On May 14, 2015, the securities regulatory authorities of British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia (the “Participating Jurisdictions”) adopted a new start-up crowdfunding exemption (the “Start-Up ECF Exemption”) that allows start-up and early stage companies to raise capital in these jurisdictions, subject to certain conditions. In many ways, the Start-Up ECF Exemption is a “Version 2.0” of the original equity crowdfunding (“ECF”) exemption put in place by Saskatchewan in December of 2013. The Start-Up ECF Exemption is yet another move towards harmonization across Canada as to the rules around ECF. What is Crowdfunding? Crowdfunding is the raising of funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media.  Crowdfunding has its origins in the concept of crowdsourcing, which is the broader concept of an individual reaching a goal by receiving and leveraging small contributions from many parties. There are, generally speaking, three (3) models of crowdfunding:

• Donation/Rewards Based: Investor either donates money out of their own goodwill and receives nothing in return from the issuing company, or invests in the particular company and receives back some good (e.g. prototype of a new product, tickets to a concert, t-shirts, cd’s). A report by Daily Crowdsource in 2011 noted that 93% of campaigns launched globally in 2011 were rewards-based whereas only 7% were of the other types noted below.
• Lending: The Lending Model allows individuals to solicit and provide micro-loans to support small business. Investors are generally reimbursed in the form of interest (although interest may not be paid at all – example: micro-loan to an individual in a developing country). According to Massolution/Crowdsourcing LLC, Lending-based crowdfunding accounted for $522 million (USD) of the crowdfunding monies raised globally in 2011.
• Equity Crowdfunding or ECF: The investor provides funds to the particular issuer in return for an equity interest in the issuer. As this type of crowdfunding trenches into the realm of selling securities, it is subject to the securities laws found in each province throughout Canada. The issuer may, subject to the rules of the particular jurisdiction, offer common shares, preferred shares, limited partnership units, or convertible debt.

Crowdfunding Portals: Gateways to ECF At the heart of all forms of crowdfunding lie crowdfunding portals, which are essentially websites where people can connect in order to crowdfund. Simplified, a business would create a profile on a portal website, provide information about the business required by the Start-Up Exemption, and investors would create profiles on the portal website and then invest in the business. The business then decides how much capital it is seeking to raise and other particulars of the offering (subject to compliance with the Start-Up Exemption) and the offering goes forward. Assuming things are successful, the portal brokers the deal between the issuer and the investors and the investors are now new shareholders in the business. Please note this is a large oversimplification of the process and there are a multitude of both legal and regulatory issues to be addressed in the process. The experienced lawyers at McKercher LLP are here to help shepherd both portals and businesses through this process. What are these New Changes? Broadly speaking, the new Start-Up ECF Exemption allows companies to raise capital in the Participating Jurisdictions without preparing and distributing a prospectus. In the absence of this exemption, companies are limited in who they can offer securities to (i.e. they are, in most cases, limited to close friends/family members, or high net worth individuals known as “accredited investors”). The Start-Up ECF Exemption is the latest incarnation of a growing desire within Canada, and other parts of the world, to democratize the raising of capital and thereby open up investment possibilities to all individuals. The Start-Up ECF Exemption is generally the same in each of the Participating Jurisdictions and can be summarized as follows: Issuer (Company) Requirements

• Head office must be in one of the Participating Jurisdictions
• Securities must be the Issuer’s securities and must be distributed through an online funding portal
• Issuer can only offer one of the following types of securities:
  • Common share
  • Non-convertible preference share
  • Security convertible into common share or non-convertible preference share
  • Non-convertible debt security linked to a fixed or floating interest rate
  • Unit of a limited partnership
• Issuer cannot raise more than $250,000 per “offering” and cannot have more than two “offerings” per year
• An “offering” can only remain open to a maximum of 90 days
• Issuer provides each investor with a contractual right to withdraw their investment within 48 hours of purchase
• None of the promoters, directors, officers and control persons (generally, persons who hold more than 20% of the equity of the issuer) is a principal of the online funding portal

Investor Requirements

• Cannot invest more than $1,500 per “offering” made by an issuer
• Must be a resident of the Participating Jurisdiction where the “offering” is being made
• Generally, cannot sell the securities acquired from the issuer for an indefinite period going forward. Securities laws provide for what are known as “hold periods” in the case of securities offered otherwise than by prospectus. The hold period rules are complex and beyond the scope of this blog entry.

