Start-up Crowdfunding Guide for Funding Portals

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Beatrice Merryl Arnold
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1 Start-up Crwdfunding Guide fr Funding Prtals Crwdfunding is a prcess thrugh which an individual r a business can raise small amunts f mney frm a large number f peple, typically thrugh the Internet. The bjective is t raise sufficient funds in rder t carry ut a specific prject. There are different types f crwdfunding, such as by dnatin, r pre-selling f prducts, and securities crwdfunding. This guide discusses securities crwdfunding. Securities crwdfunding legal bligatins In Canada, all trading f securities is subject t legal bligatins. Fr example, a persn cannt be in the business f trading securities unless the persn is registered in the prvince r territry where it is carrying n this business r has an exemptin frm the registratin requirement under securities laws. Similarly, a business seeking t raise capital by issuing securities must file a prspectus with the securities regulatr f their prvince r territry r have an exemptin frm the prspectus requirements under securities laws. These bligatins, hwever, can be cstly fr start-ups and early stage issuers. The securities regulatrs in British Clumbia, Saskatchewan, Ontari, New Brunswick, Prince Edward Island and Yukn (the CMR Jurisdictins), and Manitba, Québec and Nva Sctia (tgether with the CMR Jurisdictins, the participating jurisdictins) have made available registratin and prspectus exemptins t facilitate securities crwdfunding t help make it easier fr start-ups and early-stage businesses t raise mney by issuing securities. The securities regulatrs refer t this as the start-up crwdfunding exemptins r start-up crwdfunding". The start-up crwdfunding exemptins allw: a start-up r early stage issuer t raise relatively small amunts f capital by distributing securities t investrs withut filing a prspectus (start-up prspectus exemptin); a funding prtal t facilitate trades f thse securities withut having t register as a dealer (the start-up registratin exemptin), althugh a funding prtal can be perated by a registered dealer. Start-ups and early stage issuers intending t cnduct a start-up crwdfunding ffering must use a funding prtal. A funding prtal lists investment pprtunities and facilitates the payment f the purchase price frm the investr t the issuer. The purpse f this guide is t assist funding prtals. In this guide, regulatr means the securities regulatr r regulatry authrity in a participating jurisdictin. There are different types f funding prtals that may facilitate start-up crwdfunding: funding prtals perated by persns r cmpanies relying n the start-up registratin exemptin that are nt registered under Canadian securities legislatin and cannt give advice abut the suitability f any security r abut the merits f any investment; - 1 -

2 funding prtals perated by a registered investment dealer, exempt market dealer r restricted dealer under Canadian securities legislatin that are required t prvide advice abut the suitability f the security; funding prtals perated by a registered dealer under Canadian securities legislatin and subject t the terms and cnditins f their registratin that cannt give advice abut the suitability f any investment. An example f this type f funding prtal wuld be ne perated by a restricted dealer subject t the terms and cnditins f Multilateral Instrument Crwdfunding (MI ). Fr additinal infrmatin n MI , please refer t MI and its Cmpanin Plicy. Funding prtals perating under the start-up registratin exemptin A persn perating a funding prtal des nt have t register as a dealer if they meet all cnditins f the start-up registratin exemptin. These cnditins include, amng ther things, that the funding prtal must: have its head ffice in Canada; have a majrity f its directrs be Canadian residents; nt be registered under Canadian securities legislatin; nt tell investrs an investment is suitable fr them r therwise discuss the merits f an investment: this means the funding prtal cannt tell an investr that the securities ffered are a gd investment r that the investr shuld make an investment fr whatever reasn. The funding prtal must refrain frm saying r ding anything that might lead an investr t think that they shuld buy the securities because the securities smehw meet their investment needs r bjectives, hwever, the funding prtal can give factual infrmatin abut the securities. Fr example, it may tell investrs abut the features f the securities, the risks f the investment, hw start-up crwdfunding wrks, and ther items f a general, factual nature; must make available the issuers ffering dcuments and risk warnings n its website: a funding prtal can carry ut reviews f issuers befre making their ffering dcuments available n its website t prtect the funding prtal s wn interests r reputatin, funding prtals may want t be mindful that their website culd be used in ways nt intended. Fr example, peer-t-peer messaging systems n a funding prtal s website might be used by the funding prtal s visitrs t - 2 -

