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Issuers in Canada seeking financing on a prospectus exempt basis now have an additional means of raising capital. On January 25, 2016, Multilateral Instrument 45-108 Crowdfunding (MI 45-108), came into force in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia (the Participating Jurisdictions). MI 45-108 intends to facilitate online capital-raising activities by start-ups and small- and medium-sized enterprises through the creation of a new crowdfunding prospectus exemption (the Exemption) and an online funding portal registration framework.
The Exemption allows non-accredited investors to participate in early-stage companies, something traditionally limited to accredited and institutional investors. Non-accredited investors in all Participating Jurisdictions will be able to invest up to $2,500 per offering under the Exemption. Non-accredited investors in Ontario will be further limited to a maximum investment under the Exemption of $10,000 per calendar year. Accredited investors other than permitted clients in Ontario (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations) may invest up to $25,000 per offering and in Ontario are limited to a maximum investment under the Exemption of $50,000 per calendar year. Permitted clients in Ontario are not subject to any investment limits.
Both reporting and non-reporting issuers can rely on the Exemption. Issuers relying on the Exemption are required to distribute the securities through a single funding portal and must post the offering document and other permitted materials solely on that portal’s online platform. To be eligible for the Exemption, issuers must meet certain Canadian residency requirements and may distribute only “non-complex” securities that investors can easily understand, such as common shares, non-convertible preference shares and limited partnership units. An “issuer group” (meaning an eligible issuer, any affiliate, any other issuer that is engaged in a common enterprise with the issuer or affiliate, or any issuer that is controlled directly or indirectly by the same person or company controlling the eligible issuer) is limited to raising an aggregate of $1.5 million per 12-month period under the Exemption.
Under the Exemption, distribution periods cannot be longer than 90 days after the securities are first offered by the issuer, and closing must take place within 30 days of the end of the distribution period. Issuers cannot, directly or indirectly, advertise a distribution or solicit purchases (but may inform the public of a contemplated distribution and the portal contemplated for such a distribution). While there is no quantitative minimum raise requirement, an issuer must raise the minimum proceeds to accomplish the business objectives described in the offering document (in the prescribed Form 45-108F1 Crowdfunding Offering Document). Last, non-reporting issuers relying on the Exemption must maintain books and records and make certain annual disclosures with respect to financial statements and use of proceeds while disclosing key events as outlined in Form 45-108F4 Notice of Specified Key Events. Reporting issuers must comply with their continuous and timely disclosure obligations.
Funding portals must be registered as an investment dealer, an exempt market dealer or a restricted dealer. A portal must not act as an intermediary for distribution of an issuer that is a related issuer of the funding portal and the portal cannot, directly or indirectly, advertise a distribution or solicit purchasers. A portal may only make available to purchasers the offering document in its prescribed form and such other materials as contemplated in MI 45-108 such as term sheet or a video. The portal must review these documents and determine whether they are incorrect, incomplete or misleading and require the issuer to make any corrections prior to posting on their online platform. The portal must also ensure that the information provided to investors is presented in a “fair, balanced and reasonable manner.”
In addition, portals have certain other “gatekeeping” obligations to issuers and purchasers. Prior to granting issuers access to post a distribution, a portal must enter into an access agreement (the requirements of which are prescribed in MI 45-108), obtain a personal information form from each director, officer and promoter of the issuer and conduct, or arrange for, background and criminal checks of the issuer and the aforementioned directors, officers and promoters. With respect to purchasers, portals must obtain an executed risk acknowledgement form (Form 45-108F2 Risk Acknowledgement) and, in Ontario, obtain and validate a confirmation of investment limits form (Form 45-108F3 Confirmation of Investment Limits). Portals have an ongoing obligation to monitor distributions and must terminate a distribution if at any time during the distribution period “it appears to the funding portal that the business of the issuer is not being, or may not be, conducted with integrity.”
The Exemption and portal framework provide average Canadians with access to investments in the exempt market, a new source of capital for Canada’s budding small- and medium-sized businesses and a new chapter in Canada’s capital markets. For full details on the Exemption and portal framework, please see MI 45-108.
The Stikeman Elliott LLP Securities Law Blog is available at www.canadiansecuritieslaw.com
Darin R. Renton is a partner at Stikeman Elliott, Toronto. He can be reached at email@example.com. Matei Olaru is an articling student at Stikeman Elliott, Toronto. He can be reached at firstname.lastname@example.org. Mr. Renton and Mr. Olaru acknowledge that this story does not purport to be legal advice.
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