The OSC has been contemplating the popular online funding model as a means for a company to raise start-up capital through the sale of its securities to the public without the requirement of issuing a prospectus. On Aug. 28, it issued “OSC Notice 45-712 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising.”
The latest developments from the OSC — to further consider a crowdfunding prospectus exemption — recognizes the potential value of crowdfunding for both businesses and investors, says Paul Amirault, a partner with Norton Rose Fulbright Canada LLP in Ottawa.
“It’s their attempt to keep pace with the evolving world of social media and regulatory changes in other jurisdictions such as the U.K., Australia, and the U.S.,” says Amirault. “Right now crowdfunding is not allowed in Canada and not possible when it comes to sourcing money as an investment.”
The OSC has been looking at the exempt market regulatory regime since early this year. Under Canadian securities law you can’t issue a security unless you file a prospectus or you rely on an exemption from having to file a prospectus.
“I think it’s good as long as the focus will be how best to balance the need for start-ups and small businesses to have access to capital with the need for investor protection,” says Amirault.
On Mar. 8, 2013, the OSC closed the comment period on its “Staff Consultation Paper 45-710: Considerations for New Capital Raising Prospectus Exemptions,” which sought input from stakeholders on proposed amendments to the current legislation regarding prospectus exemptions.
The consultation paper forms part of the OSC’s review of the rules regulating the distribution of securities in the exempt market
“I think the OSC realized that in this Internet age maybe it makes sense for them to come up with some sort of exemption that allows people, if people want to start a business, to use crowdfunding,” says Andrew Parker, a partner with McCarthy Tétrault LLP in Toronto. “If a start-up can get $5-$10-$20 from 5,000 people all of a sudden they have seed capital to start a business and can offer people a share in the corporation they create on an exempt basis in accordance with securities laws.”
Under the OSC proposal, Canadian reporting and non-reporting domestic issuers (other than investment funds) may be permitted to issue securities and raise up to $1.5 million on the proposed crowdfunding exemption in a 12-month period. Individual investments would be limited in a particular issuer to $2,500 and caps aggregate investments at $10,000 per individual in a given 12-month period.
“If the OSC comes up with some straight forward rules it means start-ups don’t have to jump through as many hoops or be limited to only going after people who are accredited investors or having to produce a prospectus,” says Parker.
Amirault says the OSC’s proposed idea of an online intermediary portal to process the investments and transactions should serve to reduce the risk of fraud, and limiting investment amounts — both individual and aggregate amounts — should serve to reduce exposure to losses. The intermediary would monitor individual investor transactions and implement measures to reduce the risk of fraud such as performing regulatory checks of directors, officers, and significant shareholders.
“These aren’t large amounts, it’s for small and medium-sized businesses at the early stage of their development. It doesn’t preclude raising other amounts aside from, or in addition to, the crowdfunding exemption amounts,” says Amirault.
The United States has adopted the Jumpstart Our Business Startups Act but not created rules around crowdfunding. JOBS amends U.S. securities laws by introducing a crowdfunding exemption. This allows entrepreneurs to raise funds and issue securities publicly to a broad group of investors via an Internet portal thus bypassing current exempt market securities requirements.
While some raise concerns about fraud in online crowd-sourced models, Amiraut says the regulator doesn’t need to go any further than the rules already in place.
“When it comes to fraud that’s just simply illegal by virtue of the Criminal Code and I don’t think the regulators need to over-rotate on sanctions with respect to fraud because our laws already provide for recourse in that regard,” he says.
Other exemptions being considered by the OSC include a family, friends, and business-associates exemption, an offering memorandum exemption, and a streamlined version of the existing rights offering exemption.