Nationally Harmonized Crowdfunding Rules Proposed

On February 27, 2020, the Canadian Securities Administrators (CSA), published for comment a set of proposed harmonized rules for start-up securities crowdfunding (the Proposed Instrument).

The Proposed Instrument provides:

  • An exemption from the prospectus requirement that allows a non-reporting issuer to distribute eligible securities through an online funding portal (the Prospectus Exemption); and

  • An exemption from the dealer registration requirement for funding portals that facilitate online distributions by issuers relying on the Prospectus Exemption (the Registration Exemption).

Prospectus Exemption

The Prospectus Exemption is available to issuers that meet a number of conditions, including:

  • The distribution of, and payment for, the security is facilitated through a funding portal that is relying on the Registration Exemption or operated by an exempt market dealer or investment dealer;

  • The aggregate gross proceeds raised by the issuer group during the 12-months before the closing of the start-up crowdfunding distribution does not exceed $1,000,000 (up from $500,000 pursuant to rules currently in effect in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia);

  • Each purchaser invests no more than $2,500 (up from $1,500) or, if the purchaser has obtained advice from a registered dealer that such investment is suitable for the purchaser, $5,000;

  • The issuer prepares an offering document disclosing information about the business and the crowdfunding distribution and makes it available to each purchaser through the funding portal’s platform;

  • The closing of the crowdfunding distribution does not occur unless the issuer raises the minimum offering amount stated in the offering document within the 90-day period after the date the offering document is made available on the funding portal’s platform; and

  • The issuer provides the purchaser with a two-day contractual right to withdraw from an agreement to purchase the security by delivering a notice to the funding portal.

Notably, the Prospectus Exemption is not available if the issuer intends to use the proceeds of the distribution to invest in, merge with, amalgamate with, or acquire an unspecified business. The CSA’s stated view is that investors in issuers that propose raising capital for these purposes are better protected in regimes other than crowdfunding, such as the TSX Venture Exchange capital pool company program.

Registration Exemption

The Registration Exemption is available to funding portals that meet a number of conditions, including:

  • At least 30 days prior to the first date the funding portal facilitates a start-up crowdfunding distribution in a jurisdiction, the funding portal delivers to the securities regulatory authority or regulator in each jurisdiction a completed Form 45-110F3 Funding Portal Information and, for each principal of the funding portal, a completed Form 45-110F4 Portal Individual Information;

  • The funding portal or any of its principals must not be, or have been, the subject of certain proceedings in the last 10 years as specified in the Instrument, including claims related to fraud, theft, breach of trust, illegal distributions, or allegations of similar conduct;

  • The funding portal holds each purchaser’s assets separate and apart from the funding portal’s own property, in trust for the purchaser, and in the case of cash, in a designated trust account at a Canadian financial institution;

  • The funding portal provides the necessary disclosures (such as the issuer’s offering document and any amendments) and obtains the necessary risk acknowledgement from purchasers under the Proposed Instrument in connection with a distribution of eligible securities;

  • The funding portal is not registered under securities legislation; and

  • The funding portal does not: (a) provide advice to a purchaser about the merits of the investment or otherwise recommend or represent that an eligible security is suitable, or (b) receive a commission, fee or other similar payment from a purchaser under a crowdfunding distribution.

The Proposed Instrument has added a bad actor disqualification and a solvency and annual certification of sufficient funds requirement for funding portals.

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The CSA are welcoming all comments on the Proposed Instrument and have also included specific questions in the notice. The comment period expires on May 27, 2020.

You can access the CSA notice here.

DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.

Farzad Forooghian