June 11th, 2014
On March 20, the Ontario Securities Commission (OSC) along with its counterparts in Quebec, New Brunswick, Nova Scotia, Manitoba, and Saskatchewan, unveiled the proposed rules to deal with crowdfunding (among other things) as a source of capital for start-ups and SMEs. The comment period ends on June 18. In a sense, the OSC is playing catch-up, in that the US and UK regulators seem to be one or two years ahead of the OSC in permitting and regulating crowdfunding.
Most advocates for crowdfunding seem generally pleased with the proposals, which would allow issuers to raise up to $1.5 million in a twelve month period, without having to undergo the expense of producing a prospectus. Some investors’ rights groups are less pleased, but it appears the OSC has at least attempted to strike a balance between these competing interests. This is no surprise, as the proposals are the result of more than a year of consultation with stakeholders.
An issuer can only offer its securities through a registered funding portal, and this intermediary must also be registered. The issuer may only offer securities through one portal at a time. Investors are further protected to some degree as they are unable to invest more than $2,500 in one investment and no more than $10,000 in one calendar year. There is also a 48 hour cooling-off period. Additionally, the issuer, its directors, and the portal cannot finance the purchase by an investor. Management must also certify the offering.
Both reporting and non-reporting issuers can avail themselves of the crowdfunding exemption. Blind pools, investment funds and real estate issuers cannot. The proposed $1.5 million limit on what can be raised is in line with the OSC’s focus on financing for start-ups and SMEs.
Most exempt market industry participants feel the proposals, at the very least, are a step in the right direction by the OSC. And it does appear that the investor protections in place are at least adequate. The OSC struck the appropriate balance. It will be interesting to see what, if any, changes result from the comment period. As it stands now, the crowdfunding exemption should indeed help kick start Ontario’s exempt market.
Read the OSC’s Proposed Prospectus Exemptions.