Crowdfunding in Canada and the United States

Canadian and U.S. companies will be able to raise capital through crowdfunding beginning in 2016. Crowdfunding is already established as a way of raising money via donations from groups of people over the Internet to fund various projects and ventures. Acknowledging advances in technology and social media, securities regulators in Canada and the United States have now established legal frameworks to permit crowdfunding via sales of securities. The objective is to facilitate capital-raising by start-ups and other small companies, who often face difficulties using traditional financing models, while at the same time creating new investment opportunities for small investors.

Below, Appendix I provides a comparative overview of the new crowdfunding regimes in Canada and the United States. Generally speaking, Canadian companies may crowdfund in Canada and U.S. companies may crowdfund in the United States.

How Do the Crowdfunding Rules Work?

Companies wishing to raise capital through crowdfunding will be required to prepare an offering document containing prescribed information, on which they will be liable, and are permitted to raise C$1.5 million in Canada or U.S.$1 million in the United States per year. Additionally, issuers are required to use an online funding portal to facilitate their crowdfunding offerings, and the portal will have certain gate-keeping obligations, such as conducting background checks, to help protect investors and maintain the integrity of the market. A portal’s obligations in the United States include providing communication channels to facilitate online discussions about available offerings. 

While the Canadian and U.S. regimes are largely similar, one of the key differences is that in Canada, both public and private companies can raise funds via crowdfunding, while in the United States only non-reporting companies are eligible to do so. Thus, while the U.S. exemption may be attractive to start-up companies, those that choose to list on a U.S. securities exchange, such as emerging growth companies going public under the JOBS Act, will not be eligible to crowdfund.

Potential Implications of Crowdfunding

Costs of Crowdfunding Offerings

Given the limits on the amount of capital that can be raised via crowdfunding, these offerings may be relatively costly compared to capital raised from angel investors or through other financing models. In particular, there will be the time and expense of preparing an offering document and engaging an online portal. On the other hand, crowdfunding offers a unique opportunity to tap into a large pool of investors, and can be a publicity boon for a company, increasing its visibility with the broader market.

Number of Investors

Companies raising capital via crowdfunding may find themselves with a very large number of new investors. For context, in order to raise C$1.5 million under the Canadian regime, it would require 600 non-accredited investors (who can each invest a maximum of C$2,500) or 60 accredited investors (who can each invest a maximum of C$25,000). Accordingly, issuers will need to consider the implications of having an extensive investor base, including potentially having to obtain shareholder approval for future transactions or financings.

What’s Next?

The Canadian and U.S. crowdfunding regimes may create a viable new way for start-ups and other small companies to expand their businesses, possibly as a step toward an IPO, and may also be a catalyst for technological innovation in capital raising. As market practices evolve over time, we expect funding portals to continually adapt by finding ways to disseminate information and facilitate offerings cost-effectively, while issuers may find innovative and efficient mechanisms to handle large investor bases, whether through unique corporate structures or the use of third-party service providers. The viability and ultimate success of the crowdfunding regimes will become evident as issuers, online funding portals and other market participants seek to take advantage of this new opportunity.

Please see Appendix I below for a comparative overview of the Canadian and U.S. crowdfunding rules.

APPENDIX I

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¹ Adopted in Manitoba, New Brunswick, Nova Scotia, Ontario and Québec, and being considered in Saskatchewan. There is also a more limited start-up crowdfunding rule in British Columbia, Manitoba, New Brunswick, Nova Scotia, Québec and Saskatchewan, and a similar rule is being considered in Alberta and Nunavut.

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