On June 17, 2013, the Ontario Securities Commission (OSC) rendered a decision granting exemptive relief (the Decision) to MaRS Social Venture Connection (MaRS VX), a not-for-profit entity, effectively allowing it to operate an online platform to connect accredited investors with Ontario ventures that have demonstrable social and/or environmental impact. Although the Decision is limited in time and scope, as well as subject to numerous conditions, it is a step forward in the establishment and regulation of equity crowdfunding in Canada.
This Osler Update provides a brief summary of the Decision, followed by an overview of some interesting differences between the platform that the OSC will permit under the Decision and the model set forth in the OSC’s concept proposal for a crowdfunding prospectus exemption (the Concept Proposal) in its consultation paper published in December 2012: Considerations for New Capital Raising Prospectus Exemptions (the Consultation Paper). For our full Update on the Consultation Paper (OSC’s Crowdfunding Proposal Receives Favourable Comments), click here.
MaRS VX applied to the OSC for registration as a restricted dealer with the objective of promoting “impact investing” by bringing together, via an online platform, Ontario-based ventures that aim to solve social or environmental challenges in Ontario and accredited investors in Ontario (as this term is defined in section 1.1 of National Instrument 45-106, Prospectus and Registration Exemptions). To facilitate the use of the online platform, MaRS VX’s application sought relief from certain know-your-client (KYC) and suitability requirements of National Instrument 31-103, Registration Requirements and Exemptions.
The platform proposed by MaRS VX (the Platform) would contain two portals: one public and the other private. The public portal will simply contain general information about MaRS VX, its platform, its objectives and the process for prospective investors and issuers to access the private portal. The private portal will be password-protected and contain more detailed information about the issuer (for example, business plans, financial statements and pro-forma financial projections) but will be accessible only to (i) Ontario “accredited investors” that have established their status and have signed a written agreement, and (ii) issuers seeking to raise capital on a private placement basis through the issuance of debt or equity securities and have signed a written agreement committing to comply with certain OSC-imposed requirements.
Subject to the specific terms and conditions of the Decision, the OSC permitted MaRS VX to register as a restricted dealer and issued exemptive relief from certain KYC and suitability requirements of NI 31-103, specifically from ss. 13.2 (2) (c) and 13.3.
In essence, the KYC and suitability requirements of NI 31-103 provide that all registered dealers must collect KYC information specific to each client in order to determine the client’s tolerance for risk and ultimately ensure that sales of securities are suitable for their clients. These requirements are important for investor protection and market integrity but represent significant obstacles in the context of equity crowdfunding, because imposing these restrictions could be cumbersome to those connecting through an online platform.
A full copy of the Decision is available on the OSC’s website.
Key Differences Between the OSC’s Concept Proposal and the Decision
Although the Decision is limited to the specific facts of the MaRS VX case and does not necessarily reflect the features of any generic crowdfunding framework that may ultimately be adopted in Ontario, it is nevertheless interesting to note some of the more significant ways in which the terms of the Decision differ from the Concept Proposal. Perhaps the most important difference is that whereas the Concept Proposal envisages a framework for a new broad-based prospectus exemption for equity crowdfunding, the Decision essentially limits investor participation in the Platform to those who can establish their status as accredited investors, relying on an existing prospectus exemption. In addition, unlike the Concept Proposal, which provides that transactions and distributions can be made through an online portal, the Decision prohibits MaRS VX from both distributing any securities through the Platform and handling any investor funds or assets. No transactions may be executed, settled or cleared through the Platform, which serves only as a connection point or “match-making service” between issuers and investors. Further, unlike the Concept Proposal, which would be open to all issuers, the exemptive relief provided under the Decision is available to a restricted category of issuer – namely, only to issuers that have demonstrable social and/or environmental impact and less than $25 million in revenues.
The Concept Proposal asked whether it may be appropriate for any crowdfunding model to be introduced on a trial basis only and, indeed, this Decision is temporary and expires on the earlier of (i) two years from the date of the Decision and (ii) 90 days after any material changes in MaRS VX’s business, operations or capital. It is also limited in scope only to issuers and accredited investors located in Ontario.
Other Features of the Decision
In addition to the foregoing key differences, the following are other interesting areas of similarity or divergence between the OSC’s Decision and its Concept Proposal.
Other Issuer-related Aspects
Issuers’ ongoing disclosure obligations are more onerous under the Decision because they must provide annual audited financial statements, six-monthly interim financial statements and biannual updates on business activities; under the Concept Proposal, by contrast, audited financials would only be mandatory if the proceeds of the distribution were greater than $500,000 or if the issuer were a reporting issuer.
While the Concept Proposal limits an issuer’s aggregate offering amount to $1.5 million in any 12-month period, the Decision does not cap the capital amount that an issuer can raise through the Platform.
Other Investor-related Aspects
To be granted access to the private portal, an investor will need to take additional measures to those required by the typical accredited investor prospectus exemption. Investors will be required to acknowledge the significant risks associated with investing in issuers whose offerings are posted on the private portal. Each accredited investor participating in the private portal will also be required to verify its status by providing government-issued identification together with notices of assessment from the Canada Revenue Agency, financial or account statements or a reference letter from a financial institution confirming the investor’s income, financial assets and/or net assets; it must also notify MaRS VX of any changes to its status as an accredited investor and recertify its eligibility as an accredited investor annually.
The Concept Proposal fixed limits for an investor at a maximum of $2,500 per offering and a maximum of $10,000 in total for all offerings in a calendar year. The Decision has increased these limits to $25,000 and $50,000 respectively, with the possibility for unlimited investment if the investor (i) is a “permitted client” and has waived the KYC and suitability requirements, or (ii) has provided a letter from a registered dealer confirming that the KYC and suitability requirements for that particular offering on the private portal have been fulfilled. These higher limits are likely attributable to the fact that the Platform is directed at accredited rather than retail investors.
Unlike the Concept Proposal, which specifically required that an investor be given a withdrawal period of two business days, the Decision does not give the investors any such right.
Other Platform-related Aspects
As forecasted by the Concept Proposal, by virtue of engaging in acts to promote trading activity, MaRS VX will have to comply with all the registration requirements otherwise applicable to an exempt market dealer under Ontario’s securities laws, including requirements for initial qualification, supervision and ongoing disclosure to the OSC, with the exception of NI 31-103, ss. 13.2 (2)(c) and 13.3.
The Decision limits MaRS VX by providing that it may charge access fees to the issuers (but not the investors), it must remain a not-for-profit entity and is prohibited from participating in any referral arrangement.
With this Decision, the OSC has cleared the way for a potentially useful electronic platform to introduce issuers and investors to one another. However, the extent to which this Decision will serve as a precedent for future developments in the regulation of equity crowdfunding in Canada remains to be seen.