Crowdfunding exemption helps business owners

January 22, 2016 | Last updated on January 22, 2016
4 min read

01 Crowdfunding exemption

Securities commissions in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia published the final form of Multilateral Instrument 45-108 – Crowdfunding this past November. The instrument introduces a crowdfunding prospectus exemption that gives businesses greater access to capital from many investors through an online registered funding portal. Included in the exemption are investor protections, such as investment limits ($25,000 per investment for accredited investors), and requirements for offering documents and ongoing investor disclosure.

Bernard Pinsky, partner at Clark Wilson in Vancouver, says the exemption highlights the lack of harmonization across jurisdictions. “It’s a real chopped-up scene in Canada with respect to crowdfunding,” he says, referring to the start-up crowdfunding exemption adopted in May by B.C. and other provinces.

Ontario and B.C. have crowdfunding exemptions, but they’re not the same, he says. Further, “Alberta and Nunavut have decided they’re going to come up with a different crowdfunding exemption.” This lack of harmonization limits the investor market for those who take advantage of the exemptions, he says.

Eric Foster, senior associate at Torys in Toronto, says the exemption is “reactionary, but that in and of itself is not a bad thing.” He appreciates regulators acknowledging the important role the internet and social media play in capital raising—especially for start-ups and smaller companies.

But investor limits could cause headaches. Matthew Atkey, also a senior associate at Torys, says, “For a company to hit its yearly maximum of $1.5 million, it’d have to bring in 600 investors,” and that takes resources young companies might not have. Companies think this has the potential to be expensive money,” agrees Foster, referring to issuer requirements, such as engaging the portal, and preparing and distributing financial statements. For this reason, he thinks the exemption will probably be used in conjunction with other standard offerings.

Atkey is interested to see whether portals will be run by sole businesses or by registered securities dealers, which have greater obligations. “Where they’re run by fully registered securities dealers, those dealers may be able to help co-ordinate other offerings.” He foresees the exemption building buzz, with larger amounts being raised by accredited investors. But no one knows how the exemption will play out in practice, he says. MI 45-108 comes into force January 25, 2016.

02 OM exemption

On October 29, 2015, regulatory authorities in Alberta, New Brunswick, Nova Scotia, Ontario, Quebec and Saskatchewan published amendments to Multilateral CSA Notice of Amendments to National Instrument 45-106—Prospectus Exemptions Relating to the Offering Memorandum Exemption. The amendments introduce an OM prospectus exemption in Ontario, and modify the existing OM exemption in the other five provinces, improving investor protection. The OM exemption will now be available in all Canadian jurisdictions. Investor protection measures include:

  • providing investors with audited annual financial statements and an annual notice describing how proceeds raised under the OM exemption were used (non-reporting issuers only);
  • incorporating marketing material in the OM;
  • limiting investments by individual investors; and
  • requiring that individual investors sign a risk acknowledgement form with two added schedules.

“One of the key advantages is it brings us closer to a national regime,” says Glen Johnson, partner at Torys. Now issuers can “market and distribute a product on a mostly consistent basis in all jurisdictions.”

But do investors in different provinces really need different protections? “The number of carve-outs, qualifiers or exceptions is a […] unique feature of living in the Canadian system,” he says. For example, Annex E, Notice of Specified Key Events, is only required for New Brunswick, Nova Scotia and Ontario.

He also critiques the one-size-fits-all risk acknowledgement form. “I find the new risk acknowledgment form perhaps a little overreaching, in the sense that it’s not meant to be tailored for a particular offering, […] so the language is as dire and extreme whether the issuer is a bank or […] a start-up company.”

Pinsky says the risk acknowledgement form may cause inexperienced investors to balk, and provides a response for securities commissions to those who complain about losing money.

From his experience with the OM exemption in B.C., Pinsky says mostly non-reporting issuers will take advantage of the exemption.

A common example would be someone who wants to rezone and develop a property, but doesn’t want to go public with one development. Pinsky applauds the provision of audited financial statements as good investor protection.

Johnson agrees. “Outlining ongoing disclosure obligations is a useful initiative” that will “help drive and develop market best practices.”

The amendments come into effect in Ontario on January 13, 2016, and in Alberta, New Brunswick, Nova Scotia, Quebec, and Saskatchewan on April 30, 2016.