BC Implements Start-up Crowdfunding Prospectus and Registration Exemptions
On May 14, 2015, British Columbia joined Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia (collectively, the “Participating Jurisdictions”) in implementing prospectus and registration exemptions that allow start-up and early stage companies to conduct securities crowdfunding distributions in these jurisdictions.
BC Instrument 45-535 – Start-up Crowdfunding Registration and Prospectus Exemptions (the “Instrument”) allows non-reporting issuers with head offices in the Participating Jurisdictions to issue eligible securities (i.e., shares, convertible securities, debt securities and limited partnership units) through an online funding portal to persons resident in the Participating Jurisdictions without having to file a prospectus. A funding portal lists investment opportunities and facilitates the payment of the purchase price from the investor to an issuer conducting a start-up crowdfunding distribution. There are two types of funding portals that may facilitate start-up crowdfunding: (i) funding portals operated by persons relying on the exemption from the requirement to register as a dealer with applicable securities regulatory authorities when trading in securities (the “registration exemption”) and (ii) funding portals operated by registered dealers.
The Instrument will expire in May of 2020. A summary of the Instrument is set out below.
Exemption from the prospectus requirement for non-reporting issuers conducting start-up crowdfunding distributions
A non-reporting issuer can rely on the Instrument to conduct up to two start-up crowdfunding distributions per year, raising a maximum of $250,000 per distribution (for maximum aggregate proceeds of $500,000 per year). These maximum limits include funds raised and start-up distributions conducted by affiliates of the non-reporting issuer and (i) any other issuer that is engaged in a common enterprise with the non-reporting issuer or with the non-reporting issuer’s affiliate, or (ii) any other issuer whose business is founded or organized by the same person or persons who founded or organized the non-reporting issuer. Under the Instrument, no person can invest more than $1,500 per distribution.
When conducting a start-up crowdfunding distribution, a non-reporting issuer must provide a simple offering document in a prescribed form (the “Offering Document”) through the funding portal’s website. The Offering Document discloses information about the issuer’s business and management, the securities being distributed, risk factors, how the issuer intends to use the funds raised, the minimum offering amount needed to close the distribution and the compensation to be paid to the funding portal in respect of the distribution. Purchasers are given a contractual right to withdraw their investments within 48 hours of their subscriptions or the funding portal notifying the purchasers that the Offering Document has been amended.
Each start-up crowdfunding distribution must close within 90 days after the first date the Offering Document is made available on the funding portal’s website. If the minimum offering amount is not raised within the 90 day period, the funding portal must return all funds to each purchaser within five business days. If the minimum amount has been raised within the determined time period, the non-reporting issuer will issue the securities to the investors and instruct the funding portal to release the funds.
Within 30 days of successfully closing a distribution, a non-reporting issuer must deliver a confirmation to each purchaser setting out information about the distribution and the total compensation paid to the funding portal and must also file the Offering Document and a report of exempt distribution with the regulator of each Participating Jurisdiction where the non-reporting issuer raised money and with the regulator of the Participating Jurisdiction where the non-reporting issuer’s head office is located.
Funding portals operating under the registration exemption
The Instrument permits a funding portal to rely on the registration exemption when facilitating a start-up crowdfunding distribution, provided certain conditions are met. The key conditions are:
- the head office of the funding portal is in Canada;
- a majority of the funding portal’s directors are Canadian residents;
- the funding portal does not receive a commission or fee from an investor;
- the funding portal must not give suitability advice to investors regarding the securities being distributed under the start-up crowdfunding distribution;
- prior to allowing any person entry to its website, the funding portal requires the person to acknowledge that they are entering a website of a funding portal that is not registered under Canadian securities legislation and that does not provide suitability advice regarding the investment;
- before accepting an investment, a funding portal must obtain confirmation from the investor that he or she has read and understood the Offering Document and the risk warnings available on the funding portal;
- a funding portal must take reasonable measures to ensure that an issuer and a purchaser are residents of a Participating Jurisdiction; and
- a funding portal must keep its books and records at its head office for eight years.
A funding portal intending to rely on the registration exemption must deliver certain forms pertaining to the funding portal and its principals to regulators in each Participating Jurisdiction in which it will facilitate start-up crowdfunding distributions at least 30 days before starting operations. Following a review of these forms, a regulator can notify the funding portal that it cannot use the registration exemption because its principals or their past conduct demonstrate a lack of integrity, financial responsibility or relevant knowledge or expertise.
Within 15 days following the closing of the distribution, the funding portal must notify investors that the funds have been released to the issuer, and it must provide the issuer with contact information for each purchaser.
Funding portals operated by registered dealers
Registered dealers operating a funding portal must, among other things:
- receive an acknowledgment from any person entering the funding portal’s website that the funding portal is operated by a registered dealer that will provide suitability advice; and
- meet their existing registration obligations under securities legislation, including the know-your-client, know-your-product and suitability obligations owed to investors.
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