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OSC Releases Crowdfunding Concept Proposal

Fasken
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Capital Markets Bulletin

The Ontario Securities Commission has released for comment Consultation Paper 45-710 Considerations for New Capital Raising Exemptions (OSC Paper) which sets out concept proposals for four potential capital raising prospectus exemptions in Ontario: (i) crowdfunding, which the OSC defines as “the funding of a project or venture through small amounts of money raised from a large number of people (i.e., the “crowd”) over the internet via an internet portal intermediary”; (ii) an offering memorandum exemption; (iii) an exemption based on investment knowledge (for sophisticated investors who do not qualify as accredited investors) (the Investment Knowledge Exemption) and (iv) an exemption based on registrant advice (the Registrant Advice Exemption).

The OSC makes it clear in the OSC Paper that its consideration of these exemptions is only in the exploratory stage.  No decision has been made whether additional capital raising prospectus exemptions are warranted and, if so, whether these concept ideas should be adopted (and on what terms) or whether alternative prospectus exemptions would be more appropriate.

Comments on the proposals were due on March 8, 2013.

The four concept exemptions are described in more detail below.  

Crowdfunding Prospectus Exemption

Under the concept crowdfunding exemption, an issuer could solicit the “crowd” for investments in exchange for securities of the issuer.  Pursuant to the concept proposed by the OSC, the following restrictions would be imposed on the issuer:

Issuer qualification criteria - the issuer, its parent and its principal operating subsidiary must be incorporated or organized under Canadian federal laws or the laws of a Canadian jurisdiction and have its head office in Canada;

Limit on offerings - the issuer cannot raise more than $1.5 million under this exemption in a 12 month period;

Limit on type of security - only the following securities could be distributed under this exemption: common shares, non-convertible preferred shares, non-convertible debt securities that are linked only to fixed or floating rate interest rates and securities convertible into common shares or non-convertible preferred shares (Eligible Securities);

Limit on advertising - the issuer cannot advertise an investment except through a funding portal or on the issuer’s website but may use social media to direct investors to either.

In addition, to the foregoing the OSC’s crowdfunding concept includes the following investor protection measures:

Investment limits - the investor cannot invest more than $2,500 in a single investment under this exemption or more than $10,000 in total under this exemption in any calendar year;

Point of sale disclosure - the investor must receive a streamlined information statement at the time of distribution that includes basic information about the offering, the issuer, the funding portal and any other registrant involved, including the principal risks facing the issuer along with one year of financial statements (which must be audited if the proceeds of distribution are proposed to be greater than $500,000 or if the issuer is a reporting issuer).  The information statement must contain statutory rights in the event of a misrepresentation;

Risk acknowledgement - Investors must sign a risk acknowledgement confirming they fall within the investment limitations, understand that they may lose their entire investment and can bear the loss, and understand the illiquid nature of the investment in the case of securities of a non-reporting issuer;

Cooling off period - Investors will receive a two-business day right of withdrawal;

Ongoing disclosure – Investors will receive annual financial statements and the issuer is required to maintain certain books and records including with respect to the use of funds raised.

The crowdfunding concept proposal contemplates that all investments made under the proposed exemption must be made through a funding portal that is registered under the appropriate dealer or adviser registration category (or a restricted version thereof) depending on the business model used.

Offering Memorandum Exemption

In addition, in the OSC Paper, the OSC proposed a concept offering memorandum exemption (Ontario OM Exemption) to permit a distribution of securities based on a limited disclosure document.

Similar to the concept crowdfunding exemption, (i) the issuer, its parent and principal operating subsidiary must be incorporated or organized under the laws of Canada or a Canadian jurisdiction and have its head office in Canada; (ii) there would be a $1.5 million limit on capital that can be raised under the Ontario OM Exemption in a 12-month period; (iii) the issuer could distribute only Eligible Securities; (iv) the investor could only invest $2,500 per distribution and $10,000 in total under the Ontario OM Exemption in a calendar year; (v) a limited disclosure document must be provided to the investor (which must include statutory rights in the event of a misrepresentation); and (vi) the purchaser must sign a risk acknowledgement form and must be provided with a two-business day right of withdrawal.

Unlike an investment made under the crowdfunding exemption, an investment made pursuant to the concept Ontario OM Exemption would not need to be conducted through a funding portal and there would be no requirement for the involvement of a registrant as a condition to reliance on the exemption, unless the issuer or any intermediary is in the business of trading in securities.  

Investment Knowledge Exemption

The concept Investment Knowledge Exemption discussed in the OSC Paper would be available to an investor who has worked in the investment industry for at least one year in a position that requires knowledge of securities investments and has obtained one of the following: a chartered Financial Analyst designation, a Chartered Investment Manager designation or a Master in Business Administration degree. Under the Investment Knowledge Exemption, the investor must be provided with a basic information statement and must sign a risk acknowledgement form.

Registrant Advice Exemption

Pursuant to the concept Registrant Advice Exemption introduced in the OSC Paper, an investment dealer would be required to provide advice to the investor in connection with the distribution under this exemption, have an ongoing relationship with the investor, contractually agree that it has a fiduciary duty to act in the best interests of the investor and not provide advice in connection with a distribution of securities of a related or connected issuer of the dealer. The exemption would not extend to exempt market dealers.

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