Crowdfunding Exemption

Practical Law Canada Glossary 5-622-1385 (Approx. 5 pages)

Glossary

Crowdfunding Exemption

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Section 5(1) of Multilateral Instrument 45-108 - Crowdfunding (MI 45-108) provides that a distribution by an issuer of eligible securities of its own issue to a person or company that purchases the security as principal is exempt from the prospectus requirements of Applicable Securities Laws in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia, if all of the following apply:
  • The issuer offers the securities during the distribution period and the distribution period ends no later than 90 days after the date the issuer first offers its securities to purchasers (section 5(1)(a), MI 45-108).
  • The total proceeds raised by an issuer group under the equity crowdfunding exemption does not exceed $1.5 million within the 12-month period ending on the last day of the distribution period (section 5(1)(b), MI 45-108).
  • Investors are subject to the following investment limits:
  • An investor that does not qualify as an accredited investor:
    • $2,500 per investment; and
    • in Ontario, $10,000 in total in a calendar year.
  • An accredited investor other than a permitted client (institutional investors):
    • $25,000 per investment; and
    • in Ontario, $50,000 in total in a calendar year.
  • In Ontario, no investment limits for a permitted client.
    (Sections 5(1)(c) and (d), MI 45-108)
  • The issuer must distribute the securities through a single funding portal (section 5(1)(e), MI 45-108).
  • Before the purchaser enters into an agreement to purchase the securities, the issuer makes available to the purchaser, through the funding portal, a crowdfunding offering document that is in compliance with:
    • section 7 [Certificates] and section 8 [Right of withdrawal]; and
    • section 9 [Liability for misrepresentation – reporting issuers] or section 10 [Liability for untrue statement – non-reporting issuers], as applicable.
    (Section 5(1)(f), MI 45-108)
Section 5(2) of MI 45-108 indicates circumstances when the exemption is not available:
  • The proceeds of the distribution may not be used by the issuer to invest in, merge with or acquire an unspecified business (section 5(2)(a), MI 45-108).
  • If the issuer is not a reporting issuer and previously distributed securities in reliance on the crowdfunding exemption, it must be in compliance with all of the disclosure requirements in sections 15 [Filing or delivery of distribution materials], 16 [Annual financial statements], 17 [Annual disclosure of use of proceeds], 19 [Period of time for providing ongoing disclosure], 20 [Books and records], and in New Brunswick, Nova Scotia and Ontario, 18 [Notice of specified key events] (section 5(2)(b), MI 45-108).
  • If the issuer is a reporting issuer, it must be in compliance with its reporting obligations under securities legislation, including under MI 45-108 (section 5(2)(c), MI 45-108).
  • If the issuer has previously commenced a distribution under the crowdfunding exemption, it must have closed, been withdrawn or otherwise terminated (section 5(2)(d), MI 45-108).
The following are additional requirements in MI 45-108 in order to rely on the exemption:
  • The issuer and, if applicable, its parent are incorporated or organized under the laws of Canada or any jurisdiction of Canada.
  • The issuer's head office must be located in Canada.
  • A majority of the directors of the issuer must be resident in Canada.
  • The principal operating subsidiary of the issuer, if any, must be incorporated or organized under either:
    • the laws of Canada or any jurisdiction of Canada; or
    • the laws of the United States of America or any state or territory of the United States of America or the District of Columbia.
  • The issuer cannot be an investment fund.
  • The funding portal must be registered under National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) as either:
    • an investment dealer and acts or proposes to act as an intermediary in a distribution of eligible securities through an online platform in reliance on the crowdfunding prospectus exemption; or
    • a restricted dealer that is authorized under the terms and conditions of its restricted dealer registration to distribute securities under MI 45-108, acts or proposes to act as an intermediary in a distribution of eligible securities through an online platform in reliance on the crowdfunding prospectus exemption, is not registered in any other registration category, and, in Ontario, is not an affiliate of another registered dealer, registered adviser, or registered investment fund manager (section 1, MI 45-108).
  • A restricted dealer funding portal and a registered individual of the restricted dealer funding portal that distributes securities in reliance on the crowdfunding exemption must comply with all of the following:
    • the requirements of section 21 and Divisions 2 and 3 of Part 3 of MI 45-108 (section 21(a), MI 45-108);
    • the terms, conditions, restrictions and requirements applicable to a registered dealer and to a registered individual, respectively, as specified (with exceptions) in section 21(b), MI 45-108;
    • the requirement to deal fairly, honestly and in good faith with purchasers (section 21(c), MI 45-108);
    • any other terms, conditions, restrictions or requirements imposed by a securities regulatory authority on the restricted dealer funding portal or on a registered individual of the restricted dealer funding portal (section 21(d), MI 45-108).
  • A registered dealer funding portal and a registered individual of the registered dealer funding portal that distributes securities in reliance on the crowdfunding exemption must comply with all of the following:
    • the requirements in section 22 and Division 2 of Part 3 of MI 45-108 (section 22(a), MI 45-108); and
    • the terms, conditions, restrictions or requirements applicable to its registration category and to a registered individual, respectively, under securities legislation (section 22(b), MI 45-108).
The following forms are associated with the crowdfunding exemption under MI 45-108:
A distribution made in reliance on the exemption in MI 45-108, subject to certain exceptions, generally requires the filing of a fee and a report in Form 45-106F1 in the jurisdiction where the distribution took place no later than 10 days after the distribution. The resale of securities distributed under the exemption in in MI 45-108 is subject to the restricted period rules under section 2.5 of National Instrument 45-102 — Resale of Securities (NI 45-102).
For more information on the crowdfunding exemption, see Practice Note, Equity Crowdfunding in Canada.
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