[author: Josh Rosen]
Following a lengthy consultation period and broad review, the Ontario Securities Commission (“OSC”) has unveiled a series of proposed prospectus exemptions aimed at growing small and medium-sized enterprises (“SMEs”). Among the exemptions that will facilitate new fundraising and innovation avenues for start-ups is a set of guidelines that would open the door to equity crowdfunding (the “Crowdfunding Exemption”).
While a number of platforms have gained significant popularity in the crowdfunding realm, websites like Kickstarter and Indiegogo have limited fundraising to donation and rewards-based campaigns. This means that a SME could solicit contributions as donations or in exchange for a tangible good (for example, the product the supporter is funding) but could not raise money in exchange for a stake in their company. Once finalized, the Crowdfunding Exemption would be a game-changer for SMEs looking for venture capital and broaden the pool of prospective investors.
In a typical securities distribution, SMEs must comply with strict guidelines with respect to the type and size of offering, what kinds of disclosure must be prepared for prospective shareholders, and who can participate in the offering. The proposal put forth by the OSC is an exemption that allows equity crowdfunding investments with certain limits and conditions.
The Crowdfunding Exemption will introduce significant changes for investors, issuers, and portals through regulation that will allow for equity investments from, generally, non-accredited investors. The use of technology will create efficient and low-cost mechanisms for raising capital and making securities offerings online. The OSC has proposed the following safeguards:
· To qualify for this proposed exemption, a company must be incorporated or organized under Canadian laws and have its head office in Canada. The majority of the company’s directors must also be resident in Canada;
· The Crowdfunding Exemption will be available to both public companies (reporting issuers) and private companies (non-reporting issuers);
· A company’s raise is capped at $1.5 million for any calendar year under the Crowdfunding Exemption;
· The offering must be completed within 90 days, and must disclose the minimum offering size and whether there is a maximum offering size. A successful offering must fully subscribe the minimum offering and the issuer must have the financial resources to carry out activities outlined in the business plan;
· Equity can only be issued in the form of common shares, non-convertible preferred shares, non-convertible debt securities linked only to fixed or floating interest rates, securities convertible into common shares, units of a limited partnership, and flow-through shares under the Income Tax Act; and
· The company can only solicit for their campaign through a crowdfunding portal or on their own website and through the use of limited marketing materials, but are free to leverage social media to drive traffic to their fundraising page.
Investor Protection Measures
· An investor may contribute up to $2,500 per investment under the proposed exemption, and no more than $10,000 in a calendar year;
· The company must provide investors with an abbreviated information statement at the time of investment (for example, on the company’s crowdfunding portal landing page) that outlines basic information about the company, the fundraising platform, and one year of financial statements;
· Investors must sign a risk acknowledgement confirming investment eligibility, and consent to the prospect of losing their entire investment. In connection with this acknowledgement, the proposed exemption includes a two-day “cooling off” period that allows the investor to withdraw if there is lingering uneasiness;
· The company is required to produce and distribute streamlined disclosure – at its most basic form, disclosure of the issuer’s cash and annual financial statements – and to maintain accurate records regarding the use of capital raised. Following the campaign, issuers must provide ongoing continuous disclosure; and
· Resale of securities is subject to a four-month hold period for reporting issuers and an indefinite hold period for non-reporting issuers.
· Intended to establish the legitimacy and integrity of the platform while building investor confidence;
· All investments must be made through a portal registered as a restricted dealer; and
· The process for registering a portal would be similar to registering as a securities dealer or advisor;
· Portals will be required to conduct background checks on issuers, directors, officers, promoters, and control persons, understand the general structure, features, and risks of securities offered, review and vet information to ensure compliance and prevent fraud, and provide investor education materials; and
· Portals cannot provide any investment recommendations or endorsements, solicit purchases or sales of securities on behalf of a client of their platform, or invest in or underwrite any issuer.
With clarity on the OSC’s intentions with respect to crowdfunding, SMEs can begin to evaluate the advantages and disadvantages to launching a crowdfunding campaign at various stages of development.
The comment period on the OSC’s proposal is open until June 18, 2014. This is a fantastic opportunity for investors, issuers, and portals to contribute comments and help shape the proposed exemptions.
In upcoming posts, this blog will continue to explore the benefits and drawbacks of crowdfunding and peer-to-peer fundraising campaigns.