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Friday, August 28, 2020

Effective July 30, 2020, the Ontario Securities Commission (“OSC”) issued an interim order and adopted a new start-up crowdfunding registration and prospectus exemption regime, Ontario Instrument 45-506 Start-Up Crowdfunding Registration and Prospectus Exemption (Interim Class Order) (the “Order”), which will bring Ontario in line with British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, and Nova Scotia (collectively, with Ontario, the “Participating Jurisdictions”). The Order is intended to provide access for new sources of capital for start-ups and small and medium sized businesses. In publishing the Order, the OSC stated that this action was particularly relevant in the current COVID-19 business climate.

The Order is welcome relief for many start-ups and local businesses that have been meaningfully impacted by the COVID-19 pandemic and non-reporting issuers and their advisors should consider its application in the context of any Ontario-based issuer that will be seeking financing during this time period. The Ontario regime is in itself substantially similar to those in other Participating Jurisdictions and provides:

  • a prospectus exemption for non-reporting issuers in Ontario that wish to issue securities through an online funding portal. Under the Order, such issuers may raise up to $250,000 per distribution and up to $500,000 annually; and
  • a registration exemption from the dealer registration requirement for the funding portals that facilitate distributions by non-reporting issuers who are relying on the above prospectus exemption.

The Order will remain in effect until the earlier of the adoption of the proposed National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions, which was published for comment on February 27, 2020, or April 2022, unless otherwise extended by the OSC.

In order to be eligible for the prospectus exemption, issuers must meet a variety of conditions. These conditions include:

  • the issuer is a non-reporting issuer, with their head office located in a Participating Jurisdiction, and the distribution is of its own eligible security;
  • the distribution of the eligible security must be facilitated through a funding portal that is relying on the registration exemption mentioned above or that is operated by an exempt market dealer or investment dealer that has provided certain written confirmations to the issuer;
  • the distribution does not exceed a maximum of $250,000 and the issuer does not complete more than two start-up crowdfunding distributions in a calendar year (maximum of $500,000 raised annually). Each purchaser must not invest more than $1,500 or, if the purchaser has received advice from a registered dealer as to the suitability of the investment, $5,000;
  • the issuer produces an offering document, which includes basic information about the issuer, its management and distribution, including risk factors, how the business intends to use the funds raised, and the minimum offering amount. The offering document must be filed no later than 30 days after the closing of the distribution and must be amended in the event that it is no longer true;
  • the distribution must occur no later than 90 days after the offering document is made available on the funding portal platform; and
  • the issuer must provide the purchaser with a contractual right to withdraw a subscription by delivering notice to the funding portal within 48 hours of the purchaser’s subscription or the funding portal’s notification that the issuer’s offering document has been amended.

The OSC has stated that the first trade of a security acquired under the prospectus exemption is subject to section 2.5 of National Instrument 45-102 Resale of Securities (“NI 45-102”). Pursuant to NI 45-102, the securities will be subject to an indefinite hold period. As such, securities are only to be resold under a prospectus, a subsequent prospectus exemption, or four months after the issuer becomes a reporting issuer.

In regard to the registration exemption, in order to be eligible, a funding portal must meet a variety of conditions. These conditions include:

  • the funding portal must have its head office in Canada and the majority of its directors must be Canadian residents;
  • the funding portal must not be registered under securities legislation in any jurisdiction of Canada;
  • the funding portal must not receive a commission, fee, or other similar payment from any purchaser;
  • the funding portal must not advise a purchaser about the merits of an investment or make any recommendations or represent in any way that an eligible security is a suitable investment for the purchaser;
  • the funding portal must deliver an information form and individual information forms for each of its principals to the OSC at least 30 days prior to the first date the funding portal facilitates a crowdfunding distribution;
  • the funding portal must maintain books and records that accurately record its financial affairs and client transactions, as well as demonstrate the funding portal’s compliance with the Order for a period of eight years from the date a record is created; and
  • the funding portal must have policies and procedures in place to make available the issuer’s offering document and risk warning. Additionally, the funding portal must have policies and procedures in place to prevent a purchaser from subscribing to a distribution unless the purchaser completes the risk warning and confirms their understanding of the offering document.

If you have any questions with respect to this legal update, please contact Geoffrey Cher by email at or any other member of Wildeboer Dellelce LLP.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

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