3 slicit the purchase and sale f thers securities withut the prtal s knwledge. This may result in the funding prtal indirectly facilitating illegal securities distributins; ensure that investrs cnfirm nline, by ticking a bx, that they have read and understd the ffering dcument and risk warning available n the funding prtal; take reasnable measures t ensure that the head ffice f each issuer using the funding prtal is in a participating jurisdictin and that each investr is a resident f a participating jurisdictin; nt allw entry t its website t any persn until that persn acknwledges that they are entering a website f a funding prtal: that is nt perated by a registered dealer, under Canadian securities legislatin, and that will nt prvide advice abut the suitability advice f any security r abut the merits f any investment; the regulatrs call this the pp-up acknwledgement. Fr further explanatin n the mechanics f this, please see the sectin in this guide called Pp-up Acknwledgement; nt receive a cmmissin r fee frm an investr; disclses n its website: the full legal name, municipality and jurisdictin f residence, business mailing and address, and business telephne number f each prmter, 1 directr, fficer and cntrl persn 2 (principal) f the funding prtal, and the names f the participating jurisdictins where the funding prtal is perating and relying n the start-up registratin exemptin: each f the participating jurisdictins has their wn Start-up Crwdfunding Registratin and Prspectus Exemptins rder r rule (exemptin). Each exemptin is substantially harmnized with the ther participating jurisdictins. Hwever, the funding prtal must ensure that they are in cmpliance with the exemptin in each participating jurisdictin where they are perating. Please 1 A persn wh funded, rganized r significantly rerganized the funding prtal is generally cnsidered t be a prmter. 2 A persn wh hlds a sufficient number f vting rights t cntrl the funding prtal r wh hlds 20% r mre f the vting rights f the funding prtal is generally cnsidered a cntrl persn f the funding prtal

4 check the applicable exemptin which can be fund n the regulatr s website; The regulatrs expect that these disclsures wuld be prminently displayed n the funding prtal s website; hld investrs assets separate frm the funding prtal s prperty, in trust fr the investr and, in the case f cash, at a Canadian financial institutin: this requirement is a fundamental bligatin f the start-up registratin exemptin, funding prtals are required t prvide the regulatrs with details n the prcess and prcedure fr handling all funds in relatin t the start-up crwdfunding distributin at the initial stage, and during future cmpliance reviews; The funding prtal must maintain bks and recrds t demnstrate t the regulatr that this bligatin is fllwed clsely. A funding prtal fund t be nn-cmplaint with this cnditin may n lnger be able t rely n the start-up registratin exemptin and may be required t becme a registered dealer; keep its bks and recrds, including its cmpliance prcedures, at its head ffice fr eight years frm the date a recrd is created; and nt facilitate the distributin f securities t purchasers under prspectus exemptins ther than the start-up prspectus exemptin. Befre starting peratins Step ne A funding prtal intending t rely n the start-up registratin exemptin must deliver the fllwing frms t regulatrs: a cmpleted Frm F4 Start-up Crwdfunding Funding Prtal Infrmatin Frm (in British Clumbia, Saskatchewan, Ontari, New Brunswick, Prince Edward Island and Yukn) r a cmpleted Frm 3 Start-up Crwdfunding Funding Prtal Infrmatin Frm (in Manitba, Québec and Nva Sctia); a cmpleted Frm F5 Start-up Crwdfunding Funding Prtal Individual Infrmatin Frm (in British Clumbia, Saskatchewan, Ontari, New Brunswick, Prince Edward Island and Yukn) r a cmpleted Frm 4 Start-up Crwdfunding Funding Prtal Individual Infrmatin Frm (in Manitba, Québec and Nva Sctia) fr each principal f the funding prtal; and ther cmpleted dcuments and any additinal infrmatin that may be requested by the regulatrs

