New crowd-funding rules introduced in several provinces

On May 20, 2015, regulators in BC (along with Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia) adopted new rules which will allow companies to raise money by crowd-funding while also distributing shares. The new rules provide a new opportunity for companies because previously, companies could only raise money by crowd-funding if securities were not also being distributed.

The rules will enable private (non-reporting) companies to raise money without having to file a Prospectus and enable an online funding portal to assist with the distribution of shares or securities without being Registered as an investment dealer.

For a company to rely on the exemptions, it must:

  • not be a reporting issuer anywhere in Canada;
  • have a head office in one of the provinces listed above;
  • not use the exemption more than twice annually, and each distribution must be $250,000 or less. 

Investors relying on the exemptions may not invest more than $1,500 per distribution.

To operate a funding portal through which the securities would be distributed, and rely on the dealer registration exemption, that entity must:

  • have a head office in Canada and have a majority of its directors resident in Canada;
  • not charge a commission for the distribution of securities;
  • host a website through which the funding portal can receive payments from investors for their subscriptions, and through which it can provide information in connection with the distribution.

This is an excellent opportunity for companies to finance by crowd-funding while offering equity in the form of securities to their investors. Companies should however also consider what kinds of securities investors under the crowd-funding category should receive as they will be likely be unique from shares or convertible securities issued to founders or as seed capital.