On October 19, 2015, the Alberta Securities Commission and the Nunavut Securities Office (together, the “New ECF Jurisdictions”) published for comment (for a 60-day period) proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses (“MI 45-109”). This new Instrument follows on the heels of the previously announced start-up crowdfunding exemptions (the “Original ECF Exemptions”) announced on May 14, 2015 for the Provinces of British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia (the “Original ECF Jurisdictions”). Effectively, MI 45-109 presents the possibility of Alberta and Nunavut jumping into the new frontier that is equity crowdfunding or “ECF”. For readers looking for a synopsis of the legislation in the Original ECF Jurisdictions and a brief summary of what crowdfunding and ECF are generally, readers should refer to my prior blog post on June 30, 2015 (available here: https://www.mckercher.ca/blog/equity-crowdfunding-2-0-new-and-improved-capital-raising-options-for-entrepreneurs)

Overview of MI 45-109

As noted by the New ECF Jurisdictions, MI 45-109 appears to have been crafted “to serve the funding gap that may exist prior to an issuer being able to cost effectively using the [Offering Memorandum] exemption.” For those unfamiliar with the Offering Memorandum or “OM” exemption, this is effectively an exemption (set out in National Instrument 45-106 Prospectus Exemptions) which allows a company to raise capital from most non-accredited investors provided an OM (in a prescribed form) is provided to the investors. There are other requirements as one can expect but they are not discussed at length in this blog post. The proposed documentation put forward by the New ECF Jurisdictions included not only MI 45-109, but also a Companion Policy to MI 45-109, several proposed forms for use as part of MI 45-109, as well as consequential amendments to the SEDAR system (which is used by public companies or “reporting issuers” to file certain of their disclosure documents). For those familiar with the Original ECF Exemptions, the proposed forms track closely to the forms used as part of the Original ECF Exemptions for (i) offering documents, (ii) risk acknowledgements, and (ii) reports of exempt distribution. The key difference between MI 45-109 and the Original ECF Exemptions is that MI 45-109 does not provide any registration exemption for crowdfunding portals looking to facilitate ECF distributions. Effectively, this means that portals must be registered for securities law purposes in order to facilitate any trades in reliance on MI 45-109. This is in stark contrast to the Original ECF Distributions which provide a registration exemption to portals; consequently, portals can facilitate trades in reliance on the Original ECF Exemptions without being registered for securities law purposes. The New ECF Jurisdictions appear to have turned their minds to the detrimental effect that a lack of registration exemption is likely to cause: one of the questions posed to readers of MI 45-109 is whether a lack of registration exemption would be a “significant barrier for access to financing”.

Issuer (Company) Requirements

From the perspective of the company looking to raise capital through MI 45-109 (the “Issuer”), the following requirements apply:

ECF Distribution Requirements

Once the Issuer has decided to pull the trigger on an ECF Distribution in reliance on MI 45-109, it must meet the following requirements:

  While not required by MI 45-109, if the Issuer wishes to provide investors with financial statements, any such statements must be prepared in accordance with either (i) Canadian GAAP applicable to publicly accountable enterprises, or (ii) Part II of the CPA Canada Handbook as if the Issuer were a private enterprise and the statements consolidate any subsidiaries and account for any significantly influenced investees and joint ventures using the equity method.

Investor Requirements

From the investor’s side of things, the primary restriction is on the amount of capital they can invest as part of an ECF distribution in reliance on MI 45-109. The limits have been crafted to differentiate between investors who receive suitability advice from a “registered dealer” (for securities law purposes) and those who do not:

Key Differences: MI 45-109 versus the Original ECF Exemptions

By way of comparison, the following chart sets out some of the key differences between MI 45-109 and the Original ECF Exemptions:  

Final Comments

The provisions in proposed MI 45-109 appear to be a good start for sparking ECF distributions in the Provinces of Alberta and Nunavut. However, they notably lack an exemption for ECF portals to conduct ECF distributions online, thereby potentially creating a large barrier to raising funds. It should be kept in mind that the provisions above are only proposed at this time and may be subject to change. Thankfully it also appears that Alberta and Nunavut are sensitive to the regulatory framework already in place in the Original ECF Distributions as well as proposed Multilateral Instrument 45-108 Crowdfunding, which was introduced on March 20, 2014 (and notably would bring ECF to Ontario). Hopefully this is a signal towards harmonization of the ECF regulations throughout Canada. Given the complexities around an ECF distribution, both Issuers and portals are encouraged to seek professional advice. The lawyers at McKercher have experience with the regulatory requirements in the Original ECF 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 distribution. 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.