Crowdfunding: Have your say on possible changes in Ontario legislation (part 2)
In Part 1 of this blog, posted yesterday, I gave an overview of crowdfunding—what it is, who it’s for and what the pros and cons are. I also mentioned that the Ontario Securities Commission (OSC) is currently reviewing a potential crowdfunding exemption to enable the issuance of crowdfunded equity for local companies, and pointed to the detailed paper that they have produced for review and comment.
Essentially, the OSC is seeking feedback on an exemption that would allow equity crowdfunding in Ontario. The proposed OSC crowdfunding concept includes:
- rules for companies issuing shares (“issuers”) for sale on a crowdfunding platform;
- rules regarding how much investors can invest in equity crowdfunding; and
- rules governing the operation of an equity crowdfunding portal.
American JOBS Act–Status of US equity crowdfunding
The OSC is borrowing some of its concepts from the American JOBS Act (Jumpstart Our Business Startups Act), which is intended to encourage funding of American small businesses by easing various securities regulations. It was signed into law by President Barack Obama on April 5, 2012. The US Securities and Exchange Commission was given the mandate to publish the rules and regulations for the implementation of equity crowdfunding by December 31, 2012; however, they are delayed, so equity crowdfunding is not yet currently available in the US.
What does the OSC’s ‘concept model’ entail?
Under the OSC’s concept model, only companies (“issuers”) that are operating in Canada and issuing simple-to-understand equity and debt instruments would be eligible to seek crowdfunded equity.
These companies would:
- face a proposed limit of $1.5 million raised in any 12-month period;
- be restricted to advertising the offering only on their company or the funding portal’s website; and
- be allowed to use social media to direct potential investors to the company or the funding portal website.
Companies would be required to provide investors with an information statement about the business, including a description of the principal risks, and at least one year of financial statements, if any. If the company is raising more than $500,000, the financial statements would need to be audited; if not, then the management team of the company would need to certify them. Post-investment, the company would have to provide investors with annual financial statements and information on how the proceeds of the equity crowdfunding were used.
All equity crowdfunding investments would have to be made through a funding portal that is registered with the OSC. The OSC expects that portals doing business in Ontario will be required to register in an appropriate dealer or advisor category, but due to the limited nature of the funding portal’s activities, the OSC may exempt funding portals from some specific dealer or advisor registration requirements.
How would this model affect investors?
Under this model, investments in startup financing rounds would no longer be restricted to “accredited investors,” but could also be made by members of the general public. Investor protection measures would be required and are proposed to include investment limits of $2,500 in a single investment and no more than $10,000 overall in a calendar year. Investors would also have to sign a risk acknowledgement affirming that they could withstand to lose their whole investment amount and would have a two-business-day “cooling-off period” to back out of their investment decision.
Get involved! The OSC seeks your input by March 8, 2013
The OSC is seeking comments by March 8, 2013, from company managers who may be interested in issuing shares/raising capital (“issuers”) as well as investors—including members of the general public, accredited angel investors, venture capital firms and other institutional investors, and the legal, financial and other advisors who support them.
If interested, you may also consider registering to attend a public consultation session.
Once you’ve reviewed the OSC’s paper, provide written feedback by March 8, 2013, to John Stevenson of the OSC:
Ontario Securities Commission
20 Queen Street West
19th Floor, Box 55
Note: All comments received during the comment period will be made publicly available and posted on the OSC website at: www.osc.gov.on.ca.
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