Canada: CSA Adopt Nationally Harmonized Crowdfunding Registration And Prospectus Exemptions

New CSA rules will provide an exemption to prospectus requirements for start-ups distributing securities through an online funding portal.

• National Instrument 45-110 is intended to facilitate securities crowdfunding for start-ups and early stage issuers on a national basis.
• New exemptions will include a prospectus exemption, as well as an exemption from the dealer registration rules for funding portals.
• National Instrument 45-110 will replace the local exemption orders currently in force on a province-by-province basis.
• Assuming Ministerial approvals are obtained, the new national instrument will take effect on September 21, 2021.

On June 23, 2021, the Canadian Securities Administrators (CSA) announced the adoption of National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions (NI 45-110), and published start-up crowdfunding guides for businesses and funding portals. NI 45-110 is intended to facilitate securities crowdfunding for start-ups and early stage issuers by providing an exemption from the prospectus requirements for issuers distributing securities through an online funding portal, as well as an exemption from the dealer registration rules for funding portals.

As we previously discussed, securities regulators in various provinces enacted local blanket orders in 2015 to implement registration and prospectus exemptions intended to facilitate capital-raising through crowdfunding. While Ontario did not adopt analogous rules at the time, the Ontario Securities Commission eventually enacted similar crowdfunding exemptions in July 2020.The CSA, meanwhile, published a draft of NI 45-110 for comment in February 2020 with the intention of adopting the crowdfunding exemptions on a nationally harmonized basis.

Prospectus Exemption

Under the final version of NI 45-110, a non-reporting issuer that is not an investment fund and whose head office is located in Canada will be exempt from the prospectus requirement in respect of a crowdfunding distribution where eligible securities (including common shares and non-convertible preference shares) are issued through a funding portal, provided that certain conditions are satisfied, including:

• An issuer relying on the exemption will have to provide to the funding portal an offering document in prescribed form containing basic information about the issuer, its management, the distribution, risk factors, and how the proceeds of the crowdfunding distribution will be used.
• The crowdfunding distribution will have to close no later than 90 days after the offering document is first made available to purchasers on the funding portal's platform.
• A copy of the offering document, along with certain other information about the investor's purchase, will have to be delivered to each purchaser within 30 days after the closing of the distribution.
• Each investor must be provided with a contractual right to withdraw by delivering notice to the funding portal no later than midnight on the second business day after entering into a subscription agreement, or midnight on the second business day following an amendment to the offering document.
• Issuers relying on the prospectus exemption will be limited to raising no more than $1,500,000 during the 12-month period before the closing of the crowdfunding distribution. The limit on proceeds has been raised from the $1,000,000 limit initially proposed in the original version of NI 45-110 released last year.
• The amount an investor will be able to purchase per distribution will be limited to $2,500, or $10,000 where suitability advice has been obtained. The limit for purchases where suitability advice has been obtained has also been increased from the $5,000 limit proposed last year.

Further, since the exemption is only available to non-reporting issuers, the eligible securities will be subject to an indefinite hold period and will only be able to be resold under another prospectus exemption, under a prospectus or four months after the issuer becomes a reporting issuer.

Registration Exemption

Funding portals, meanwhile, will be exempt from the dealer registration requirement provided certain conditions are satisfied, including:

• The funding portal must have its head office in Canada and take reasonable steps to confirm that a majority of its directors ordinarily reside in Canada as well.
• Funding portals will be prohibited from providing advice to purchasers and may not receive commissions or fees from investors. Funding portals will not be permitted to close a distribution unless each purchaser completes a form acknowledging the risks of the purchase and confirms they have read and understood the offering document provided by the issuer.
• Funding portals will also have to deliver to the applicable regulator an information form and individual information forms for each of their principals at least 30 days before facilitating their first crowdfunding distribution.
• A funding portal will also have to maintain records of its financial affairs and client transactions for eight years from the time the record is created.

A funding portal will not be able to rely on the exemption in NI 45-110 if it or any of its principals is or has been the subject of certain proceedings in the last 10 years related to a claim based in whole or in part on various conduct such as fraud, theft, breach of trust, or allegations of similar conduct.

Assuming Ministerial approvals are obtained, NI 45-110 will come into force on September 21, 2021. 

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