The Canadian Securities Administrators (CSA) published a new regulation that provides a harmonized national framework for securities crowdfunding for start-ups and early-stage businesses. National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions (NI 45-110) provides (i) issuers with an exemption from prospectus requirements if distributing eligible securities through online funding portals (portals), and (ii) certain portals with an exemption from dealer registration requirements in facilitating such distributions.
Under NI 45-110, eligible issuers can raise up to $1.5 million in a 12-month period through one or more distributions of eligible securities, provided the distributions are facilitated through a portal that operates in compliance with NI 45-110. Eligible investors can contribute a maximum amount of $2,500 per distribution, with such maximum amount increasing to $10,000 if the investor has been advised by a registered dealer. Issuers may only have one active crowdfunding campaign at any given time.
NI 45-110 is anticipated to come into force September 21, 2021, and will replace a number of similar instruments adopted by the provincial securities regulators in each of British Columbia (Instrument 45-535), Alberta (Blanket Order 45-521), Saskatchewan (General Order 45-929), Manitoba (Blanket Order 45-502), Ontario (Instrument 45-506), Quebec (Regulation 45-108), New Brunswick (Blanket Order 45-506) and Nova Scotia (Blanket Order 45-524). Other provincial and national instruments will be revised as required to reflect the provisions of NI 45-110. Multilateral Instrument 45-108 Crowdfunding, which also provides a prospectus exemption for issuers distributing securities via portals, will be monitored by securities regulators following the implementation of NI 45-110 to determine if there is reason to maintain it.
Prospectus exemption for issuers
Eligibility and Timelines
The new crowdfunding prospectus exemption is available to corporations, limited partnerships, general partnerships, and other associations (as defined in NI 45-110) with head offices in Canada, provided the securities being offered are eligible equity or debt securities, and the issuer is not (i) an investment fund, (ii) a reporting issuer, or (iii) an issuer commonly referred to as a “blank check company” without operations other than identifying and evaluating assets or businesses to invest in, merge with, or acquire. Such “blank check companies” will be required to finance their endeavours using alternative strategies, such as the TSX Venture’s Capital Pool Company program.
Under NI 45-110, issuers have a maximum of 90 days to complete an offering and must, within 30 days of the closing date, distribute a written confirmation to each purchaser, setting out, among other things, the quantity, price, and description of the securities purchased, and any commissions or fees payable in connection with the offering. Issuers must also file with all applicable securities regulators a completed Form 45-106F1 Report of Exempt Distribution and Form 45-110F1 Offering Document within the same period.
The issuer must prepare an offering document to be posted on the portal's website. The offering document must have all the information required by Form 45-110F1 Offering Document, including:
- basic information about the business and the offering, the minimum and maximum amount sought, and a description of the intended use of any proceeds;
- relevant risks of the business or project; and
- residency, principal occupation, expertise, and security holdings of each founder, director, officer, and control person of the issuer.
NI 45-110 does not require that the offering document include financial statements; however, issuers may include financial statements, provided they are prepared in accordance with Canadian GAAP. Issuers are required to amend their offering document if any information contained in the offering document changes during the financing campaign, and investors may withdraw their investment within two business days following any such amendment. Issuers are subject to statutory liability for misrepresentations in the offering document.
Dealer registration exemption for portals
Eligibility and Timelines
The dealer registration exemption is available to non-registered portals with head offices in Canada provided that, among other things, a majority of the portal's directors ordinarily reside in Canada (a requirement in contrast to the general trend in Canadian corporate law away from director residency requirements), and that the portal remains solvent and maintains all required policies, procedures and records. The dealer registration exemption is not available if the portal or any of its principals is or has been the subject of certain proceedings in the last 10 years related to conduct such as fraud, theft, or breach of trust.
At least 30 days before the first date the portal facilitates a crowdfunding distribution, eligible portals must file with the local securities regulator a completed Form 45-110F3 Funding Portal Information, and each principal of the portal must file a completed Form 45-110F4 Portal Individual Information. A completed Form 45-110F5 Semi-Annual Financial Resources Certification must be filed in January and July of each year.
Exempt portals may only facilitate crowdfunding distributions, may not advise investors as to the merits or suitability of an investment, may not receive commissions or fees from investors, and are prohibited from facilitating distributions where a principal of the portal is also a principal of the issuer group.
Registered dealers may operate portals that facilitate distributions in reliance on the crowdfunding prospectus exemption, provided that the dealer meets its existing registration obligations under securities legislation and also remains in compliance with all applicable requirements of NI 45-110.
NI 45-110 contains several additional positive and negative obligations on both issuers and portals, and should be reviewed by anyone considering conducting or facilitating a distribution relying on the crowdfunding prospectus or dealer registration exemptions in NI 45-110.
The full text of NI 45-110 is available here. A complete summary of the difference between the existing framework and NI 45-110 is available here. CSA Staff Notice 45-329 Guidance for using the start-up crowdfunding registration and prospectus exemptions is available here.
The authors wish to thank James Farrell, articling student, and Johanna Vanneste, summer student, for their help in preparing this legal update.