McKERcHER LLP BARRISTERS & SOLIcITORS
mckercher.ca
SASKATOON374 Third Avenue South Saskatoon, SK S7K 1M5(306) 653-2000 F (306) 653-2669
REGINA500 – 2220 12th Avenue Regina, SK S4P 0M8(306) 565-6500 F (306) 565-6565
SEcuRITIES LAwcrowdfunding Unleashed
December 9, 2013
Resource Bulletin
McKERcHER LLP BARRISTERS & SOLIcITORS
On December 6, 2013, the Government of Saskatchewan, through the Saskatchewan Financial and Consumer Affairs Authority (FCAA), put into action its new crowdfunding exemption for the raising of capital in Saskatchewan. This new exemption is a “first in Canada” solution to an issue that has gained international attention in recent years. The purpose of this article is to provide some background on crowdfunding, the exemption itself, and how it stacks up against regulatory requirements in other jurisdictions.
What is Crowdfunding?Crowdfunding is the raising of capital by gathering funds from a large number of investors (the so-called “crowd”) who individually do not contribute a significant amount of funds. In some cases, the contribution can be as little as a dollar. In return, the investor may receive nothing (donation model), some good or service such as a copy of a production or a prototype of the product being financed (sale of goods model), or an equity interest in the venture itself (equity model). This article is focused on the latter of these models, the equity model.
How do I Crowdfund?Generally speaking, crowdfunding occurs through an intermediary called a “portal”. New ventures will set up an account with a crowdfunding portal in order to raise their funds. Some of the larger portals include Kickstarter and Indiegogo. The venture will then provide information about their business to potential investors and advise how much money is required for a particular interest in the business. The portals do not typically mandate the level of disclosure; however, more successful ventures typically provide more comprehensive and continuous disclosure on their business.
Why do we need an Exemption?Each Province in Canada has jurisdiction over the regulation of buying and selling “securities”. The term “securities” is interpreted very broadly and includes traditional debt, equity, and derivative instruments, as well as any other interest obtained by an investor expecting to make a profit. In order to sell securities,
a company is typically required to file a prospectus or rely on an exemption. The general theories behind securities regulation are that the investor is either
(i) provided with disclosure about the investment through a document such as a prospectus, (ii) in a close relationship with the business raising money or the principles behind the business, or (iii) a wealthy or sophisticated individual who can bear the loss should the investment not work out.
Selling equity interests through a crowfunding portal is a sale of securities and therefore subject to securities regulation. Since a prospectus is costly and comes with the additional burdens of continuous disclosure obligations (e.g. filing of quarterly and annual financials and reports when material events occur to the business), many businesses would rather turn to an exemption. Therefore, the crowdfunding exemption exists to allow businesses to raise funds without being subjected to all the regulatory securities law rules.
What is the Exemption?The features of the exemption can be broken down into the following five categories: general, issuers/offerings, portals, investors, and documentation:
1. General• An issuer can have no more than two (2) offerings per year,
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cRowdFunding unleAShed
unless they have applied for an exemption from this rule.• Each offering is limited to six (6) months in length.• The maximum size of an offering is $150,000.• The crowdfunding exemption will be automatically repealed
in two years from the date of enactment unless extended by the Province or alternative legislation is introduced.
• Trades can only occur in Saskatchewan (i.e. if the business is raising funds in other Provinces, they will need to rely on a different exemption in those Provinces). This will generally mean the issuer must be based in Saskatchewan; however, out of Province issuers may be able to raise funds by establishing subsidiary entities in the Province.
2. Issuers/Offering• Any type of entity can use this exemption (e.g., partnership,
corporation, trust).• Issuer cannot be a public company or an investment fund and
cannot offer derivative type securities.• There is no limit on the type of security offered excepting
that derivatives may not be offered (e.g. common shares, preferred shares, debentures, promissory notes, are all permissible).
• Promoters, directors and officers will be required to sign and consent to a Canadian Police Information (CPIC) check.
• Sufficient funds must be raised under an offering to complete the project.
• No commissions can be payable to an issuer or their employees/agents.
• Issuer must give notice to the FCAA of their intention to issue an offering 10 business days before posting online.
• Issuer must file a trading report with FCAA within 30 days of closing the offering.
• No ongoing disclosure requirements will be placed on the issuer (albeit it may be prudent to keep investors updated by email, website, social media, etc.).
3. Portals • Portals (such as Kickstarter and Indiegogo) will not be
required to be registered with the FCAA.• The portals will be exempt from “know your client” and
“suitability” obligations typically placed on registered advisers, dealers, and investment fund managers.
• Portals will not be permitted to give investment advice
• Portals cannot be related to the issuers raising funds through them.
