If They Build It (Again), Will They Come? The CSA Proposes a Harmonized, Start-up Crowdfunding Regime
On February 27, the Canadian Securities Administrators (CSA) published for comment proposed National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions (NI 45-110), as well as proposed start-up crowdfunding guides for businesses and funding portals (Guides). If adopted, NI 45-110 will replace the patchwork of local instruments and blanket orders that provide for prospectus and/or registration exemptions for start-up crowdfunding activities. The CSA is also considering whether to repeal Multilateral Instrument MI 45-108 Crowdfunding (described below), which is currently available in Ontario and a number of other provinces. In our first look at the proposed new regime, we describe below its key features and share our initial impressions.
Existing Framework: Start-ups and early stage issuers have raised capital under local crowdfunding blanket orders (Blanket Orders) that grant prospectus and registration exemptions in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia. By contrast, to date no fundings have been completed under the prospectus and registration exemptions in Multilateral Instrument 45-108 Crowdfunding (MI 45-108), which is available in Alberta, Saskatchewan, Manitoba, Ontario, Québec, New Brunswick and Nova Scotia. There has been some fundraising under Alberta Securities Commission Rule 45-517 Prospectus Exemption for Start-up Businesses, which is similar to the Blanket Orders except that it doesn’t require use of a funding portal and doesn’t provide a registration exemption.
The Canadian securities regulatory framework for crowdfunding has been criticized for its complexity, lack of harmonization, low caps on fundraising, and regulatory costs. The CSA hopes that MI 45-110 will address these concerns while still providing adequate investor protection.
Proposed NI 45-110 differs from the existing regulatory framework in a number of ways, including the following:
- Maximum aggregate proceeds: NI 45-110 will permit an issuer group to raise up to $1,000,000 every twelve months (on a rolling basis measured from the date the new offering closes). The existing Blanket Orders permit an issuer group to raise up to $250,000 up to two times per calendar year. MI 45-108 has a 12-month, rolling $1,500,000 cap. We expect that some issuers and portal operators will view the $1,000,000 limit as too low to make these exemptions attractive. The CSA has asked if investor protection concerns can be adequately addressed if the cap is raised to $1,500,000.
- Maximum investment per purchaser: NI 45-110 will permit an investor to make an investment of up to $2,500 in an offering (or $5,000 if the investor obtains advice from a registered dealer that the investment is suitable for the purchaser). The existing Blanket Orders have a $1,500 limit (with BC, Alberta and Saskatchewan permitting $5,000 if the purchaser receives advice from a registered dealer that the investment is suitable). Existing MI 45-108 sets limits on how much a purchaser can invest in a given distribution and in all distributions made in reliance upon MI 45-108’s prospectus exemption in calendar year. The limits vary depending on the jurisdiction (e.g., Ontario has much higher limits) and the type of investor. We expect that some issuers and portal operators will view these investor-level caps as too low as well. The CSA has asked if caps at $5,000 (or $10,000 if the investor obtains suitability advice from a registered dealer) would be more appropriate.
- Funding Portals Not Required to Register: NI 45-110, like the Blanket Orders but unlike MI 45-108, will not require funding portals to be registered. If NI 45-110 is adopted, the existing, exempt funding portals operating in some Canadian jurisdictions will be able to access Ontario investors and facilitate crowdfunding nationally.
- Annual Working Capital Certification for Funding Portals: NI 45-110 introduces a new requirement for funding portals to provide regulators with a certificate that they have sufficient working capital to continue operations for at least the next twelve months.
- Bad Actor Disqualification: NI 45-110 introduces a prohibition on a funding portal relying upon the start-up crowdfunding registration exemption if it or any of its principals is or has been the subject of certain proceedings in the last ten years related to a claim based in whole or in part on conduct involving fraud, theft, breach of trust or allegations of similar conduct.
- Statutory Civil Liability: Under NI 45-110, issuers and, in some jurisdictions, the directors and executives signing the offering document, will be subject to statutory liability if the offering document contains a misrepresentation.
It will be interesting to see if market participants find the package of reforms in NI 45-110, in a nationally harmonized instrument, a more attractive mechanism for start-up crowdfunding. The comment period on proposed NI 45-110 will close on May 27, 2020. The CSA Members that have adopted the Blanket Orders will extend them so that they remain available until NI 45-110 is available. If you would like to discuss how proposed NI 45-110 might affect your business, please contact your usual lawyer at AUM Law.
February 28, 2020