OSC Adopts Start-Up Crowdfunding Exemptions

August 4, 2020

To better facilitate access to capital for small businesses, the Ontario Securities Commission (OSC) has adopted registration and prospectus exemptions for start-up crowdfunding effective July 30, 2020.

  • Non-reporting issuers in Ontario can now issue eligible securities through an online funding portal to raise up to $250,000 per distribution (and $500,000 annually) on a prospectus-exempt basis.
  • The prospectus and registration exemptions are being implemented by way of an interim local order in Ontario (the Interim Order) and are substantially similar to the local start-up crowdfunding exemptions available in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia (collectively, and together with Ontario, the Participating Jurisdictions).
  • The Interim Order will remain in effect until either the adoption of proposed National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions (NI 45-110), published for comment earlier this year, or 18 months from the effective date of the Interim Order.  

Background

As we discussed in 2015, the securities regulators of the Participating Jurisdictions other than Ontario each implemented local start-up crowdfunding blanket orders that provided registration and prospectus exemptions intended to facilitate the ability of Canadian start-ups and early stage companies to raise money through crowdfunding in such jurisdictions. As of December 31, 2019, 11 funding portals had relied on the registration exemption under the local blanket orders, one registered dealer had facilitated start-up crowdfunding distributions and a total of 70 distributions had been completed in reliance on the start-up crowdfunding blanket orders by 62 different issuers. A total of $3,470,754 was raised in start-up crowdfunding distributions.

On February 27, 2020, the Canadian Securities Administrators (CSA) published for comment proposed NI 45-110, which would adopt the start-up crowdfunding exemptions on a nationally harmonized basis. The Interim Order is intended to provide interim relief until the CSA have had the opportunity to consider comments, finalize and implement the start-up crowdfunding regime contemplated in proposed NI 45-110.

Prospectus Exemption

The Interim Order allows a non-reporting issuer, that is not an investment fund and whose head office is located in a Participating Jurisdiction, to issue eligible securities (including common shares and non-convertible preference shares) through online funding portals. The funding portals may either rely on the registration exemption contained in the Interim Order or may be operated by a registered dealer that has provided certain written confirmations to the issuer.

While issuers are exempt from the prospectus requirement under the Interim Order, they must produce an offering document in prescribed form, which contains basic information about the issuer, its management and the distribution, including risk factors, how the issuer intends to use the funds raised and the minimum offering amount. No later than 30 days from the closing of the offering, the offering document must be filed along with a report of exempt distribution.

Furthermore, the prospectus exemption applies only if certain conditions are met:

  • Investment Limits. Issuers cannot raise aggregate funds of more than $250,000 per distribution and are limited to a maximum of two such distributions in a calendar year. No investor can invest more than $1,500 per distribution or $5,000 provided that the purchaser has obtained suitability advice from a registered dealer.
  • Right of Withdrawal. Each investor must have a contractual right to withdraw a subscription by delivering notice to the funding portal within 48 hours of either the purchaser’s subscription or a notification by the funding portal of amendment to the offering document. The funding portal must return the funds within five business days of receiving the notice from the investor.
  • Distribution Period. The distribution may remain open for a maximum of 90 days.
  • Restricted Securities. Since the exemption is only available to non-reporting issuers, the eligible securities are subject to an indefinite hold period and can only be resold under another prospectus exemption, under a prospectus or four months after the issuer becomes a reporting issuer.

Registration Exemption

The Interim Order provides a registration exemption for funding portals with a head office in Canada and a majority of its directors ordinarily resident in Canada to facilitate distributions under the prospectus exemption without being formally registered, subject to certain conditions, including:

  • Regulatory Filings. Funding portals must deliver an information form and individual information forms for each of its principals to the OSC at least 30 days prior to facilitating their first start-up crowdfunding distribution.
  • Interaction with Investors. Funding portals may not provide any advice to investors and are not permitted to collect fees or commissions from investors. Additionally, the funding portals may not allow a subscription until the investor confirms its understanding of the offering document and the risk warning, both of which must be disclosed on the funding portal’s website. Payment from investors must be received electronically though the funding portal’s website.
  • Books and Records. The funding portal must maintain books and records for a period of eight years from the date a record is created, and such books and records may be inspected by a participating regulator.
  • The funding portal must release funds to the issuer after the minimum offering amount has been reached and provided that all 48-hour rights of withdrawal have elapsed or return the funds to the investors if the minimum offering amount is not reached or if the start-up crowdfunding distribution is withdrawn by the issuer.

Update: On August 20, 2020, the OSC published a series of crowdfunding guidance documents, which among other things provide answers to common questions regarding crowdfunding, as well scenarios illustrating the various steps of the crowdfunding investment process:

Start-up Crowdfunding Guide for Businesses

Start-up Crowdfunding Guide for Funding Portals

Start-up Crowdfunding Guide for Investors

These guides are substantively similar to those published by the other Participating Jurisdictions.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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