In a statement yesterday (Thursday, February 19th), the Ontario Securities Commission shared they expect to release crowdfunding rules this coming summer. The proposed rules entered a comment period last year and the Commission has been in the process of reviewing the feedback;
“The comment period ended on June 18, 2014 and the participating CSA jurisdictions collectively received approximately 916 comment letters regarding the OM exemption and approximately 45 comment letters regarding the crowdfunding regime. We are reviewing the comments and our goal is to publish the OM exemption and the crowdfunding regime either in final form or, if warranted, for a second comment period, in summer 2015.”
The proposed rules which were released in the spring of 2014 were as follows:
- The proposed crowdfunding regime would allow businesses to raise capital from a potentially large number of investors through an online portal registered with the securities regulatory authorities. Businesses could raise up to $1.5 million during a 12 month period. The proposed crowdfunding regime is aimed primarily at start-ups and small and medium-sized enterprises based in Canada.
- The proposed crowdfunding regime incorporates important investor protection measures, including: o
- small investment limits ($2,500 in a single investment and $10,000 under the exemption in a calendar year),
- requirements to provide investors with certain limited disclosures at the point of sale and on an ongoing basis,
- requirement for investors to be given a risk acknowledgement form highlighting the key risks associated with the investment, and
- requirement that all investments be made through a registered crowdfunding portal.
The crowdfunding comments were joined by an update on a proposed OM Exemption (offering memorandum) that has also been designed to facilitate capital raising for smaller companies. The description of the OM Exemption is as follows;
- The proposed OM exemption would allow businesses to raise capital based on an offering memorandum being made available to investors. The exemption would be available for a wide range of businesses at different stages of development.
- The proposed OM exemption incorporates important investor protection measures, including:
- requirement that a comprehensive disclosure document, that is subject to statutory liability if it contains a misrepresentation, be delivered to investors at the point of sale,
- investment limits for individual investors who do not qualify as accredited investors ($10,000 or $30,000 under the exemption in a 12 month period depending on the circumstances of the investor),
- requirements to provide investors with certain limited disclosures on an ongoing basis, and requirement for investors to be given a risk acknowledgement form highlighting the key risks associated with the investment.
The OSC is working with other provincial securities authorities to coordinate both exemptions.
The OSC also published a family, friends and business associates prospectus exemption which is expected to provide a cost-effective way for issuers (other than investment funds) to raise capital from their networks of family, close personal friends and close business associates. Subject to Ministerial approval, the exemption comes into effect on May 5, 2015.
Interestingly Neil Gross, the Executive Director of Foundation for the Advancement of Investor Rights (FAIR), criticized the friends and family exemption. They have not been supportive of the crowdfunding exemption in the past either. Gross was quoted in the Financial Post stating, “supposes that those close to the promoter can gauge his or her trustworthiness, but many investment frauds involve an element of affinity fraud, whereby fraudsters focus on a group or groups with whom they share an affiliation such as family, friends and social organizations”. He called it “difficult to police”. FAIR is a group originated by the Investment Regulatory Organization of Canada an SRO that has purveyance over the broker/dealer industry – a group that will be impacted by new approaches towards capital formation.