There is a lot of buzz amongst start-ups and small businesses as seven provinces have announced they are inviting comments on proposed rule exemptions that would legalize equity-based crowdfunding.

Equity-based crowdfunding differs from crowdfunding models popularized on sites like Kickstarter and Indigogo. Instead of seeking donations or pre-selling products, actual securities like shares or promissory notes are exchanged for money.

With seven different regulatory bodies involved and two possible crowdfunding models, understanding what is happening Canada-wide is confusing, to say the least.

CanadaOne spoke with Dean Murrison, Director of the Securities Division at Saskatchewan's Financial and Consumer Affairs Authority (FCAA) and Tony Herdzik, the Deputy Director of the Securities Division at FCAA to gain an understanding of what is happening country-wide.

Crowdfunding: A Canada-wide overview

Murrison explained that Saskatchewan is currently the only province or territory in Canada where equity-based crowdfunding is legal. The province passing exceptions to its rules known as the Start-Up Crowdfunding Exemption in December 2013 to make that possible.

Now British Columbia, Manitoba, New Brunswick, Nova Scotia and Quebec are considering adopting the same model, including fundraising and investor thresholds, as well as the processes and forms required to complete a crowdfunding offer.

What is causing much of the confusion is Ontario's decision to release a different set of proposed crowdfunding rule exemptions, known as the Integrated Crowdfunding Exemption. Now, all of the provinces that had adopted or were looking to adopt Saskatchewan's Start-Up Exemption model have announced that they will consider adopting Ontario's as well.

At this time Ontario is only considering its own model.

Only three provinces – Alberta, Newfoundland and Prince Edward Island – as well as the territories have not made announcements related to possible crowdfunding rule exemptions.

Key aspects of the Start-Up Crowdfunding Exemption model

Saskatchewan's model addresses the needs of start-ups and smaller companies. Their crowdfunding model is straightforward and works like this:

• The portal: There are just two forms that a portal has to submit to the regulatory authority before it can launch. The forms must be submitted at least 30 days before the portal plans to go live, and as long as there are no objection during those 30 days the portal can go live. (A key difference from the Ontario model is that the Start-Up Exemption makes it much less onerous for crowdfunding portals to get started, which could result in higher costs for businesses that want to use the portal.)
• The business: A business that wants to raise funds needs to put together an offering on a portal. To do this it first finds a portal that it wants to use and then files three forms with the regulatory authority. As long as the authority doesn't object to their filing, they can go live with the offering.
• The offering period: While the offering is underway, the portal will hold the investors' money in trust until the business' fundraising goal is met.
• Offer perks: Murrison noted that the Start-Up Exemptions do not address whether or not a business can combine perks, such as giving out a free t-shirt, along with its security offer. In cases where the legislation is silent, (unless the law changes) there is no reason for a business to think that it can't combine both perks and security offerings.
• When the offering closes: Once the crowdfunding goal is met, the portal must give the business all of the investor information they need within 15 days. The business then files a form with the securities authority within 30 days and the offering completes with the business and investors now working together under Canada's corporations laws.

Under this model there are three limits that help to protect investors and minimize risk.

1. The first is a cap on how much money a company can raise. Businesses are limited to raising $150,000 for one offering and can have no more than two offerings per year.
2. Similarly, investors are restricted to investing no more than $1,500 per offer.
3. Investment funds and existing reporting issuers (businesses that have already filed a prospectus with the securities regulatory authority) cannot create an offering.

This infographic provides a good overview of the process that will be used in provinces that adopt Saskatchewan's model. Murrison noted that other provinces plan to adopt not just the overall process, but also the forms that need to be filed with the security authority in each province.

Key aspects of the Integrated Crowdfunding Exemption model

Looking at larger sized projects, Ontario's Integrated Crowdfunding Exemption model proposes rules that have higher investment thresholds and more stringent requirements for both portals and companies seeking to raise funds.

The Integrated Exemption model has the following requirements and limits:

• Fundraising caps: With much high caps than the Start-Up Exemption model, Ontario Integrated Exemption will allow businesses to use crowdfunding to raise up to $1.5 million during a 12 month period.
• Investment limits: Ontario's proposed rule changes, if adopted, will allow for investments of up to $2,500 for a single investment and $10,000 in total in a calendar year.
• Registered portals: The Integrated Exemption model requires that crowdfunding be done through online funding portals that are registered with the Ontario Securities Commission (OSC) – a process that is complex and may limit the number of companies that are able to meet the registration requirements.
• Combining perks and securities: Combining both security and non-security rewards and perks in an offering will be allowed.
• Disclosure: Businesses would be required to provide their investors with certain limited disclosures at the time of the initial transaction or sale, as well as on an ongoing basis. The proposed changes note that this information will include warnings to investors, financing facts, issuer facts, registrant facts and contact information.
• Risk acknowledgement: Businesses, most likely through the crowdfunding portals, would also be required to disclose risks associated with the investment, through a risk acknowledgement form.
• Paperwork & filings: Since each province has its own security authority, businesses and crowdfunding portals operating in the province will need to determine what paperwork and filing obligations may apply. For example, in Saskatchewan both portals and businesses must file prescribed documents with the FCAA.

Going forward with crowdfunding in Canada

At this time, all participating security authorities are inviting comments on the proposed rules until June 18, 2014.

Murrison explained that it is possible we may ultimately see many (if not all) provinces and territories adopt a single, unified set of exemptions and processes.

This is important, because legal variances across provincial borders can limit opportunities for both companies and investors.

It is a positive sign that the security regulatory authorities are moving forward with concrete proposals that could lead to other provinces beyond Saskatchewan introducing legal, equity-based crowdfunding options.

I would strongly encourage all small business owners and other stakeholders to submit comments before the June 18 deadline.

Further reading

• Saskatchewan Equity Crowdfunding information
  http://www.sfsc.gov.sk.ca/SKEC
• OSC proposes four new capital raising prospectus exemptions
  http://www.osc.gov.on.ca/en/NewsEvents_nr_20140320_osc-proposes-four-capital-raising.htm
• Canadian Security Regulators Propose New Crowdfunding Exemptions
  https://www.securities-administrators.ca/aboutcsa.aspx?id=1228

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