Securities Crowdfunding
When issuers sell securities such as stocks, options or bonds, they are generally required to file a prospectus with the Commission and to provide a copy to investors so they can make a fully-informed decision about the investment opportunity. Securities sold without a prospectus are called “exempt market securities.” The sale of exempt market securities is also referred to as private placements or exempt distributions. Exempt market securities are risky and are not for everyone.
To protect investors, there are strict rules about who can buy exempt market securities and how they can be sold. For the start-up prospectus exemptions these include conditions around where the head office is located, how securities can be distributed, resale restrictions, forms and information that need to be shared with investors and regulators, disclosure on how the investors’ money will be used, investor’s contractual rights, maximum individual investment amounts, how much money a company is allowed to raise using this exemption, and more.
Crowdfunding describes raising small amounts of money from many people. Securities crowdfunding (also called equity crowdfunding) is a way for businesses, particularly start-ups and small businesses, to raise capital.
The securities crowdfunding model involves investors backing a small or start-up business in exchange for shares or another eligible security.
Individuals can invest in entrepreneurial start-ups through an intermediary, known as a “funding portal.”
In return, investors receive securities from the business. This means they may become part owners of the company, as they would if they had purchased a share or stock on an established stock market.
Start-up Crowdfunding
In Canada, all trading of securities is subject to legal obligations. For example, a business seeking to raise capital by issuing securities must file a prospectus with the securities regulator of their province or territory or avail itself of an exemption from the prospectus requirement under securities law. These obligations can be costly for start-ups and early stage issuers.
Through Start-up Crowdfunding, the Commission allows start-up and early stage companies to raise funds without filing a prospectus or preparing financial statements (under certain conditions).
Under Start-up Crowdfunding, the prospectus requirement does not apply to a distribution by an issuer if they satisfy certain conditions. Start-up Crowdfunding also provides an exemption from the dealer registration requirement for funding portals, subject to certain conditions. The exemptions from the prospectus and dealer registration requirement apply only to securities crowdfunding—they do not apply to donation-based crowdfunding (like Kickstarter or Indiegogo) or other crowdfunding models.
The Start-up Crowdfunding exemptions allow:
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a start-up or early stage issuer to raise relatively small amounts of capital by distributing securities to investors without filing a prospectus (start-up prospectus exemption); and
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a funding portal to facilitate trades of those securities without having to register as a dealer (start-up registration exemption), although a funding portal can be operated by a registered dealer
Before launching a securities crowdfunding campaign, the issuer should:
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evaluate other sources of funding, such as a loan from a financial institution
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assess whether they are willing to invest the time and efforts needed to prepare a start-up crowdfunding campaign
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determine the type of securities that will be sold
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determine the number of securities to be sold and at what price; and
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estimate if they have the capabilities to manage a great number of security holders
If a securities crowdfunding campaign is successful, the founders of the issuer may have to give up part of the ownership of the issuer to investors. The issuer will be accountable to investors. Investors will likely expect to be informed about successes and failures of the issuer’s business. The issuer may have to spend time and money to maintain contact with investors.
Once an issuer has determined that it will launch a start-up crowdfunding distribution, there are additional obligations, such as preparing an offering document for investors to read to determine if they want to invest and choosing a funding portal to post its offering document.
The offering document must include basic information about the business and the offering, how it will use the money and any risk to the project. The offering document must also include the minimum amount needed to be raised to accomplish the business’ goals. The information contained in the offering document must be kept up to date throughout the duration of the start-up crowdfunding distribution.