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Sean Walberg’s blog

Canadian Equity Crowdfunding Rules

Be forewarned, I’m not a lawyer or a securities dealer. I’m just an interested person writing down my opinion.

Back in May the Canadian Security Administrators released the Start-up Crowdfunding Registration and Prospectus Exemptions (PDF). The core idea is that in certain situations a startup company can sell equity in their company without filing a detailed prospectus or registering as a dealer, often called crowdfunding, though here more properly called equity crowdfunding.

What’s the difference? In crowdfunding sites, such as Kickstarter, you give a project money in return for a prize or product. The project is assured a certain amount of sales to cover any capital costs, which should put them on a good footing for later sales. If the project is a success or a bust you don’t have any long term interest in the company – you’re basically pre-purchasing a product. In the equity crowdfunding scenario you’re buying a piece of the company much like if you bought it on the stock market. If the company does well then your investment may be worth a multiple of the purchase price. If the company does poorly then it’s worth nothing.

Normally these types of equity transactions are heavily regulated to prevent fraud and people from preying on novice investors. These new guidelines are an attempt to reduce the regulations while still preserving the investor protection. It should be noted that these only apply to British Columbia, Saskatchewan, Manitoba, Qu├ębec, New Brunswick and Nova Scotia. It is interesting to note that Ontario is developing their own rules.

While there are many conditions in these new equity crowdfunding guidelines the most important are:

  • The issuer (startup company) must write up an offering document containing basic information about the company and the money being raised. No financial statements are required, or even supposed to be attached to the offering document.
  • Each distribution (fundraising round) can be up to $250,000 and an issuer can only raise twice per calendar year.
  • A distribution declares a minimum amount it will raise, and it must raise that within 90 days or the money is returned to investors

Additionally the investors have some rights and limitations:

  • Can only contribute $1,500 per distribution
  • Has 48 hours to back out of a decision (either after the initial decision or after any updates have been made to the offering document)
  • May not be charged a fee for investing (i.e. the issuer must pay any fees)
  • Can not resell their shares unless
    • They are sold as part of another distribution
    • They are sold under a formal prospectus (e.g. what this system is trying to avoid)
    • The company becomes publicly listed and then only after a 4 month hold period expires

These distributions are expected to be sold through online portals that are either run by registered dealers or privately.

My take on all this is that it’s a good start. My main problem is the low limit on the personal contributions. If you raise $100k you need at least 67 people to buy in. I realize there must be a limitation to protect the downside but it seems it could have been a lot higher, maybe as much as $5,000. You now have 67 investors to manage, though you can make sure that the shares being issued to this class of shareholders has very few rights. If you go for institutional funding after a crowdfunded round then this may complicate things.

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