Authors: Mark Mielke, Esha Saxena
Crowdfunding has revolutionized how entrepreneurs and startups can raise cash. In short, startup crowdfunding is a process through which a business can raise small amounts of money from a large number of people using the internet.
National Instrument 45-110 – Start-Up Crowdfunding Registration and Prospectus Exemptions of the Canadian Securities Administrators allows a startup or early-stage business to raise cash by distributing eligible securities without filing a prospectus through an online funding portal if the issuer satisfies certain legal requirements.
So, how can you use crowdfunding for your startup?
Here are eight things your startup should know about crowdfunding:
What is a funding portal?
A funding portal posts startup crowdfunding projects on its website. The funding portal is responsible for explaining the risks of investing to potential investors, holding all investor funds in trust until the startup raises the minimum funding target, and returning funds to investors (without deduction) if the startup does not reach its target.
Before a funding portal can operate in any Canadian jurisdiction, it must meet certain regulatory conditions such as filing mandatory documents with the securities regulator in that jurisdiction, relying on a registration exemption or being operated by an exempt market dealer or investment dealer.
How do I start crowdfunding?
Startups looking to crowdfund must first prepare an “Offering Document” in accordance with applicable securities law which can be found in Form 45-110F1 Offering Document. The Offering Document must set out certain prescribed information related to the startup, including information related to the startup’s business plan, the key details about the startup’s industry and operations, information relating to the directors, officers and founders of the startup, risk factors applicable to the startup, the minimum and maximum amount to be raised, and the type of securities being offered, in addition to other disclosure requirements prescribed by securities law. The startup is not required to provide financial statements or any continuous disclosure to the investors. The Offering Document must be posted on the startups’ funding portal for potential investors to review. Investors have a two-day right of withdrawal if they change their minds.
How much can an investor invest?
Each investor can contribute up to $2,500 per startup crowdfunding offering. However, each investor can contribute up to $10,000 if the investor received advice from a registered dealer that the investment is suitable for the investor.
Is there a limit on how much I can crowdfund?
Yes, the maximum amount a startup can raise when crowdfunding is $1.5 million during a 12-month period.
How long do I have to crowdfund?
The distribution of securities by the startup must close within 90 days after the Offering Document is made available to a prospective purchaser on the funding portal and no concurrent crowdfunding distribution can be made by the startup for the same purposes as described in the Offering Document. Although a startup cannot have more than one startup crowdfunding campaign running at the same time, the startup can raise funds using other prospectus exemptions during a startup crowdfunding campaign.
Are there any other restrictions or conditions?
There are further restrictions related to crowdfunding, some of which are as follows:
- The head office of the startup must be in Canada
- The startup can only sell “eligible securities”
- Principals of the startup cannot be principals of the funding portal
- The startup must have operations other than to identify and evaluate assets or a business with a view to completing an investment/amalgamation and cannot intend to use proceeds to invest in an unspecified business
- Each investor must confirm that they have read and understood the Offering Document and the risk warning by signing Form 45-110F2 Risk Acknowledgement
- The startup must file a Form 45-106F1 Report of Exempt Distribution
- The securities sold are subject to restrictions on resale
Is a kickstarter a crowdfunded business?
No, a “kickstarter” is not crowdfunding. A key difference between crowdfunding and kickstarting is that, when crowdfunding, startups issue securities of the corporation in exchange for the investment. When kickstarting, the purpose of the fundraising is to pre-purchase a product in order to provide the business with the necessary cash to manufacture or otherwise develop the product.
MLT Aikins can help
Our team has extensive expertise in helping startups and early-stage businesses raise money through a broad range of options. The lawyers in our securities group have experience with the crowdfunding exemption, as well as various other exemptions to curate unique money raising strategies for all our clients. Please contact Mark Mielke or Esha Saxena with any questions.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.