On September 21, 2021, National Instrument 45-110 – Start-up Crowdfunding Registration and Prospectus Exemptions (NI 45-110) came into force. NI 45-110 replaces local startup crowdfunding blanket orders currently in force on a province-by-province basis in an effort to provide issuers with a harmonized national regime for startup crowdfunding.
Background and Rationale
During recent years, many provincial securities regulators have adopted blanket orders to implement prospectus and registration exemptions intended to facilitate capital-raising through crowdfunding. Unfortunately, the local blanket orders established three regimes, with notable differences in the regimes including differences in: the limits imposed on the amounts that could be raised; the maximum amount that a single investor could invest; and, exclusively in Alberta, the requirement to use a funding portal and the availability of a registration exemption. In response to criticism from stakeholders, the Canadian Securities Administrators made the decision to introduce a new regime.
NI 45-110 is meant to address the various differences among provinces by implementing a harmonized regime for startup crowdfunding across Canada. Pursuant to NI 45-110, issuers can raise up to $1.5 million in a 12-month period through one or more distributions, provided the distributions are facilitated through a portal that operates in compliance with NI 45-110. Investors can invest a maximum of $2,500 per distribution, with such amount increasing to $10,000 if the investor has been advised by a registered dealer.
Prospectus Exemption for Issuers
NI 45-110 provides issuers with an exemption from prospectus requirements if distributing eligible securities through online funding portals. Pursuant to NI 45-110, a non-reporting issuer that is not an investment fund and whose head office is located in Canada will be exempt from the prospectus requirement in respect of a crowdfunding distribution where eligible securities (including common shares and non-convertible preference shares) are issued through a funding portal, provided that the following conditions are met:
an offering document in prescribed form containing basic information about the issuer, its management, the distribution, risk factors, and how the proceeds of the crowdfunding distribution will be used is delivered to the funding portal;
the crowdfunding distribution closes no later than 90 days after the offering document is first made available to purchasers on the funding portal’s platform;
a copy of the offering document, along with certain other information about the investor’s purchase, is delivered to each purchaser within 30 days after the closing of the distribution; and
each investor is provided with a contractual right to withdraw by delivering notice to the funding portal no later than midnight on the second business day after entering into a subscription agreement, or midnight on the second business day following an amendment to the offering document.
Since this prospectus exemption is only available to non-reporting issuers, the securities distributed under any distribution will be subject to an indefinite hold period and will only be able to be resold under another prospectus exemption, under a prospectus or four months after the issuer becomes a reporting issuer.
Registration Exemption for Portals
NI 45-110 provides certain portals with an exemption from dealer registration requirements in facilitating such distributions. Funding portals will be exempt from the dealer registration requirement provided that the following conditions are met:
the funding portal has its head office in Canada and takes reasonable steps to confirm that a majority of its directors ordinarily reside in Canada as well;
the funding portal does not provide advice to purchasers and does not receive commissions or fees from investors;
the funding portals does not close a distribution unless each purchaser completes a form acknowledging the risks of the purchase and confirms they have read and understood the offering document provided by the issuer;
the funding portals delivers to the applicable regulator an information form and individual information forms for each of their principals at least 30 days before facilitating their first crowdfunding distribution; and
the funding portal maintains records of its financial affairs and client transactions for eight years from the time the record is created.
Funding portals will not be able to rely on the registration exemption in NI 45-110 if it or any of its principals is or has been the subject of certain proceedings in the last 10 years related to a claim based in whole or in part on various conduct such as fraud, theft, breach of trust, or allegations of similar conduct.
Outlook
The adoption of NI 45-110 will provide issuers and funding portals with a harmonized set of rules for crowdfunding across Canada, which we believe will be a welcome change for participants. A harmonized regime will likely increase access to capital for issuers.
Please contact us if you would like further information on the implications of the adoption of NI 45-110.
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.