OSC Facilitates Entrepreneur Fundraising

<b>Newly proposed prospectus exemptions will give start-ups and small businesses easier access to equity financing <br/> <br/>By Sandra Rubin</b> <br/> <br/>WHEN THE ONTARIO Securities Commission published four new prospectus exemptions in late March, players in Canada's start-up community must have been beaming. The proposed changes, out for a 90-day comment period, will make it easier for them to raise funds without the disclosure and compliance costs involved in issuing a prospectus. <br/> <br/>“In the wake of the financial crisis, it's been extraordinarily difficult for start-ups and small and medium-sized enterprises to raise capital,” says Stephen Halperin, co-chair of the corporate securities group at Goodmans LLP. “There has been an outcry from various constituencies that they ...
OSC Facilitates Entrepreneur Fundraising
Newly proposed prospectus exemptions will give start-ups and small businesses easier access to equity financing

By Sandra Rubin


WHEN THE ONTARIO Securities Commission published four new prospectus exemptions in late March, players in Canada's start-up community must have been beaming. The proposed changes, out for a 90-day comment period, will make it easier for them to raise funds without the disclosure and compliance costs involved in issuing a prospectus.

“In the wake of the financial crisis, it's been extraordinarily difficult for start-ups and small and medium-sized enterprises to raise capital,” says Stephen Halperin, co-chair of the corporate securities group at Goodmans LLP. “There has been an outcry from various constituencies that they need access to capital, that the rules are too restrictive, and they can't afford to comply with them. These proposals address that.”

The measure getting the most attention is the crowdfunding proposal that would allow large numbers of people to buy shares of a company through an online portal such as Kickstarter or Indiegogo. That could help them invest in the next Square or Shazam before the company comes to market with multi-billion-dollar valuations. But there are concerns about the threat of the lower disclosure threshold being used by fraudsters, so the OSC is proposing clear limits on investment size.

As the proposal stands, companies would only be able to raise $1.5 million in any 12-month period through crowdfunding, while investors would be limited to $10,000 per year and a maximum of $2,500 per investment.

The OSC is also proposing an offering memorandum exemption that would allow businesses to raise money based on a document that falls short of a full prospectus. Eligible investors – those with net assets or net income above a certain level or who have obtained advice – would be permitted to invest up to $30,000 per 12 months, while everyone else would be limited to $10,000.

“I think what we're seeing here is the commission striving for balance between efficient capital markets and investor protections,” says Mindy Gilbert, a partner at Davies Ward Phillips & Vineberg LLP. “They're not allowing moms-and-pops to put too much capital at risk.”

The third OSC proposal, which would allow public companies to raise capital from existing shareholders without issuing a prospectus, also comes with curbs. Shareholders would be limited to $15,000 per 12 months unless they have obtained specific advice on its suitability.

And the final measure put forward by the OSC is a family, friends and business-associates exemption that would allow people to raise funds from their own personal network of contacts.

Will the measures create more work for lawyers? “I don't think it will be hugely significant for the downtown Toronto law firms,” says Halperin, “but it could be very significant for entrepreneurs who don't have access to conventional capital.”

Lawyer(s)

Stephen H. Halperin Mindy B. Gilbert

Firm(s)

Goodmans LLP Davies Ward Phillips & Vineberg LLP