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Crowdfunding in Ontario

By: Shawn Blundell | September 19, 2016

In January of 2016, Multilateral Instrument 45-108 (the “Crowdfunding Exemption”) was adopted in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia, allowing Issuers to utilize Crowdfunding as a means to raise capital. The purpose of this article is to provide (i) a brief definition of Crowdfunding, (ii) the details of the new Crowdfunding Exemption, and (iii) outline how an Issuer can prepare themselves to utilize the Crowdfunding Exemption to distribute securities in Ontario.

What is Crowdfunding?

Crowdfunding is an all-encompassing term describing the various methods of funding a project or venture by raising money from members of the public over the internet via an online portal. The Ontario Securities Commission (“OSC”) has identified a number of Crowdfunding models but only seeks to regulate the “securities based model”. The securities based model describes a situation where the public invests in an Issuer in return for the Issuer’s securities, whether equity, debt or in some other form. Issuers that utilize a donation, rewards-based or pre-purchase of goods or services model will not be subject to securities regulations.

The Crowdfunding Exemption

Issuers are now able to raise an aggregate of up to $1,500,000 over the course of a twelve-month period under the Crowdfunding Exemption. The twelve-month period begins from the last date of a “distribution period”. A distribution period is the 90-day window that Issuers have to offer securities to the pubic via a Crowdfunding portal under the Crowdfunding Exemption. 

Therefore, an Issuer who raises $500,000 by selling its securities via a Crowdfunding portal with a distribution period from March 1, 2016 to May 29, 2016, will be able to raise another $1,000,000 between May 29, 2016 and May 29, 2017 under the Crowdfunding Exemption. Upon the conclusion of a distribution period, the Issuer has 30 days to close the distribution. If the Issuer fails to close within 30 days, the Crowdfunding portal must promptly return all funds received from potential investors.

Concurrent Distributions

Issuers are not precluded from distributing securities under other prospectus exemptions (e.g. accredited investor or offering memorandum exemption) during the distribution period, and need not issue securities at the same price or on the same terms or conditions as those being issued under the Crowdfunding Exemption. However, information about any concurrent distribution must be included disclosed in the Crowdfunding offering document.

Investment Limits

The Crowdfunding Exemption places limits on purchasers of securities. In Ontario, a purchaser that is not an accredited investor is limited to purchasing $2,500 in securities per distribution and an annual limit of $10,000. Accredited Investors are limited to $25,000 per distribution and an annual limit of $50,000. A permitted client, is not subject to an investment limit. The Issuer must ensure that they receive a confirmation from the funding portal that the purchaser is an accredited investor if the subscription is over $2,500 and a confirmation that a purchaser has not gone over their annual limits at the closing of a distribution.

Preparing to Use the Crowdfunding Exemption & Ongoing Disclosure Requirements

In order to utilize the Crowdfunding Exemption, an Issuer must prepare a Crowdfunding Offering Document in the form prescribed by regulation. The Offering Document requires an Issuer to provide information about its business, its directors, and details on the distribution including, but not limited to, the type of securities being offered, the amount being raised, the minimum subscription amount, if any, and the use of proceeds from the distribution. 

Additionally, if an Issuer raises more than $250,000 in a given year, they will be required to provide audited financial statements for the most recent financial year and a comparative year (if available) in both the Offering Document and each year thereafter in order to qualify for the Crowdfunding Exemption. Issuers in Ontario will also be required to provide notices to investors of specified key events within 10 days of the occurrence of the event. 

As such, Issuers should seek the advice of counsel when contemplating a distribution via the Crowdfunding Exemption as there may be more work required than the Issuer anticipated. Moreover, preparing these documents requires an in-depth understanding of securities law to prevent oneself from inadvertently falling afoul of regulations and landing in hot water with the OSC.

With that said, a Crowdfunding campaign can be an excellent tool for raising capital and can be utilized alongside other prospectus exemptions to optimize an Issuers financing objectives.



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