Crowdfunding’s popularity as a way to raise capital is on the rise. In March 2014 the Nova Scotia and New Brunswick securities commissions joined with regulators in Manitoba, Saskatchewan, and Quebec in proposing a regulatory framework that would provide new prospectus exemptions for crowdfunding. If implemented, the new framework will be directed toward facilitating securities law compliance by SMEs and start-ups when accessing capital through crowdfunding.
What is crowdfunding? Simply put, crowdfunding is way to access capital. Individual investors who together form the “crowd” provide small amounts of money to finance a project or business venture, typically through an Internet portal. Crowdfunding investors have traditionally received products or services in return for their investment, but increasingly investors are receiving an equity interest in the business they fund. This brings securities laws into play.
What securities laws apply? Every Canadian province has laws regulating trading in securities, an important purpose of which is investor protection. Securities laws generally require the business issuing the security (i.e., the issuer) to provide a prospectus to investors, unless the issuance fits within an exemption from this requirement. A prospectus is a detailed document describing the security to be issued and providing other information about the issuer and the offering. Since it’s a time-consuming and costly document to prepare, issuers usually try to fit the issuance into an available prospectus exemption.
What exemptions are proposed? Although existing securities laws apply to securities issued in the crowdfunding context, the prospectus exemptions currently available don’t work well for crowdfunding. As noted earlier, the securities commissions in Nova Scotia and New Brunswick have partnered with other provincial regulators in publishing proposed prospectus exemptions for crowdfunding. Neither Prince Edward Island nor Newfoundland and Labrador has adopted any crowdfunding exemptions yet, and neither participated in this proposal, which would create these two new exemptions from the requirement to file a prospectus:
1. Crowdfunding exemption: This would be available to reporting and non-reporting issuers formed in Canada that have their head office in this country and a majority of directors resident here. Some key features of this proposed exemption are:
2. Start-up exemption: This exemption would be available to non-reporting issuers with their head office in one of the provinces that participated in the new proposal, but not to investment funds. Some key features of this proposed exemption are:
What are the next steps? The proposed exemptions were open for public comment until June 18, 2014. The regulators in the participating provinces will now review the feedback received and decide whether to proceed with the proposal, and if so, whether further modifications are necessary.
What is the impact? The details still need to be fleshed out, but, generally, this has the opportunity to be a positive development for SMEs and start-ups. If implemented, the framework proposed by the regulators will be directed toward facilitating regulatory compliance by SMEs and start-ups when accessing capital through crowdfunding, by means of creating a tailored set of rules balancing the needs of both issuers and investors.
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Chris MacIntyre is a lawyer with McInnes Cooper. As a member of the firm’s corporate finance and securities team, he advises clients on transactions such as securities offerings, private placements, and mergers and acquisitions, as well as corporate governance and regulatory compliance matters.