5 Submitting the fllwing dcuments t the regulatrs with Frm F4 r Frm 3 may help expedite the prcess: business plans and financial statements, if the funding prtal intends t facilitate start-up crwdfunding distributins in Québec; rganizing dcuments such as articles and certificate f incrpratin r partnership agreement if the funding prtal intends t facilitate start-up crwdfunding distributins; business registratin numbers and prf f extra-prvincial registratin if the funding prtal intends t facilitate start-up crwdfunding distributins; dcuments describing the funding prtal s prcess and prcedure fr handling investrs funds, including the fllwing details: the name f the Canadian financial institutin where the trust accunt fr investrs cash is lcated, the name f the signatries n that trust accunt and their rle with the funding prtal, hw the investrs assets will be kept separate and apart frm the funding prtal s assets, hw the cash will flw frm: (i) the investrs t the funding prtal s trust accunt; (ii) frm the funding prtal s trust accunt back t the investrs bank accunts in the event that the ffering des nt clse; and (iii) frm the funding prtal s trust accunt t the issuer in the event that the ffering des clse; a cpy f the trust agreement fr the funding prtal s trust accunt with a Canadian financial institutin r details surrunding the establishment f this accunt; and prvide the regulatrs access t the funding prtal s website in a test envirnment when cmplete and ready fr viewing. The funding prtal must deliver the frms and dcuments by t the regulatr in each participating jurisdictin where the funding prtal intends t facilitate start-up crwdfunding distributins. The funding prtal may satisfy the requirement t deliver the frms and dcuments in multiple CMR Jurisdictins by making a single filing with the Chief Regulatr. Such filing will cnstitute a filing under the Capital Markets Act in all CMR Jurisdictins. Fr example, a funding prtal with a head ffice in Saskatchewan that intends t seek funds frm investrs in all participating jurisdictins must deliver the frms and dcuments described in this guide t the Chief Regulatr (fr the CMR Jurisdictins) and the regulatrs in each f the ther participating jurisdictins. In such a case, it is suggested the funding prtal each regulatr invlved at the same time

6 Delivery f the frms and dcuments by the funding prtal is nly the first step and des nt mean that funding prtal can start peratins. The regulatrs may have questins fr the funding prtal regarding these frms and dcuments. Step tw Befre starting peratins, the funding prtal must receive written cnfirmatin frm the regulatr that the frms and dcuments delivered t the regulatr in step ne are cmplete. Please nte that the regulatr may ntify the funding prtal that it cannt use the start-up registratin exemptin because its principals, r their past cnduct, demnstrate a lack f integrity, financial respnsibility r relevant knwledge r expertise. Changes affecting infrmatin in frms r dcuments If a change ccurs and the infrmatin in the frms and dcuments delivered t a regulatr are n lnger up-t-date, the funding prtal must update the infrmatin by delivering a new frm r dcument setting ut the change. Fr example, if management at a funding prtal changes, an updated funding prtal infrmatin frm as well as a funding prtal individual infrmatin frm fr each new principal must be delivered t the regulatrs. Cmpliance with laws and regulatins The funding prtal s activities are subject t the securities laws f the jurisdictins where its head ffice r ther places f business are lcated, as well as the jurisdictins where the issuers and purchasers are resident. If a funding prtal intending t rely n the start-up registratin exemptin has its head ffice lcated in a jurisdictin where that exemptin is nt available then the funding prtal may be required t be registered as a dealer. Fr example, an Alberta resident intending t perate a funding prtal may have t register as a dealer with the Alberta Securities Cmmissin even thugh the funding prtal is nt sliciting issuers r investrs frm that prvince. Once registered as a dealer in any jurisdictin then the start-up registratin exemptin is n lnger available (see later sectin n Funding prtals perated by registered dealers). Failing t cmply with lcal securities laws is a serius ffence that culd prevent the funding prtal frm being able t rely n the start-up registratin exemptin. The funding prtal must als ensure that it cmplies with all ther applicable laws and regulatins f a participating jurisdictin. We encurage funding prtals t cnsult a lawyer fr advice. Regulatrs in the participating jurisdictins plan t cnduct cmpliance reviews f funding prtals relying n the start-up registratin exemptin sn after the cmmencement f peratins. If a funding prtal des nt meet the cnditins f the start-up registratin exemptin, then it can n lnger rely n that registratin exemptin and may be required t becme a registered dealer

