BCSC | Brenda M. Leong | May 1, 2014

Introduction and Background

“Crowdfunding” is a term that describes raising small amounts of money from many people, usually over the internet. Charities and some businesses who offer pre-sales already use the concept.

In April 2012, the US adopted a new crowdfunding exemption that would allow companies to sell securities to anyone over the internet through either a registered broker- dealer or a registered portal. The US exemption will not be available until the SEC adopts certain rules to support it. In Canada, Saskatchewan adopted a crowdfunding exemption allowing the sale of securities late last year.

Today some members of the Canadian Securities Administrators published a proposed crowdfunding exemption, modelled on the Saskatchewan exemption (the start-up crowdfunding exemption). We request comment on whether BCSC should consider adopting a similar exemption in British Columbia.

The exemption

The start-up crowdfunding exemption would allow an issuer to distribute securities without a prospectus provided the issuer complies with certain conditions, including the following:

•    the issuer raises no more than $150,000 per offering and offers no more than twice per year

•    no investor invests more than $1,500 per offering

•    the issuer is not a reporting issuer or an investment fund

•    the offering must go through an on-line funding portal

•    the issuer provides a streamlined offering document to investors through the portal

The start-up crowdfunding exemption would allow a portal to operate without being registered under securities legislation provided the portal complies with certain conditions, including the following:

•    the portal is prohibited from providing investment advice

•    the portal must ensure investors confirm online that they have read and understood the issuer’s offering document and the risk warnings required under the exemption

•    the portal must ensure that all funds are held in trust for investors until the issuer raises the minimum amount required to close the offering

•    the portal must provide advance notice of its intention to use the exemption

We provide further information on the start-up crowdfunding exemption in Appendix A.

Crowdfunding for small and early-stage businesses in British Columbia

We understand that many small and early-stage businesses believe the current regime is too expensive, relative to the amount of capital they need. We would like to know whether a start-up crowdfunding exemption would fill a funding gap in the current regime.

The start-up crowdfunding exemption would be directed at small and early-stage businesses, designed to allow them to raise a defined amount of money in a more cost effective way. Investors in these start-ups would accept the risks of investing in early- stage businesses with some protection through limits on their investments.

As the business grows and requires more capital, it could look to other sources of funds, through the accredited investor exemption or the offering memorandum exemption.

Request for comments

We welcome all comments on the start-up crowdfunding exemption. We have the following specific questions on the proposal:

General

1.   Is there a funding gap that prevents small and early-stage businesses from raising sufficient capital under our existing prospectus exemptions? If so, please describe where you think the gap exists and what causes it?