From the Regulators

Exemption designed to facilitate capital raising by very early-stage companies

By James Langton |

Several provincial securities commissions are introducing the so-called startup crowdfunding exemption that was proposed last year.

The Nova Scotia Securities Commission (NSSC) published a blanket order Thursday indicating that it, along with several other provinces (including British Columbia, Saskatchewan, Manitoba, Quebec and New Brunswick) are adopting the startup crowd funding exemption that was initially published last year, which is modeled on the exemption that was first introduced in Saskatchewan. Ontario has proposed to introduce a different type of exemption to facilitate equity crowdfunding. 

The startup crowdfunding exemption aims to enable early-stage businesses and start-ups to raise funds from small investors that wouldn't qualify for other sorts of prospectus exemptions through online funding portals. It is designed to facilitate capital raising by very early-stage companies, and to allow investors to participate in online equity investing in risky ventures.

The exemption would allow a crowdfunding portal to operate without being registered as a dealer, subject to certain conditions, including that it does not provide advice and that investors receive a risk acknowledgement form, and that it holds investors' assets in trust pending the deal reaching a minimum offering amount.

It also imposes several conditions on companies seeking to raise funds through the exemption, including a $250,000 limit on funds raised, and that it can only carry out two distributions per year. Investors are limited to risking $1,500 per deal.

The order adopting the new exemption takes effect today, May 14, and expires on May 13, 2020.

"Crowdfunding is an attractive way for start-ups to raise capital. This regime addresses micro- capitalization needs and issues, which are more local in nature and sometimes industry-specific. Each member of the Canadian Securities Administrators (CSA) was therefore able to consider the characteristics of its own market and choose whether to opt in to the exemption regime," explains Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers (AMF).

The Ontario Securities Commission (OSC) says that it "continues to believe that the appropriate direction for our market" is the other crowdfunding exemption that it proposed last year, which would introduce both a higher offering limit and a higher investment limit than the startup exemption. It would also require crowdfunding portals to register as a dealer. "In our view, the registration of portals is important for managing risks to investors and the reputation of Ontario's capital markets," the OSC says.

The OSC expects to publish its proposed exemption in the fall, either in final form, or for a second comment period. It also says that it is continuing to evaluate both global and local developments in the equity crowdfunding space.