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Archive for the ‘Crowdfunding’ Category

Saskatchewan Proposes Its Own Crowdfunding Prospectus Exemption

Posted by Shane McLean on October 23, 2013

The Saskatchewan Financial and Consumer Affairs Authority (FACC) has announced a detailed equity crowdfunding proposal.  This follows an update by the Ontario Securities Commission (OSC) in August about its own progress on coming up with a new crowdfunding exemption from prospectus requirements (Read more here).

The FACC put out a backgrounder for discussion purposes back in July.  As a follow up to that discussion piece, this month the FACC released a draft order for comment purposes which contained far more detail on what an equity crowdfunding exemption may look like in Saskatchewan.  As with the OSC proposal, the FACC will require that equity crowdfunding be raised through an online portal but the Saskatchewan proposal appears focused on smaller financings than the OSC’s proposal ($150,000 per offering no more than twice a year vs the OSC’s $1.5 Million per year).  On the other hand, the Saskatchewan process seems to be simpler for the issuer, investor and portal than what we expect to see coming out of the OSC.

The high level details of the FACC’s proposed process are as follows:

  • The exemption will be available to private companies only and both the issuer and the investor must have addresses in Saskatchewan (i.e. this is a Saskatchewan only exemption).
  • The issuer must file an issuer information form and each promoter, director, officer and control person of the issuer must file a personal information form ten business days prior to beginning to trade.
  • The issuer must use a defined form of offering document which must be filed ten business days prior to beginning to trade and made available through the portal to investors.  The offering document must disclose how the funds raised will be used and set a minimum offering amount to close the offering, which must be equal to the amount needed to carry out the purpose for which the funds are sought as set out in the offering document.
  • The offering size must be $150,000 or less, no investor may invest more than $1,500 in any offering and the offering period must not be longer than 6 months.
  • There can be no concurrent offering by the issuer or other issuer for the same project.
  • The securities being offered must not be derivatives.
  • The issuer and its promoters, directors, officers and control persons must not use this exemption more than two times in a calendar year.
  • No commission or other amounts are paid to the issuer or its promoters, directors, officers, control persons, employees or agents with respect to the trade.
  • The issuer must file a report of trade within 30 days after the offering closes.
  • Unless another exemption is available, the securities purchased under this exemption will be subject to a hold period until the date that is 4 months and a day after the later of (i) the distribution date; and (ii) the date the issuer becomes a reporting issuer in any province or territory of Canada.

The FACC has clearly set out the requirements it proposes for portals as follows:

  • A portal must file an information form and each promoter, director, officer and control person of the owner of the portal must file a personal information form thirty days prior to beginning to facilitate crowdfunding trades.
  • The portal must not provide advice.
  • The portal must:
  1. Make the offering document of the issuer and certain risk warnings separately available to investors electronically online;
  2. Not allow an investment until the investor confirms online they have read and understood the offering document and risk warnings;
  3. Not release funds to the issuer until the minimum amount to close the offering has been reached and until that time ensure that all the funds received for the offering are held in trust for the investors;
  4. When the offering is closed, provide the issuer with the details of the investors (name, address, telephone number, email address, details of purchase) within 15 days of closing of the offering; and
  5. Ensure issuers and investors have an address in Saskatchewan.

The FACC’s portal requirements are not as demanding as we expect the OSC’s requirements to be (based on the material put out by the OSC to date).  It is interesting to note that under the FACC’s proposals a portal is not required to be registered as a broker or dealer and there is apparently no vetting of the issuer or investor required except to ensure that the investor has read and understood the risks and that the issuer and investor have Saskatchewan addresses.

One potential barrier to the use of equity crowdfunding in Saskatchewan is the small size of the projects permitted.   The maximum amount that can be raised is $150,000, the amount raised must be “the amount needed to carry out the purpose” and no concurrent fundraising for the same project is allowed.  Issuers will have to be creative and careful about how they define the purpose of their fundraising to ensure that they can complete it using not more than $150,000 in financing.

Technically, this is still a request for comment by the FACC, but it is interesting to see another Canadian jurisdiction put out a detailed (but different) set of proposed rules for an equity crowdfunding exemption.   We will be watching to see which jurisdiction is first to actually implement a new rule and then to see how the different rules are eventually harmonized, if at all.

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Crowd funding in Ontario’s future

Posted by Shane McLean on September 5, 2013

In December 2012 the Ontario Securities Commission published a Staff Consultation Paper seeking comments on a number of potential new prospectus exemptions.  One of the potential exemptions that created a bit of excitement in the startup community was an exemption which would allow Canadian companies to raise equity financing through crowd funding, which is essentially a process of raising financing from a large number of small investors through an online portal.

Borrowing heavily from the concepts established by the US regulators in the JOBS Act approved in early 2012 (most of which has yet to be implemented in practice), the OSC described the following possible crowd funding structure:

  • The funding would have to be raised through a registered funding portal that meets certain qualifications.
  • A company would not be able to raise more than $1.5 Million in a 12 month period using the crowd funding exemption.
  • An investor’s investment in any one company would be limited to $2,500 and the investor’s aggregate investments in a calendar year using the crowd funding exemption would be limited to $10,000.
  • Investors would have to sign a form of risk acknowledgement.
  • Investors would have a 2 day cooling off period during which they could withdraw.
  • The company would be required to provide a pre-defined level of disclosure about the company, the financing and the funding portal.
  • The company would have certain ongoing disclosure obligations to investors that came in through the crowd funding exemption.

On August 28, 2013 the OSC released a progress report.  The good news for crowd funding fans is that the feedback received by the OSC on the crowd funding proposal has been positive.  As a result, the OSC will continue its work to come up with a definitive framework based on the proposed structure.  The key area where further deliberation and focus may be required seems to be on the role of the funding portal including the qualifications needed and the processes to be followed by such intermediaries.

The bottom line is that it sounds like Ontario companies and investors can expect to be able to someday take advantage of a crowd funding prospectus exemption for equity financings along the lines described above.   Regulators in other Canadian provinces are looking into this issue too and we would hope that any structure ultimately settled on will be rolled out as a harmonized policy across the country.

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