Securities regulators in Ontario, Quebec, Manitoba, New Brunswick and Nova Scotia on Thursday published in final form a new rule that introduces a crowdfunding prospectus exemption allowing fledgling companies to raise funds from ordinary investors through online portals.
The new exemption aims to expand the avenues for small companies to raise capital, and gives ordinary retail investors the opportunity to invest in risky startups.
The exemption also includes a number of measures designed to bolster investor protection, including: setting investment limits; requiring issuers to distribute their securities through funding portals that must be registered as dealers; and certain gatekeeper functions, such as reviewing issuers’ disclosure and carrying out background checks on the issuer, its directors, executives and promoters.
In addition, issuers that use the new exemption will be liable for their disclosure, they will be banned from advertising, and they will be limited to offering “non-complex” securities.
“This new crowdfunding regime is another way to facilitate capital raising for start-ups and small and medium-sized enterprises while protecting the interests of investors,” says Louis Morisset, chairman of the CSA and president and CEO of the Autorité des marchés financiers (AMF).
The new crowdfunding regime is not significantly different from the regulators’ initial proposal, which was put forward in early 2014. The regime will allow issuers to raise up to $1.5 million during a 12 month period. The investment limits for non-accredited investors will be $2,500 per investment, and an annual limit of $10,000 (only in Ontario). For accredited investors, they will be limited to $25,000 per investment, to an annual limit of $50,000 (again only in Ontario). Issuers will also have ongoing disclosure requirements that oblige them to provide investors with annual financial statements, and an annual notice regarding the use of the proceeds raised under the exemption.
Four of the five regulators (excluding Ontario) adopted start-up crowdfunding exemptions earlier this year, which impose lower investment limits and tougher restrictions on capital raising. The exemption regime proposed today is designed to be complementary to that existing regime.
Pending ministerial approval, the new exemption is set to take effect on Jan. 25, 2016.
The Ontario Securities Commission (OSC) proposed a new offering memorandum (OM) exemption last month, which is also set to take effect in the new year.
With these two new exemptions coming on line, the OSC says that it is “developing a compliance and oversight program to monitor distributions under these new capital raising tools.”