We are honoured to take part in the consultative process of what we believe to be this decade’s most innovative solution to Canada’s financial gap. Without further a due, we present to you our response to the Autorité des marchés financiers with regards to the new equity crowdfunding exemption REG 45-108.
We applaud the Autorité des marchés financiers (hereinafter «Autorité») on their initiative to expand the application of equity crowdfunding to established businesses and start-ups. We would also like to thank the National Crowdfunding Association of Canada and team for their support and awareness-building initiative.
Our feedback was requested on the following set of 27 questions:
Issuer qualification criteria
1) Should the availability of the Crowdfunding Exemption be restricted to non-reporting issuers?
2) Is the proposed exclusion of real estate issuers that are not reporting issuers appropriate?
3) The Crowdfunding Exemption would require that a majority of the issuer’s directors be resident in Canada. One of the key objectives of our crowdfunding initiative is to facilitate capital raising for Canadian issuers. We also think this requirement would reduce the risk to investors. Would this requirement be appropriate and consistent with these objectives?
4) The Crowdfunding Exemption would impose a $1.5 million limit on the amount that can be raised under the exemption by the issuer, an affiliate of the issuer, and an issuer engaged in a common enterprise with the issuer or with an affiliate of the issuer, during the period commencing 12 months prior to the issuer’s current offering. Is $1.5 million an appropriate
limit? Should amounts raised by an affiliate of the issuer or an issuer engaged in a common enterprise with the issuer or with an affiliate of the issuer be subject to the limit? Is the 12-month period prior to the issuer’s current offering an appropriate period of time to which the limit should apply?
5) Should an issuer be able to extend the length of time a distribution could remain open if subscriptions have not been received for the minimum offering? If so, should this be tied to a minimum percentage of the target offering being achieved?
Restrictions on solicitation and advertising
6) Are the proposed restrictions on general solicitation and advertising appropriate?
7) The Crowdfunding Exemption would prohibit an investor from investing more than $2,500 in a single investment under the exemption, and more than $10,000 in total under the exemption in a calendar year. An accredited investor can invest an unlimited amount in an issuer under the AI Exemption. Should there be separate investment limits for accredited investors who invest through the portal?
Statutory or contractual rights in the event of a misrepresentation
8) The Crowdfunding Exemption would require that, if a comparable right were not provided by the securities legislation of the jurisdiction in which the investor resides, the issuer must provide the investor with a contractual right of action for rescission or damages if there is a misrepresentation in any written or other materials made available to the investor (including video). Is this the appropriate standard of liability? What impact would this standard of liability have on the length and complexity of offering documents?
Provision of ongoing disclosure
9) How should the disclosure documents best be made accessible to investors? To whom should the documents be made accessible?
10) Would it be appropriate to require that non-reporting issuers provide financial statements that are either audited or reviewed by an independent public accounting firm? Are financial statements without this level of assurance adequate for investors? Would an audit or review be too costly for non-reporting issuers?
11) The proposed financial threshold to determine whether financial statements are required to be audited is based on the amount of capital raised by the issuer and the amount it has expended. Are these appropriate parameters on which to base the financial reporting requirements? Is the dollar amount specified for each parameter appropriate?
12) Are there other requirements that should be imposed to protect investors?
Crowdfunding Portal Requirements
General registrant obligations
13) The Crowdfunding Portal Requirements provide that portals will be subject to a minimum net capital requirement of $50,000 and a fidelity bond insurance of at least $50,000. The fidelity bond is intended to protect against the loss of investor funds if, for example, a portal or any of its officers or directors breach the prohibitions on holding, managing, possessing or
otherwise handling investor funds or securities. Are these proposed insurance and minimum net capital amounts appropriate?
Additional portal obligations
14) Do you think an international background check should be required to be performed by the portal on issuers, directors, executive officers, promoters and control persons to verify the qualifications, reputation and track record of the parties involved in the offering?
15) The Crowdfunding Portal Requirements would allow portal fees to be paid in securities of the issuer so long as the portal’s investment in the issuer does not exceed 10%. Is the investment threshold appropriate? In light of the potential conflicts of interest from the portal’s ownership of an issuer, should portals be prohibited from receiving fees in the form
16) The Crowdfunding Portal Requirements restricts portals from holding, handling or accessing client funds. Is this requirement appropriate? How will this impact the portal’s business operations? Should alternatives be considered?
17) Are there other requirements that should be imposed on portals to protect the interests of investors?
18) Will the regulatory framework applicable to portals permit a portal to appropriately carry on business?
19) Considering that the Start-Up Exemption will be substantially harmonized amongst the Participating Jurisdictions, it is our intention to allow a portal established in one Participating Jurisdiction to post offerings from issuers established in another Participating Jurisdiction.
Also, portals established in one Participating Jurisdiction would be allowed to open their offerings to investors from other Participating Jurisdictions. Do you see any problems with this approach?
20) One of the major differences between the Crowdfunding Exemption and the Start-Up Exemption is that there is no registration requirement for the portal under the Start-Up Exemption. Do you think there are appropriate safeguards to protect investors without the registration of the portal? If not, please indicate what requirements should be imposed to the portal in order to adequately protect investors.
21) We are considering imposing a limit per calendar year of 2 capital raises by an issuer of a maximum amount of $150,000 under the exemption ($300,000 per year). Are these limits appropriate? If not, please provide what you would consider acceptable limits given the parameters of the proposed exemption.
22) The Start-Up Exemption would prohibit an investor from investing more than $1,500 in a single investment under the exemption. Is this limit appropriate? Should there also be a limit on the dollar amount that may be invested on a yearly basis by an investor?
23) Should there be minimal ongoing disclosure that issuers be required to provide to their security holders? If yes, what should it be?
24) We expect issuers using the Start-Up Exemption to maintain the information provided in the Issuer Information form and the Offering Document form updated throughout the distribution period. Should there be an obligation for issuers to further update that information outside the distribution period?
25) Should investors have the right to withdraw their subscription at least 48 hours prior to the disclosed offering deadline, as proposed under the Crowdfunding Exemption?
26) For Nova Scotia only, should Community Economic Development Investment Funds (CEDIFs) be eligible to use the Crowdfunding Exemption and/or Start-Up Exemption? If so, why? If not, why?
27) Are there other requirements that should be imposed to protect investors, taking into account the stage of development of the issuers susceptible to issue securities under the exemption?