The recent arrival of the KickStarter platform in Canada serves as a reminder that some interesting developments in the regulation of “crowdfunding” have been occurring in the last several months. This article focuses on the exemption granted to MaRS VX by the Ontario Securities Commission, which recently authorized the very first capital crowdfunding platform in Canada.
Crowdfunding is a way of financing a project or business by pooling small financial contributions obtained through Web platforms (such as La Ruche in the Quebec City region) and making use of social media for advertising and solicitation. A person seeking financing can present the project to the “crowd” using the Web platform and request small contributions from a large number of individuals, thereby raising a sizable sum.
In Canada, some platforms already offer the opportunity to entrepreneurs to obtain financing through crowdfunding in the form of donations or in exchange for rewards, but in the absence of an exemption from the obligation to file a prospectus, the offering of equity is prohibited. Nevertheless, over the course of the last few months, securities commissions across the country have shown some degree of open-mindedness, hinting at the possibility that exemptions from the obligation to file a prospectus may ultimately be granted to businesses that wish to raise capital through crowdfunding. In this regard, capital crowdfunding will soon be permitted in the United States, and is already permitted in Australia and Great Britain (subject, in each of these cases, to various conditions).
Decision of the OSC in the MaRS VX case
On June 17, 2013, the OSC rendered an interesting decision granting MaRS VX, an online crowdfunding platform, the authorization to be registered as a restricted dealer. MaRS VX had submitted an application to the OSC for registration with the objective of facilitating “impact investing”. The Web platform’s stated goal was to act as a bridge between “impact issuers” (defined as issuers with a mission of solving social or environmental problems in Ontario and less than $25 million in revenues) and “accredited investors” (within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions).
With the objective of facilitating the use of the Web platform, MaRS VX was seeking an exemption from certain “know-your-client” and “suitability” requirements provided for in Part 13 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Those requirements in effect require all restricted dealers to obtain information on each of their clients so as to determine their individual risk tolerance and to ensure the suitability of the securities that they are proposing to sell to such clients.
While those requirements are crucial for the protection of investors and the integrity of the market, they present significant obstacles in the context of crowdfunding. The OSC has thus decided to exempt MaRS VX from the know-your-client and investment suitability requirements, subject to certain conditions summarized here.
Ultimately, the OSC ruling has a relatively limited scope, since only accredited investors and “impact issuers” are contemplated by the exemption. Nevertheless, the ruling does open the door to capital crowdfunding in Canada.
As well, It will be interesting to see what impact the SFCAA’s proposal to legalize capital crowdfunding will have across Canada
A version of this post originally appeared in the Edilex legal blog.