Portal Requirements

• Head office is located in Canada
• Portal is not a “registrant” (e.g. a registered dealer, financial advisor, etc.) for securities law purposes
• Majority of the funding portal’s directors are Canadian residents and provides disclosure (i.e. name, residence, mailing/email address, telephone number) about all the portal’s principles on its website
• Portal does not provide advice to an investor or otherwise represent that a security is suitable, or about the merits of the investment
• Portal does not receive a commission, fee, or any other amount from an investor
• Portal makes reasonable efforts to ensure that an issuer and an investor are residents of a Participating Jurisdiction where the “offering” is taking place
• Portal makes the “offering document” (i.e. the document which talks about the issuing company and the investment) available online to investors and does not allow an investment until the investors have confirmed that they have read and understood these documents
• Portal receives payment for securities electronically through the portal’s website (i.e. no physical handling of cash)
• Portal holds the Investor’s assets (i.e. their money for the investment) separate and apart from its own property, in trust for the investors and, in the case of cash, at a Canadian financial institution
• Portal maintains books and records at its head office to accurately record its financial affairs and client transactions and to demonstrate the extent of the portal’s compliance with the Start-Up ECF Exemption for a period of eight (8) years after the record is created
• Portal either:
  • Releases funds to the issuer (business) after the minimum offering amount (i.e. the amount set by the issuer at the time of the offering) has been reached and provided that the 48-hour right of withdrawal has elapsed; or
  • Returns the funds to purchasers if the minimum offering amount is not reached or if the offering is withdrawn by the issuer

In addition, there are a number of forms to be filled out and submitted to each of the Participating Jurisdictions both for the portal as well as any issuer company. Reference should be had to the websites of the securities regulatory authorities in each of the Participating Jurisdictions. Additional Important Points In addition the rules noted above, there are several other points worth making:

• Scope of Issuance: An issuer is not required to be registered and to offer securities in all of the Participating Jurisdictions. If they are not registered in one of the jurisdictions however, they cannot offer securities to residents of that jurisdiction. For example, if a Saskatchewan-based business is not registered in Manitoba, it cannot offer securities to Manitoba residents. Issuers should be aware that registration in each Participating Jurisdiction requires submitting forms to each of the particular jurisdictions (i.e. there is not one overall application which results in registration in all the Participating Jurisdictions).
• Quebec: In a not-unexpected twist, the Quebec rules are modified from the general rules noted above. Issuers and others should be particularly aware of the following:
  • The offering document (i.e. the one that sets out the specifics of the offering and the issuer) must be in either (i) French, or (ii) French and English. For those issuers situated outside of Quebec, the costs of translation will need to be factored into a decision to offer in Quebec.
  • The $250,000 offering limit ($500,000 in aggregate for two (2) offerings per year) is reduced to $150,000 (or $300,000 aggregate for two (2) offerings per year).
• Offering Limits: Issuers should also be aware that the offering limits of $250,000 per offering ($500,000 in aggregate for two (2) offerings per year), or the modified limits for Quebec, are aggregated across all This effectively means that an issuer does not get to multiply their offering limit by the number of Participating Jurisdictions they are registered in. Issuers should therefore be aware that investors from one Participating Jurisdiction may “take up” the entire offering to the exclusion of investors from another Participating Jurisdiction. However, issuers still retain the ability to designate which of the Participating Jurisdictions they are offering into.

Final Comments The Start-Up ECF Exemption provides a new framework for issuing equity by small businesses in the Participating Jurisdictions. While the offering limits are still relatively small, ECF should help bridge the funding gap for many small businesses between initial financing from family/friends and financing by venture capital. In addition to the Start-Up ECF Exemption, issuers and portals should also be aware that the Participating Jurisdictions, as well as Ontario, are working towards a new harmonized exemption which would apply to the $300,000 - $1,500,000 offering space. This exemption is known as Multilateral Instrument 45-108 – Crowdfunding and its language is presently being worked on. Given the complexities around an ECF offering, both issuers and portals are encouraged to seek professional advice. The lawyers at McKercher have experience with the regulatory requirements in the Participating Jurisdictions and have acted as counsel to funding portals. In addition to the regulatory requirements touched on in this blog post, issuers should especially be aware of the internal corporate governance matters which should be addressed prior to undertaking an ECF offering. Again, McKercher is here to help issuers get “raise ready”.

About the author: Joe is an associate in the Saskatoon office where he practices in the areas of corporate finance, securities, mergers & acquisitions, and taxation.

About McKercher LLP: McKercher LLP is one of Saskatchewan’s oldest, largest law firms with offices in Saskatoon and Regina. Our deep roots and client-first philosophy have made us a top ranked firm by Canadian Lawyer magazine (2011, 2013). Expertise, experience and capacity provide innovative solutions for our clients’ diverse legal issues and complex business transactions. This post is for information purposes only and should not be taken as legal opinions on any specific facts or circumstances.  Counsel should be consulted concerning your own situation and any specific legal questions you may have.