Currently, you can buy some special consideration to get your favourite movie made (Veronica Mars), but in Canada you can’t invest in the equity of the production company that is going to make the movie. You can make an early purchase of an innovative computer in order to ensure it get’s made (Kano), but you can’t purchase equity in the company that is going to fabricate the computers.
All of that is set to change, in Ontario at least. On March 20, 2014, the Ontario Securities Commission released for comment proposed revisions ______ to the prospectus and registration rules relating to the distribution of securities in Ontario. Comments are open for 90 days, after which time it is clear that the OSC intends to move ahead with revisions to the rules to allow for crowdfunding in Ontario.
The stated objectives of the crowdfunding rules are to facilitate capital-raising for start-ups and SMEs – specifically Canadian start-ups and SMEs. Overly simplified, current securities rules place limits on who a company can sell its shares to without going through a public registration, reporting and prospectus process – a process that is both time consuming and expensive for smaller companies. The proposed new rules will allow companies to sell their shares to the public on a less restrictive basis. There will be fewer reporting and disclosure obligations on companies, which sell under these rules.
There are several proposed parameters in the new rules and the highlights are as follows (for a complete discussion of the new rules, refer to the OSC Draft Rules):
- A company must be incorporated in Canada, have it’s head office in Canada and have a majority of directors resident in Canada to be able to rely on the new rules.
- The company must provide ongoing disclosure, although at a much more limited way than under other public trading rules.
- Both public companies (reporting issuers) and private companies (non-reporting issuers) can offer shares under the crowdingfunding rules.
- Non-reporting real estate issuers and investment funds may not use the new rules to offer shares.
- Companies must have a business plan.
- The maximum amount which can be raised in any year by the company is $1.5 million and the raise must be complete within 90 days.
- The offer must have a stated minimum offering size and must make clear a maximum offering amount, if there is one.
- Companies may only advertise the offering on a crowdfunding portal or through their own website.
- Only non-complex securities can be offered, such as common shares, preferred shares and debt securities linked to an interest rate, etc.
- Point of sale disclosure about the company must include information about the amount of cash the issuer has and financial statements.
- An investor can invest no more than $2,500 in any given offering and a maximum of $10,000 per year through the crowdfunding exemptions.
- Investors must sign a risk assumption statement and acknowledge that they may lose their entire investment.
- There is a two-day cooling off period during which the investment can be retracted.
- Resale of the purchased securities is subject to a four-month hold for public company securities and an indefinite hold for private company shares.
The proposed rules have the potential to greatly increase the options that start-ups and SMEs have to finance their operations. Individuals who want to be more active participants in investing in Canadian companies will have the option to do so. The proposed exemptions are open for comment until June 18, 2014.