B.C. Securities Commission Proposes New Equity Crowdfunding Rule
On March 20, 2014 the British Columbia Securities Commission (BCSC), along with the securities regulators in Québec, New Brunswick, Manitoba and Nova Scotia, published a Notice and Request for Comment for a proposed a new exemption from the prospectus requirements to enable private companies to raise smaller amounts of money from members of the public over the internet. This method of raising funds is generally referred to as “crowdfunding” and has been used for several years by many individuals and entities to obtain donations or pre-sales in small amounts from a large number of people, but using this method to sell securities has generally been contrary to existing securities rules in most jurisdictions until recently.
In the United States, the SEC has been working to bring in a crowdfunding exemption since 2012 and in Canada, Saskatchewan brought in a new crowdfunding exemption in December, 2013. The rule proposed by the BCSC is based on the Saskatchewan rule. If implemented, it would allow private business in BC to raise up to $150,000 twice per year from BC resident investors by selling securities without the need for a prospectus or offering memorandum, provided that the issuer complies with certain conditions, including the following:
- the issuer raises no more than $150,000 per offering and offers no more than twice per year
- no investor invests more than $1,500 per offering
- the issuer is not a reporting issuer or an investment fund
- the offering must go through a registered on-line funding portal
- the issuer provides a streamlined offering document to investors through the portal
Ontario is proposing a different rule which would allow issuers to raise a larger aggregate amount per calendar year ($1.5M) and which provides for a higher maximum investment per investor ($2500 per investment and $10,000 per calendar year). It would also be available to both public and private companies.
The comment period for both the BCSC rule and the OSC rule is open until June 18, 2014. It is not clear how long after that date the rules will be adopted, if at all, but we would not expect to see the rules brought in prior to September 2014.
We have received many inquiries over the past several years regarding the restrictions on undertaking equity crowdfunding campaigns. While the proposed new rules are a step in the right direction to fill this need in the marketplace, we have concerns as to whether the BCSC rule will prove to be a cost effective alternative for most issuers. This will depend to a large extent on the cost structures implemented by the portals, the frequency and extent of compliance reviews undertaken by the regulators (which can be quite costly to an issuer) and the relative success of the individual crowdfunding campaigns. We anticipate that the financing requirements of most companies will be significantly greater than $300,000 per year and that most issuers seeking to rely on the new rule will need to plan to raise additional capital from other sources using other existing capital raising exemptions such as the private issuer, accredited investor, friends and family, minimum amount ($150,000) and offering memorandum exemptions. We are also concerned that the apparent inability of all of the provincial and territorial regulators to adopt a single common crowdfunding rule will significantly undermine the effectiveness of this method of raising capital in Canada. Portals and issuers will be obligated to limit access to the fundraising campaigns to residents of those jurisdictions who have adopted a common rule. As a result, if the rule were currently available, a BC issuer would not be able to rely on the rule to raise funds from a resident of Alberta, Ontario or any other jurisdiction which does not have a similar rule (including any foreign jurisdictions).
Raising capital in the exempt market involves many complex regulations which are unfamiliar to most private entities. We encourage anyone engaged in raising funds from investors, either for their own purposes or on behalf of another party, to obtain legal advice from an experience securities lawyer.
Blair Forrest heads up the Technology and Securities Law Group at Pushor Mitchell LLP. You can contact Blair at (250)869-1160 or at firstname.lastname@example.org