7 Pp-up" Acknwledgement The start-up crwdfunding exemptins require investrs t acknwledge certain infrmatin befre entering the website f a funding prtal. This requirement des nt distinguish between where r hw the investr enters the funding prtal s website. As a result, funding prtals must design their website s that purchasers acknwledge the required infrmatin regardless f whether thse purchasers enter the website thrugh the funding prtal s hme page r thrugh anther page n the funding prtal s website. The funding prtal shuld als manage the risk that ptential purchasers are visiting the funding prtal s website using a shared cmputer, tablet, r ther mbile device. In ther wrds, multiple peple in a husehld may be entering the funding prtal s website at different times using the same device. As a result, in rder t cmply with the pp-up acknwledgment requirements, the funding prtal shuld cnsider designing their website s that the required pp-up acknwledgements reappear each time the investr s internet brwser is clsed and repened. The mechanics f the pp-up acknwledgement: The pp-up acknwledgement appears upn the first and every subsequent time a persn enters a funding prtal s website. This means that after pening their internet brwser regardless f which ne (Internet Explrer, Chrme r any ther internet brwser): (a) (b) If a persn lands n any page f a funding prtal s website (hme page r ther page) the pp-up acknwledgment appears. If the persn clicks "I acknwledge" and then immediately clses ut f the website, when the persn ges back t any page n a funding prtal s website, the pp-up acknwledgment appears. The result is that the same persn will have t click n "I acknwledge" t g back int the funding prtal s website regardless f the fact that they had just been t that website. The pp-up acknwledgement appears regardless f a persn s entry pint t the website (hme page r ther page). Fr example: (c) (d) If a persn were t search the name f the funding prtal and fund a link t the funding prtal s website, the link wuld take the persn t the funding prtal s website hme page and a pp-up acknwledgement appears. If a persn were t search name f the funding prtal and fund the web page link t the funding prtal s issuer ffering page, the link wuld take the persn t that page f the funding prtal s website and a pp-up acknwledgement appears

8 Once this persn clicks I acknwledge and enters the funding prtal s website, they can navigate frm page t page within the website withut the re-appearance f the ppup acknwledgement. Funding prtals perated by registered dealers Registered exempt market dealers, investment dealers and restricted dealers are allwed t perate start-up funding prtals. Registered dealers that perate funding prtals must: meet their existing registratin bligatins under securities legislatin (such as the knw-yur-client, knw-yur-prduct and suitability bligatins wed t investrs); cnfirm t issuers that the funding prtal meets certain f the cnditins in the start-up prspectus exemptin, such as making an ffering dcument and risk warning available t investrs n the funding prtal s website prmpt any persn entering the funding prtal s website t acknwledge that they are entering a website f a funding prtal: that is perated by an investment dealer, exempt market dealer r restricted dealer as applicable, and that will prvide suitability advice if required t d s under securities legislatin, r that will nt prvide suitability advice if nt required t d s (fr example as in the case f a restricted dealer perating under the terms and cnditins under MI ); The regulatrs call this the pp-up acknwledgement. Fr further explanatin n the mechanics f this please see the abve sectin called Pp-up Acknwledgement; file either a cmpleted Frm F5 Change f Registratin Infrmatin, r Frm F6 Firm Registratin that describes its business as including perating a funding prtal under the start-up crwdfunding exemptins. The funding prtal must disclse all fees charged t investrs in accrdance with relatinship disclsure requirements under Natinal Instrument Registratin Requirements, Exemptins and Onging Registrant Obligatins. Hw des start-up crwdfunding wrk? Issuers are respnsible fr preparing an ffering dcument that cmplies with the prescribed frm. In particular, issuers must indicate the minimum amunt necessary t clse a start-up crwdfunding distributin. Issuers will prvide the ffering dcument t the funding prtal t pst nline. The funding prtal must take reasnable measures t ensure that the issuer is a - 8 -

