On October 19, 2015, Multilateral CSA Notice of Publication and Request for Comment Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses (the “Notice”) was published. In the Notice, the Alberta Securities Commission and the Nunavut Securities Office (collectively, the “Participating Jurisdictions”) published for a 60-day comment period:
- Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses (“MI 45-109“);
- Proposed Companion Policy 45-109CP Prospectus Exemption for Start-up Businesses;
- Proposed Form 45-109F1 Start-up Business Offering Document;
- Proposed Form 45-109F2 Start-up Business Risk Acknowledgment; and
- Proposed Form 45-109F3 Start-up Business Report of Exempt Distribution (collectively, the “Proposed Start-up Business Exemption“);
- Proposed Amendments to National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR) (“NI 13-101“); and
- Proposed Amendments to Multilateral Instrument 13-102 System Fees for SEDAR and NRD (“MI 13-102“) (collectively, the “Proposed Consequential Amendments”).
For some small early-stage businesses, the costs of using the offering memorandum prospectus exemption (the “OM Exemption“) in National Instrument 45-106 Prospectus Exemptions (“NI 45-106“) can be relatively high to the limited funds being raised. The Proposed Start-up Business Exemption is intended to provide a prospectus exemption, but not a registration exemption, to address these situations. The Participating Jurisdictions intend the Proposed Start-up Business Exemption to be available only to serve the funding gap that may exist prior to an issuer being able to cost effectively use the OM Exemption.
Under the Proposed Start-up Business Exemption, issuers are required to provide investors an offering document containing prescribed information. Additionally, the issuer must obtain from each investor a completed risk acknowledgment at the same time or before they sign an agreement to purchase the security. The information required in the offering document is more streamlined than that required under the OM Exemption and financial statements will not be required.
There are investment limits on the amount of money a purchaser can invest under the Proposed Start-up Business Exemption, which are intended to off-set the risks associated with the reduction in both initial and ongoing disclosure and the limited ability to resell the securities. If a registered dealer is not involved, no investor can invest more than $1,500 in a single investment or more than $3,000 in the issuer group in a 12 month period under start-up business distributions (a distribution under MI 45-109 or a corresponding exemption). An issuer group is defined as an issuer together with each of the following:
(a) each affiliate of the Issuer,
(b) each other issuer
(i) that is engaged in a common enterprise with the issuer or with an affiliate of the issuer,
(ii) that has a founder that is a founder of the issuer or an affiliate of the issuer.
A corresponding exemption includes the Start-up Crowdfunding Blanket Orders (as adopted by certain members of the Canadian Securities Administrators on May 14, 2015, as listed in Appendix A of MI 45-109) and any other prospectus exemptions substantially similar to the Proposed Start-up Business Exemption or the Start-up Crowdfunding Blanket Orders. Where a registered dealer is involved and provides suitability advice, a purchaser can invest up to $5,000 in a single investment and up to $10,000 per issuer group in a 12 month period under start-up business distributions.
Issuers using the Proposed Start-up Business Exemption would be subject to a $1,000,000 lifetime limit on the amount that they can raise under either MI 45-109 or any corresponding exemptions in corresponding jurisdictions. A corresponding jurisdiction is defined as a jurisdiction that has adopted the Start-up Crowdfunding Blanket Orders and each other jurisdiction in which the securities regulatory authority or regulator has adopted a corresponding exemption. In calculating the $1,000,000, all funds ever raised by the issuer and other members of the “issuer group” under MI 45-109 or a corresponding exemption are included. The view is that once an issuer has raised $1,000,000 through start-up business distributions, the issuer should be in a position to prepare financial statements and comply with the other disclosure requirements under the OM Exemption.
The Participating Jurisdictions have endeavored to harmonize the Proposed Start-up Business Exemption with the prospectus exemption found in the Start-up Crowdfunding Blanket Orders in order to facilitate start-up business distributions in multiple jurisdictions at the same time. In certain circumstances, the Participating Jurisdictions will accept the prescribed form of offering document, risk acknowledgement and report of exempt distribution under the Start-up Crowdfunding Blanket Orders.
On March 20, 2014, Manitoba, Nova Scotia, New Brunswick, Ontario, Quebec and Saskatchewan published for comment proposed Multilateral Instrument 45-108 Crowdfunding (“MI 45-108“), which contemplates a prospectus exemption in connection with a financing via a funding portal and sets out a regime for registering portals in a special restricted dealer category as a “restricted dealer funding portal”. However, as MI 45-108 has not yet been adopted as a rule, the Proposed Start-up Business Exemption at this time, does not yet contemplate harmonization with MI 45-108.
The Proposed Start-up Business Exemption differs from the Start-up Crowdfunding Blanket Orders in certain key areas. As set out in the Notice, the main points of difference are below:
- The Proposed Start-up Business Exemption provides a prospectus exemption but not a registration exemption. The Start-up Crowdfunding Blanket Orders include both a prospectus and registration exemption.
- The Start-up Crowdfunding Blanket Orders require all distributions to be conducted through an online funding portal. The Participating Jurisdictions have designed the Proposed Start-up Business Exemption so that it is not limited to online crowdfunding.
- The Start-up Crowdfunding Blanket Orders limit issuers to two offerings a year with an offering limit of $250,000 per distribution. However, there is no lifetime limit for issuers. Subject to the lifetime limit of $1,000,000, the Proposed Start-up Business Exemption does not limit the offering amount per distribution or the number of distributions in a year.
- Investors cannot invest more than $1,500 in a single investment under the Start-up Crowdfunding Blanket Orders. Under the Proposed Start-up Business Exemption, there are different investment limits based on whether a registered dealer facilitates the distribution: $1,500 without and $5,000 with a registered dealer.
- In MI 45-109, the Participating Jurisdictions propose to designate the offering document as an offering memorandum. This results in the application of both a statutory two-day right of withdrawal and statutory civil liability for any misrepresentations included in an offering document. The Start-up Crowdfunding Blanket Orders do not include a similar designation but do include a contractual 48 hour right of withdrawal which the Participating Jurisdictions have included in MI 45-109 as well to align investors’ rights in the event of a multi- jurisdictional distribution.
- The prescribed forms under the Start-up Business Exemption and the Start-up Crowdfunding Blanket Orders are different. This was necessary to address the fact that the Start-up Business Exemption is not limited to crowdfunding. However, the Participating Jurisdictions have included a provision that would allow an issuer who is primarily conducting a distribution under a corresponding exemption in a corresponding jurisdiction to use, and file where required, the forms prescribed under the corresponding exemption in lieu of those mandated by the Proposed Start-up Business Exemption.
The Proposed Start-up Business Exemption requires that an offering document and report of exempt distribution be prepared and filed by an issuer through SEDAR. The Proposed Consequential Amendments are necessary to facilitate these requirements.
The comment period expires December 18, 2015. For more information, please see http://www.albertasecurities.com/Regulatory%20Instruments/5205021-v1-CSA_Notice_MI_45-109_with_all_Annexes_attached.pdf.