Crowdfunding for Start-Ups and Early Stage Companies

What is crowdfunding?

Crowdfunding is a process through which an individual or a business can raise small amounts of money from a large number of people.

Previously, many start-up companies in Canada couldn’t raise capital by selling equity to investors through crowdfunding due to prospectus and registration rules. However, on May 14, 2015, as a result of the adoption of new registration and prospectus exemptions (the “Start-Up Crowdfunding Exemptions”) by Canadian Securities Regulators in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia (collectively, the “Participating Jurisdiction”), non-reporting issuers (private companies) can now raise capital by crowdfunding.

What does this mean for start-ups?

The Start-Up Crowdfunding Exemptions allow non-reporting issuers (private companies) to simultaneously raise capital from residents of Participating Jurisdictions by offering them certain eligible securities. This includes common shares and non-convertible preferred shares through online crowdfunding portals, subject to certain conditions.

Assuming a non-reporting issuer (private company) meets the conditions of the Start-Up Crowdfunding Exemptions, it can distribute securities without having to file a prospectus – which can be a time consuming and costly endeavour for start-ups and early stage issuers.

What are some of the key conditions to use the Start-Up Crowdfunding Exemption?

The Start-Up Crowdfunding Exemptions are subject to a number of conditions. Some of the key conditions are as follows:

  • issuer’s head office must be located in a Participating Jurisdiction;
  • $1,500 maximum limit per investor;
  • $250,000 maximum limit per start-up crowdfunding distribution;
  • start-up crowdfunding distribution maximum of two per year;
  • streamlined offering document;
  • the distribution must be made through an online funding portal that is either relying on the start-up registration exemption or is operated by a registered dealer;
  • the funding portal must deliver a funding portal information form and individual information forms for each of its principals to the participating regulators at least 30 days prior to facilitating its first start-up crowdfunding distribution;
  • the head office of the funding portal must be located in Canada and the majority of the funding portal’s directors must be Canadian residents;
  • the funding portal must not provide advice to a purchaser or otherwise recommend or represent that an eligible security is suitable, or about the merits of the investment;
  • the issuer and its principals do not receive a commission, fee or any other amount from a purchaser of eligible securities.

How long will the Start-Up Crowdfunding Exemptions be available?

The Start-Up Crowdfunding Exemptions will be effective until May 13, 2020.

Other considerations

Any non-reporting issuer (private company) seeking to rely on the Start-Up Crowdfunding Exemptions should carefully consider whether the use of such exemptions are appropriate. Taking into account key considerations such as the time and efforts to prepare a crowdfunding campaign, the expectations of crowdfunding investors, the non-reporting issuer’s capital structure and whether the non-reporting issuer can manage a large number of security holders, etc.

Want to know more?

These exemptions can be found in local blanket orders which will be available on the website of the respective securities regulatory authority of each Participating Jurisdiction.

For more information about the Crowdfunding Registration and Prospectus Exemptions, please contact Candice Mordy at cmordy@nullboughtonlaw.com or 604-605-5624.

Tags: Article, Securities, Candice Mordy