On May 14, 2015, the securities regulatory authorities of British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia adopted, through local blanket decisions, substantially harmonized start-up crowdfunding prospectus and registration exemptions (the “Start-Up Exemption”). The Start-Up Exemption is aimed at non-reporting issuers which are at a very early stage of development. It should be noted that the more elaborate “Crowdfunding Prospectus Exemption” proposed in March 2014 and aimed at more developed issuers has not been adopted at this time and is still under consideration by various Canadian securities regulators.
The Start-Up Exemption will allow an issuer to raise up to $250,000 twice during a given calendar year through the issuance of equity (common shares and non-convertible preference shares), securities convertible into equity, non-convertible debt securities linked to a fixed or floating interest rate and units of limited partnership. The Start-Up Exemption will not be opened to investment funds. Existing securityholders of the issuer will not be able to use the Start-Up Exemption to offload their positions in the issuer.
Investment under the Start-Up Exemption will be opened to anyone, but investors will be limited to no more than $1,500 per each placement made by an issuer under the exemption.
An issuer participating in a crowdfunding under the Start-Up Exemption will, among other things, need to complete the financing through a crowdfunding portal. The issuer must also make available on the portal an offering document which contains basic information about the issuer, its business, its management, the intended use of proceeds, any occurrence of previous financing made by the issuer using the Start-Up Exemption, the fees and commissions charged by the portal to the issuer, risk factors, any information the issuer intends to provide investors after the closing of the financing, and the frequency of such information. The offering document will also need to indicate the minimum amount of the offering.
An offering made through the Start-Up Exemption can remain open for up to 90 days. The Start-Up Exemption adopts an “all-or-nothing” model. If after the expiry of the 90-day period the minimum amount was not raised, all proceeds money will have to be returned to each prospective investor.
The resale of securities issued under the Start-Up Exemption will be subject to section 2.5 of National Instrument 45-102 – Resale of Securities, which means the securities will have an indefinite hold period unless resold under a prospectus, or prospectus exemption, or the issuer subsequently becomes a reporting issuer in at least one Canadian jurisdiction and holds that status for at least four months.
The new Start-Up Exemption contains a couple of revisions from the March 2014 draft proposals. Firstly, funds collected from investors by the funding portal do not need to be kept by a third party. The funding portal must hold the investors’ assets separate and apart from its own property in trust for the investors and in the case of cash, at a Canadian institution. This means that portal operators will keep and safeguard the money intended for investing pending the achievement by the issuer of the minimum offering. Secondly, investors will now benefit from a contractual right to withdraw an offer to purchase within 48 hours of (i) the investor’s subscription or (ii) the funding portal notifying the investor that the offering document has been amended.
A funding portal operator under the Start-Up Exemption will not need to be registered as a dealer under Canadian securities laws, but will, among other things, need to have its head office located in a jurisdiction of Canada and have a majority of its directors be residents of Canada.
The Start-Up Exemption orders are in place for the next five years and will expire on May 13, 2020.
With this new funding possibility, which is not yet possible in the United States, Canadian start-ups will be able to say goodbye to the old “accredited investors”, family members, friends and business associates and hello to the crowd.
For more information please see:
Multilateral CSA Notice 45-316 Start-up Crowdfunding Registration and Prospectus Exemptions.