How does Equity Crowdfunding work in Canada?

The Crowdfunding space has has experienced numerous changes in North America. We previously covered the JOBS Act in the US and the expected consequences of the Act. Now it’s time to have a look at the Canadian market for Equity Crowdfunding. Where are we, in relation to the US and what do our Laws permit us to do in Canada?

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First off, an overview of equity crowdfunding the US

There are 7 US states where equity crowdfunding is permitted:

1. Georgia
2. Indiana
3. Kansas
4. Maine
5. Michigan
6. Washington
7. Wisconsin

The market for equity crowdfunding is restrictive, in that only people who reside in one of those same states can invest, with a cap on investment (a company’s ability to raise) of $1.5 million.

The main focus of crowdfunding is to allow investment from “non-accredited investors” and an opportunity to bridge the gap between experienced investors and the everyday consumer. Many current crowdfunding platforms help new companies prove their product-market fit, by soliciting support from the crowd, often with angel investor seed capital to help reach their pledged goals – the reward for support is typically some package of gifts and bonuses, but not equity in the company.

The more traditional world of venture capital and banking can step in at the next level and, therefore, the option for equity crowdfunding can help to close this gap.

If you are classed as an “accredited investor” (net worth of at least one million US dollars) or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married and have the expectation to make the same amount this year.”) [2] then you can invest across borders. (If you are not, then you cannot invest in certain securities)

As discussed with Title III of the JOBS Act, this is poised to change. Currently however, it is 'stuck' in congress. So, what are the the rules for equity crowdfunding in Canada? The market in Canada is similar to America in that equity crowdfunding is emerging on a regional level before a national one.

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Canadian crowdfunding is based around four OSCs (Ontario Securities Commission) prospectus exemptions

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Crowdfunding Prospectus Exemptions

This allows online portals to connect accredited investors to investment opportunities. It permits the sale of “securities” to the general public. Currently (as of June 2013), the OSC allows an online portal to connect investors to opportunities in social or environmental impact projects in Ontario only. Similar exemptions have just been published for comment in Manitoba, Quebec, New Brunswick, and British Columbia as of March 20, 2014, with an amendment to the existing exemption in Saskatchewan. This means companies in these provinces will be able to raise $150,000 per campaign (again, with a limit of 2 per year), with investor contributions being capped at $1,500 per person, per campaign. [3]

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Offering Memorandum Prospectus Exemption

This is a release from the strict requirements of filing a detailed prospectus (similar to the one in June from the OSC in June 2013) in Manitoba, Quebec, New Brunswick, Nova Scotia and British Columbia. Canadian companies must provide financial statements to crowdfund under the OM (Offering Memorandum) exemption. They are able to do so in the above provinces. The full scope of auditing financial statements and reporting requirements will not be known until September 2015.

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Family, Friends and Business Associates Exemption

Would allow issuers to sell certain types of securities to family, friends and business associates in Ontario. This exemption has been available in every Canadian province and Territory since 2004.[5]

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Existing Security Holder Prospectus Exemption

Securities regulators in all jurisdictions except Ontario and Newfoundland and Labrador, would allow public issuers (other than investment funds) listed on the Toronto Stock Exchange, TSX Venture Exchange and Canadian Securities Exchange to raise capital by distributing securities to existing investors. [4]

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A leader in the equity crowdfunding market: the UK

While North America speculates and waits in limbo for the new rules to be pushed through, the UK (and Europe) leads the crowdfunding market. In the UK, anyone is permitted to invest on the basis that this amount does not exceed 10% of their net assets in debt or equity assets annually. The total equity crowdfunding contribution in the UK currently sits at over 20 million pounds.

Back here in North America however, we’re looking at another year before we can really get the opportunity to close the gap on equity crowdfunding. Hang tight; the Canadian proposals we discussed earlier are open for public comment until June 2014 and the Request for Comment can be found at the OSC website. In the meantime, startups can still find funding from a variety of sources; although, when equity crowdfunding ultimately does come into effect it will undoubtedly have a powerful impact on the way that funds are raised in North America.

*Special thanks to our friends at Fundrazr: Robert DeFilippi, for providing the background information on Equity Crowdfunding & Tessa MacDougall for her insight on crowdfunding platforms.

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References:

• Capital Match Point
• Accredited Investor: Canadian Criteria
• Regulators Green-light Equity Crowdfunding
• Crowdfunding and other New Prospectus Exemptions Proposed by the Ontario Securities Commission
• Ontario Proposed Friends and Business Associates Exemption
• Equity Crowdfunding Developments in the UK