interviews with major media outlets reported in May 2015,1 the OSC said its decision to not join the other provinces was based in part on the lack of a registration requirement for funding portals and its desire to incorporate higher capital raising limits. The OSC also said it expects its own crowdfunding rules will follow the framework which it had proposed in March 2014 (see our summary in our bulletin Crowdfunding and Other New Prospectus Exemptions Proposed by the Ontario Securities Commission). Among other things, the framework would allow companies to raise up to a total of $1.5 million per year and would permit investors to invest up to $2,500 in a single investment, to a maximum of $10,000 a year. The rules would also require funding portals to register with the OSC.
Notably absent from the Crowdfunding Jurisdictions is Alberta, which, unlike Ontario, has to date not proposed any similar crowdfunding exemption, leaving it as a significant outlier amongst Canada's more significant capital markets.
- See Janet McFarland, “Six Provinces Approve Crowdfunding, Ontario to Develop Separate Standards”, The Globe and Mail (14 May 2015) and “Securities Regulators in 6 Provinces Agree to Crowdfunding Rules for Startups”, CBC News (15 May 2015)