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CSA Proposed NI 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions
Letter Summary:
The proposed National Instrument and related guidance attempt to harmonize the framework for securities crowdfunding by start-ups and early stage issuers. The instrument would provide a prospectus exemption to allow a non-reporting issuer to distribute eligible securities through an online funding portal and a registration exemption for funding portals. The prospectus exemption would be subject to a number of conditions, including that the aggregate gross proceeds raised by the issuer (and certain others) during the prior 12-months cannot exceed $1,000,000 and that each purchaser would be limited to investments of no more than $2,500 or, if the purchaser has advice from a registered dealer, $5,000. While the issuer would need to prepare a prescribed offering document and provide the purchaser with a two-day withdrawal right, it would not be required to provide financial statements or any other continuous disclosure documents.
The registration exemption would also be subject to conditions, including prior filings by the portal with the securities regulatory authority of a completed information form, the funding portal must hold each purchaser’s assets separate and apart from the funding portal’s own property, and in the case of cash, in a designated trust account at a Canadian financial institution, and the funding portal cannot provide advice to a purchaser or receive a commission, fee or other similar payment from a purchaser. A firm registered as an EMD or investment dealer may operate a funding portal provided that it meets the requirements set out in the proposed National Instrument.
Overview of the Council’s Comments:
We are supportive of measures taken to assist small and emerging companies to finance growing operations while emphasizing investor protection. We also agree with steps to harmonize registration and prospectus exemptions across jurisdictions for ease of use by issuers and investors.
We offered additional views on the importance of imposing proportionate due diligence and related obligations on funding portals to protect investors from fraud or other unfair or improper practices, and additional disclosure obligations on issuers and funding portals, including:
· Obligations of Funding Portals: we highlighted that the Proposed Instrument does not appear to place any responsibility on funding portals to screen issuers before posting their offering documents online, beyond taking reasonable measures to confirm that the issuer’s head office is in Canada. Other jurisdictions, such as Australia and the United States, place additional obligations on funding portals to reduce the risk of fraud. We noted that the CSA should consider this within the regime.
Disclosure Obligations: We highlighted that investors may not be cognizant of the fact that each additional financing by the issuer will dilute their investment, and thus the risk warning (or other similar warning prominently displayed by the portal) should specifically address the risk of dilution due to additional financings. We also have concerns about the potential lack of disclosure on the financial condition of the issuer. Under corporate or other applicable laws, an issuer’s obligation to prepare and distribute annual financial statements after completing a crowdfunding offering will vary depending on its jurisdiction of incorporation and the type of securities it issues. We proposed eliminating this potential source of confusion by making the preparation of annual financial statements and their distribution to crowdfunding securityholders an ongoing obligation of issuers that have completed a crowdfunding offering.