• Portals can charge fees for their services but none will be payable to the FCAA.
• All funds being held in trust for investors by a portal pending closing an offering must be held by a lawyer.
4. Investors• All investors must be located in Saskatchewan (however,
there may be opportunities for out of Province entities to invest through entities set up in Saskatchewan).
• Any investor may purchase securities, but with the following restrictions:a. Maximum purchase price per offering: $1,500.b. No limit on the number of offerings an investor can participate in annually.
• All securities issued will be subject to resale restrictions preventing their subsequent resale except in prescribed circumstances – Generally, an issuer will have to “go public” before the shares are issued or the investor will have to sell the shares through an exemption (for example, to an accredited investor or high-net worth individual).
5. Documentation• Issuers will be required
to complete the following forms for the offering:a. Issuer Information Form – GO45-925F1b. Individual Information Form – GO45-925F2c. Offering Document – GO45-925F3d. Report of Trades Form – GO45-925F4
• Portals will be required to complete the following:a. Portal Information Form – GO 45-925F5b. Portal Individual Information Form – GO45-925F6
In addition to these documents, an issue will also recieve share purchase agreements with each of the investors. As of yet there is no prescribed form for such an agreement but one can be developed with proper knowledge of the law.
McKERcHER LLP BARRISTERS & SOLIcITORS
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McKERcHER LLP BARRISTERS & SOLIcITORS
Are there Crowdfunding exemptions in other Jurisdictions?
At the time of this article, no Province has passed legislation allowing for an exemption for equity crowdfunding. However, in December of 2012, the Ontario Securities Commission (the regulator in Ontario) published a proposal for a crowdfunding exemption. This proposal was reiterated on August 28, 2013 and the OSC has stated, on December 4, 2013, that they intend to publish a new crowdfunding exemption for comment in the first quarter of 2014. The proposal is summarized below:
• QualificationCriteria ~ Issuer must be incorporated or organized under Canadian federal laws or the laws of a Canadian jurisdiction and the issuer must have its head office in Canada.
• LimitonOfferings ~ Issuer cannot raise more than $1,500,000 in any 12-month period.
• LimitonAdvertising ~ Issuer is not permitted to advertise except through a funding portal or on the issuer’s website. However, the issuer can use social medial to direct investors to the funding portal or to the issuer’s website.
• InvestmentLimits ~ Investors cannot invest more than $2,500 in a single investment and no more than $10,000 on all crowdfunding investments in a calendar year.
• OfferingDisclosure~ Investor must receive an information statement that includes basic information about the offering, the issuer, the funding portal, and any other registered entities involved. The statement must include a description of the principal risks facing the issuer as well as 1 year of financial statements. If the funds to be raised are greater than $500,000 or the issuer is a public company, financial statements must be audited. Otherwise, the financial
statements must be certified by management.
• Marketing ~ The only marketing material permitted is the information statement (excepting advertising through the funding portal and the issuer’s website/social media).
• RiskAcknowledgement ~ Investor must sign a risk acknowledgement where they confirm that:o They fall within the investment limitationso They understand they may lose their entire investment and they can bear that losso They understand the illiquid nature of the investment (if issuer is not a reporting issuer).
• CoolingOffPeriod ~ Investors are given two (2) business days, from the date of their investment, to withdraw their investment.
• OngoingDisclosure~ Issuer must provide investors with annual financial statements within 120 days of its year-end. The issuer must also keep books and records (which can be inspected by the staff of the Ontario Securities Commission) which contain, at minimum:o Information on the securities issued by the issuer as well as the distribution price and dateo Names of all security holders and the size of their holdingso Use of funds raised.
• ResaleRestrictions ~ Generally, the investor will not be able to sell their equity interests unless (i) the issuer becomes a public company, or (ii) the investor sells their interests through another securities exemption.
• FundingPortals ~ Portals will be required to be registered in a traditional category such as “adviser” or “dealer” but may be able to seek exemptions from certain rules.
In addition to the proposal put forward by Ontario, the U.S. passed legislation (in April of 2012) providing for their own
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AT The TiMe oF ThiS ARTicle, no PRovince
hAS PASSed legiSlATion Allowing FoR An
exeMPTion FoR equiTy cRowdFunding.
crowdfunding exemption. Subsequently, on October 23, 2013, the U.S. Securities and Exchange Commission (SEC) published a fact sheet on the proposed exemption (open for comment for 90 days), which is summarized below:
• QualificationCriteria ~ Only available to companies organized under and subject to the laws of a State or territory of the U.S. or the District of Columbia. Ineligible companies include:a. Non-U.S. companiesb. Companies that already are SEC reporting companiesc. Certain investment companiesd. Companies that are disqualified under the proposed disqualification rulese. Companies that have failed to comply with the annual reporting requirements in the proposed rulesf. Companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies
• Disclosure ~ Companies will be required to file certain information with the SEC, provide it to investors and the crowd funding portal, and make the information available to potential investors. In the offering document, the company will be required to disclose: a. Information about officers and directors as well as owners of 20% or more of the companyb. A description of the company’s business and the use of proceeds from the offeringc. The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amountd. Certain related-party transactionse. A description of the financial condition of the companyf. Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public
accountant or auditor.Companies will be required to amend the offering document to reflect material changes and provide updates on the company’s progress toward reaching the target offering amount. In addition to the offering document, companies will be required to file an annual report with the SEC and provide it to investors.