9 resident f a participating jurisdictin where the ffering dcument is made available. Investrs will read the ffering dcument and decide whether r nt t invest. Befre accepting an investment, a funding prtal must btain cnfirmatin frm the investr that he r she has read and understd the ffering dcument and the risks described in the risk acknwledgement frm. A funding prtal must btain the purchaser s persnal infrmatin and take reasnable measures t ensure the purchaser resides in a participating jurisdictin. An issuer cannt clse a distributin if it has nt raised the minimum amunt set ut in its ffering dcument and befre each purchaser s right t withdraw has expired. At the clsing: the issuer issues shares r ther eligible securities t purchasers; the funding prtal releases funds t the issuer. N later than 15 days fllwing the clsing f the distributin, the funding prtal must ntify purchasers that the funds have been released t the issuer, and it must prvide the issuer with purchaser infrmatin such as: full name; address; telephne number; address; number f securities purchased; and ttal purchase price. The issuer requires this investr infrmatin in rder t cmplete a reprt f exempt distributin. When prviding investr infrmatin t the issuer, we encurage the funding prtal t use this same spreadsheet that the issuer is required t use fr filing. Please refer t the Start-up Crwdfunding Guide fr Businesses fr mre infrmatin n the issuer s filing requirements. If the issuer withdraws its start-up crwdfunding ffering r des nt raise the minimum amunt within 90 days after the funding prtal psts the ffering dcument nline, all the funds must be returned in full t investrs within 5 business days. N deductins are permitted. The funding prtal must als send a ntice t the issuer and each investr cnfirming that the funds have been returned t investrs. The funding prtal may send ntices t investrs and issuers by . Related-party restrictin A funding prtal cannt act in a start-up crwdfunding distributin if ne f its principals is als a principal f the issuer grup. The issuer grup means the issuer, an affiliate f the issuer, and any ther issuer that is engaged in a cmmn enterprise with the issuer r an affiliate, r whse - 9 -

10 business is funded r rganized by the same persn r cmpany wh funded r rganized the issuer. Investr s right t withdraw In British Clumbia, Saskatchewan, Ontari, New Brunswick, Prince Edward Island and Yukn, investrs have the right t withdraw their investment within 48 hurs fllwing the investr s subscriptin pursuant t sectin 21.3 f CMRA Regulatin Definitins, Prcedure, Civil Liability and Related Matters. Investrs als have the right t withdraw their investment within 48 hurs f the funding prtal ntifying the investr f an amendment t the ffering dcument. T exercise this right f withdrawal, an investr must ntify the funding prtal. The funding prtal must give investrs the pprtunity t exercise this right. The funding prtal must return the funds t an investr wh exercises this right, withut any deductin, within 5 business days after the ntice. Amendments t the ffering dcument An issuer must amend its ffering dcument after it has been psted nline if the infrmatin it cntains is n lnger true. This culd be the case if, fr example, an issuer wants t change the price f the securities r the minimum r maximum ffering amunt. The issuer must send the amended versin t the funding prtal fr psting n the funding prtal s website. The funding prtal must ntify investrs abut the amendment. Issuer s financial statements Under the start-up prspectus exemptin, issuers are nt required t prvide financial statements t investrs with the ffering dcument. If an issuer wants t make its financial statements available t investrs, it can place a hyperlink n the funding prtal leading t the financial statements. Hwever, the hyperlink must nt appear in the ffering dcument. Financial statements d nt frm a part f the ffering dcument

11 Questins: Refer any questins t the fllwing participating jurisdictins: British Clumbia Saskatchewan Manitba Ontari Québec New Brunswick Capital Markets Regulatry Authrity Telephne: [ ] Tll free in Canada: [ ] [ ] [website] Capital Markets Regulatry Authrity Telephne: [ ] Tll free in Canada: [ ] [ ] [website] The Manitba Securities Cmmissin Telephne: Tll free in Manitba: exemptins.msc@gv.mb.ca Capital Markets Regulatry Authrity Telephne: [ ] Tll free in Canada: [ ] [ ] [website] Autrité des marchés financiers Directin du financement des sciétés Telephne: Tll free in Québec: financement-participatif@lautrite.qc.ca Capital Markets Regulatry AuthrityTelephne: [ ] Tll free in Canada: [ ] [ ] [website]

12 Nva Sctia Prince Edward Island Yukn Nva Sctia Securities Cmmissin Telephne: Tll free in Nva Sctia: nssc.nvasctia.ca Capital Markets Regulatry Authrity Telephne: [ ] Tll free in Canada: [ ] [ ] [website] Capital Markets Regulatry Authrity Telephne: [ ] Tll free in Canada: [ ] [ ] [website]

The Company is a public company incorporated in Bermuda and its securities are listed on AIM.

The Company is a public company incorporated in Bermuda and its securities are listed on AIM. (Incrprated in Bermuda Registratin N. 44512) POLICY FOR TRADING IN COMPANY SECURITIES The Cmpany is a public cmpany incrprated in Bermuda and its securities are listed n AIM. Schedule 1 t this Plicy cntains