Crowdfunding is a great way for businesses to raise a small amount of money from a large group of people to help fund a new business venture. However, businesses who use crowdfunding to raise capital by issuing securities in exchange for the money raised need to make sure they are not violating any securities laws by using a registration and prospectus exemption available in their jurisdiction. There are currently two exemptions from prospectus and registration requirements under securities laws in Canada for crowdfunding, start-up crowdfunding and equity crowdfunding.
The first exemption is for start-up crowdfunding, available for start-ups and early stage issuers looking to raise capital. This exemption is currently available in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia. Start-up crowdfunding allows companies to raise small amounts of capital by selling securities without filing a prospectus. A funding portal is allowed to help companies facilitate trades of the securities distributed under the start-up prospectus exemption without having to register as a dealer, except in Alberta where such exemption for funding portals in not available.
British Columbia Securities Commission published a helpful guide that explains how start-up crowdfunding works and the steps involved. A small business posts on a crowdfunding website their investment opportunity, outlining the basic information about their business, how much they are looking to raise, the risk involved in their business venture and how the money they raise will be used. Investors can invest up to $1,500 and investors residing in BC and Alberta can invest up to $5,000 if the issuer has a head office in BC or Alberta, the crowdfunding distribution is made through a registered dealer and the dealer has determined that the investment is suitable for that particular investor. The crowdfunding website will hold the money raised in trust for investors until the minimum amount is raised. If the business fails to raise the minimum amount, the crowdfunding website will refund the money back to the investors. The maximum amount that can be raised is $250,000 per start-up crowdfunding distribution. In Alberta, once a business has raised $1,000,000 under this exemption over the course of its existence, it can no longer used this exemption.
As discussed in our previous post, equity crowdfunding exemptions that exist in Ontario, Quebec, Manitoba, New Brunswick and Nova Scotia allow companies to raise up to $1.5 million annually and distribute securities through a registered funding portal without filing a prospectus. Investors have to reside in one of the participating jurisdictions and can invest up to $2,500 per year in a single distribution and up to $10,000 per year in total. Businesses relying on this exemption still have certain obligations to their investors, including making their annual financial statements available to investors and giving notice of key events, such as change in control of the business.
By using one of the exemptions discussed above, businesses can raise money through crowdfunding in participating jurisdictions without running afoul of securities laws.
The author would like to thank Olga Lenova, Articling Student, for her assistance in preparing this legal update.
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