• LimitonOfferings ~ Annual limit of up to $1,000,000, but with financial statement disclosure requirements:a. Up to $100,000 - Normal financials, not reviewedb. $100,000 - $500,000 - Financials reviewed by independent public accountantc. $500,000 -$1,000,000 - Audited financial statements
• InvestorLimits ~ Investor limits in any 12-month perioda. Annual income or net worth less than $100,000 - Up to the greater of (i) $2,000 and (ii) 5% of the annual income or net worthb. Annual income or net worth over $100,000 - Up to the greater of (i) 10% of their annual income, and (ii) 10% of their net worthc. Overall limit of $100,000 of crowdfunding securities in a 12-month period
• Resalerestrictions ~ Can’t be resold for a period of 12 months after the date of issue. Holders of these securities would not count toward the threshold that requires a company to register with the SEC under ss. 12(g) of the Exchange Act.
• FundingPortals ~ Under the proposed exemption, crowdfunding offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.
The proposed rules would require intermediaries to:• Provide investors with educational materials• Take measures to reduce the risk of fraud
McKERcHER LLP BARRISTERS & SOLIcITORS
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McKERcHER LLP BARRISTERS & SOLIcITORS
mckercher.caSASKATOON374 Third Avenue South Saskatoon, SK S7K 1M5(306) 653-2000 F (306) 653-2669
REGINA500 – 2220 12th Avenue Regina, SK S4P 0M8(306) 565-6500 F (306) 565-6565
with offices in Regina and Saskatoon, McKercher llP has over 60 practicing lawyers in all major areas of law. These lawyers are backed by an outstanding team of support staff with a wealth of resources. we are strategically positioned to take advantage of all that Saskatchewan has to offer. Tracing our roots back to 1926, we are proud of what we have accomplished and consistently work towards serving our clients with innovation and integrity.
McKercher’s corporate team has expertise in all manner of corporate finance and securities laws. They have assisted several large companies in the raising of capital and the listing of their securities on the TSx venture exchange and Toronto Stock exchange, in addition to helping small to medium size companies raise capital in the exempt market.
This resource bulletin is for information purposes only and should not be taken as legal opinions on any specific facts or circumstances. counsel should be consulted concerning your own situation and any specific legal questions you may have.
• Make available information about the issuer and the offering• Provide communication channels to permit discussions about offerings on the platform• Facilitate the offer and sale of crowdfunded securitiesMust be registered with the SEC as either a “broker” or a “funding portal”.
The proposed rules would prohibit funding portals from:• Offering investment advice or making recommendations• Soliciting purchases, sales or offers to buy securities offered or displayed on its website• Imposing certain restrictions on compensation people for solictiations• Holding, possessing or handling investor funds or securities
The latter is exempt from registration as a broker or dealer but is subject to SEC authority or is not permitted to
(i) offer investment advice, (ii) solicit purchases or sales of the crowdfunded securities offered on its website, (iii) compensate employees or others based on sales of crowdfunded securities, or (iv) hold or manage investor funds.
The SEC is presently seeking comments on these proposed rules. In addition, the U.S. Financial Industry Regulatory Authority is
also seeking comments on the set of prepared rules for funding portals and related forms.
TaxesAt this time, the Canada Revenue Agency has been unclear about the potential taxation of crowdfunding revenues. They have noted that these funds likely constitute income from carrying on a business in Canada but have not been definitive in this statement. Additionally, they have not provided commentary as to whether corresponding deductions are available to crowdfunding issuers for the funds they use to further their projects. With the introduction of this exemption for equity crowdfunding, the tax implications of raising capital through crowdfunding may be somewhat unclear.
Additional InformationThe FCAA has published guides for issuers, investors and portals on their website (http://www.fcaa.gov.sk.ca) which will provide these parties with additional information about equity crowdfunding.
Joe gill, a lawyer in McKercher
llP’s Saskatoon office,
maintains a general corporate
and commercial law practice
with particular emphasis
in the areas of corporate
Finance, Securities, Mergers &
Acquisitions, and Taxation.
