Interim local order set to strike balance between small-business access to capital and appropriate investor protection
In the face of COVID-19 and the challenges it poses to small businesses in need of capital, the Ontario Securities Commission (OSC) has issued an interim local order to adopt a start-up crowdfunding regime currently present in certain other jurisdictions in Canada.
The interim order, which came into force in Ontario on July 30, offers registration and prospectus exemptions for start-up crowdfunding that are substantially similar to other local exemptions enjoyed by certain businesses in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, and Nova Scotia.
“The adoption of the Interim Ontario order will better facilitate access to capital for start-ups and other small businesses, while still providing appropriate investor protection,” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers.
According to the order, publicly available for viewing on the OSC website, a funding portal may be granted an exemption from the registration requirement in respect of a distribution by an issuer, subject to a raft of more than 20 conditions that must be satisfied. They include, but are not limited to:
- The funding portal is not registered under securities legislation in any jurisdiction of Canada;
- It does not advise a purchaser about the merits of an investment, or make recommendations or representations suggesting that an eligible security is a suitable investment for the purchaser;
- It does not receive a commission, fee, or other similar payment from a purchaser;
- The funding portal only facilitates or proposes to facilitate crowdfunding distributions; and
- The funding portal has its head office in Canada
Funding portals that rely on the exemption must also fulfil various reporting, disclosure, oversight, gatekeeping, and other types of obligations.
The interim order also allows for exemptions to be granted to issuers making a distribution, specifically with respect to the prospectus requirement. The exemption may be granted only when conditions and terms including, among others:
- The issuer is making a distribution of its own eligible security;
- The issuer is not a reporting issuer or an investment fund in any jurisdiction within or outside Canada;
- The head office of the issuer is located in a participating jurisdiction;
- The aggregate funds raised in any start-up crowdfunding distribution by any person or company in the issuer group do not exceed $250,000;
- The issuer group completes no more than two start-up crowdfunding distributions within a calendar year
The interim order comes a few weeks after the conclusion of a comment period to National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions, originally floated by the CSA on February 27. That proposed instrument aims to replace and harmonize local start-up crowdfunding exemptions in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, and Nova Scotia, as well as those adopted under Ontario’s interim order.
The Ontario interim order will stay in place until the adoption of the proposed national instrument, or for 18 months following the effective date of the order.
