Over the past decade, countless founders have launched successful companies through crowdfunding platforms as an alternative to traditional lending or venture capital investment. In 2012, the new multi-million dollar company, PopSocket, amassed over $18,000 in funding through a Kickstarter campaign. The direct-to-consumer bedlinen company, Brooklinen, has a similar story of success after launching their company through crowdfunding.
In North America, crowdfunding generates around $17.2 billion each year. Success stories and the increased permeance of crowdfunded companies may lead some founders to consider whether or not to turn to sites like Kickstarter, GoFundMe, or Indiegogo to fund their company. Here are some considerations you need to know before approaching this option in Ontario.
First and foremost, there are a few different types of crowdfunding that companies may undertake, including donation-based crowdfunding, rewards-based crowdfunding, crowd-investing, and crowdlending. Donation-based crowdfunding is more typically used for charitable philanthropic or research projects and funders do not expect anything in return for their contributions. Rewards-based crowdfunding promises perks in exchange for backing and usually includes crowdfunding campaigns that offer pre-sales of goods. In crowdlending, individuals extend loans at a fixed interest rate to the company or individual. Through crowd-investing or securities crowdfunding, businesses can raise funds by issuing securities.
It is important to note that this final form of crowdfunding, crowd-investing or securities crowdfunding, is an activity regulated in Canada. In Ontario, this regulatory body is the Ontario Securities Commission, which in 2020 published a series of guides outlining the legal considerations companies must take when looking to participate in securities crowdfunding. The Start-up Crowdfunding Guide for Businesses was published following the enactment of a new crowdfunding exemption regime in Ontario, exempting those businesses looking to issue securities through a crowdfunding website from the certain prospectus and registration requirements.
“Start-up crowdfunding allows a start-up or early-stage issuer to raise relatively small amounts of capital by distributing securities to investors without filing a prospectus” and funding portals to facilitate their trade without having to register as a dealer.
Does your business qualify for the startup prospectus exemption?
In order to qualify for the startup exemption, your business must have a head office in a participating jurisdiction, which includes British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, or Nova Scotia. The funding portal must also be operating in one of these participating jurisdictions. Further, although the crowdfunding exemptions are substantially similar and harmonized among these provinces, your business must comply with the obligations of each jurisdiction in which you intend to raise funds.
How much can you raise through securities crowdfunding?
Businesses can raise a maximum of $250,000 per startup crowdfunding distribution and an issuer group can only complete a maximum of two start-up crowdfunding distributions per calendar year. There is a maximum cap of $1500 per individual investor that may be raised in the distribution as well, however, this maximum can be increased to $5000 if the investor resides in BC, Alberta, Saskatchewan, or Ontario, the issuer has a head office in these same provinces, the distribution is made through a registered dealer, and “the dealer has determined that the investment is suitable for the investor”. The issuer likewise has a deadline of 90 days to raise the minimum amount of funds they specified in their offering document and can set minimum per-investor amounts.
What to include and how to file the offering document?
In order to qualify for the prospectus exemption, the offering document must include the minimum amount that the issuer has to raise before the offering can close. Issuers must also include important basic information about the business and offering, and outline how they will use the money and risks. This document must be kept up to date and must be filed within 30 days with the regulator within 30 days of closing the distribution.
Ontario Instrument 45-506 Start-Up Crowdfunding Registration and Prospectus Exemption (Interim Class Order) remains in effect until the proposed National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions are adopted or April 2022.
A special thank you to Julia Nowicki for her help and contributions to this article!
The content of this article is written for general information purposes only and does not constitute specific legal advice. This article should not be used as a substitute for competent legal advice from a licensed lawyer. Please contact us at 416-238-5527 if you’d like to speak to an Emerge LLP lawyer.