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New equity crowdfunding exemptions

September 8, 2020   ·   0 Comments

By Luis Chacin

A few years ago, crowdfunding platforms like Kickstarter and Indiegogo opened the door to online funding for a wide variety of projects, from wearable tech such as the Pebble smartwatch, to card games such as Exploding Kittens. These crowdfunding platforms enable artists, inventors and entrepreneurs to connect with millions of people around the world to raise funds for their various projects. In the most popular form of crowdfunding, each “backer” contributes or “pledges” a small amount of money in exchange for an early edition of the product and/or a special recognition on the promoter’s website. Other models include crowdfunding for community projects or causes, crowdfunding for the benefit of individuals affected by a tragedy, as well as debt or equity crowdfunding. 

In the case of equity crowdfunding, entrepreneurs seek to raise funds from the crowd in exchange for an equity stake in their businesses. Think of CBC’s Dragons’ Den, but replace the “dragons” with thousands of online investors each investing no more than $5,000. Because equity crowdfunding involves investments offered to the public, securities regulators have stepped in to establish certain ground rules to protect investors. 

Generally speaking, pursuant to the Securities Act (Ontario), entrepreneurs are not able to publicly offer or distribute the securities issued by a private corporation without first qualifying for both a prospectus exemption with respect to the securities being offered and a dealer registration exemption with respect to the qualifications of the salesperson. Many small businesses are organized as incorporated “private issuers” with their constituting documents imposing transfer restrictions on all securities and limiting the total number of security holders to no more than 50 persons comprised of family members, close personal friends or close business associates, amongst others prescribed under National Instrument 45-106 – Prospectus Exemptions. As private issuers, small businesses may rely on the private issuer exemption without having to file or report to the Ontario Securities Commission (“OSC”). 

However, if you are a small business owner (or promoter) looking to raise capital from the public, not limited to your immediate circle of business partners, friends and family, you may be interested to know that, effective July 30, 2020, the OSC made an interim local order adopting a start-up crowdfunding regime that provides registration and prospectus exemptions similar to those in British Columbia, Alberta, Manitoba, Quebec, New Brunswick and Nova Scotia. This temporary order would be replaced by the adoption of the proposed National Instrument 45-110 – Start-up Crowdfunding and Prospectus Exemptions, subject to amendments, over the coming months.

The new crowdfunding exemptions in Ontario include a crowdfunding prospectus exemption and a crowdfunding portal registration exemption. The crowdfunding prospectus exemption allows for a maximum of $250,000 to be raised per distribution (up to twice per year), where no individual investor can invest more than $1,500 (or $5,000 with advice from a registered dealer regarding suitability), provided the securities (such as common shares, preferred shares, non-convertible debt or units of a limited partnership) are issued and paid for through a crowdfunding portal. The crowdfunding portal registration exemption requires that the crowdfunding portal abstains from providing investment recommendations or advice, or from collecting any commission, fee or other amount from investors, and ensures that the offering document of the issuer and the relevant risk warnings are available and acknowledged by investors on the crowdfunding portal.

Small business owners and investors may search the directory of the National Crowdfunding and Fintech Association (NCFA) website, which lists a number of crowdfunding platforms available for a variety of business projects such as consumer products, real estate and consulting services. It is important to note that lack of transparency and efficiency continue to be the main problems faced by investors and private corporations raising capital, both online and through more traditional means. However, with these new exemptions in Ontario, it seems clear that crowdfunding is becoming an important tool in the “democratization of capital”.

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