A few years ago, as social media became more pervasive, crowdfunding became something we at the ASC began receiving questions about. At the time, we posted Caution: Crowdfunding that explained what crowdfunding is, and what implications it has in regards to Alberta securities laws. We also wrote Facebook "friends" don't count - a post about the ways social media can contribute to fraud, including when crowdfunding is used.
To summarize these two posts, crowdfunding involves raising money, typically small amounts, from a large number of people through online mediums such as a website portal. When crowdfunding is simply the sourcing of “donations” – people funding a project with no expectation of getting their money back or making a profit in return - securities laws are typically not applicable.
However, when the people who are providing the funds have some expectation of a return or payment – securities laws likely apply. The funders may be offered securities in the form of shares, promissory notes, units or some other creative name for their investment. This is securities-based crowdfunding and it operates under the same rules as conventional financing, meaning that the dealers and companies raising money must meet the existing rules and regulations in Alberta securities laws. The unique aspect with crowdfunding is that investors and companies work online and not face-to-face.
Securities laws generally require that potential investors are entitled to certain information (via a prospectus or prospectus exemption) prior to making investing decisions, and that a person offering investments must be registered to do so. Alberta securities laws do offer some exceptions to these rules in order to facilitate business, however, these exceptions are limited.
The most commonly used exemptions for crowdfunding are the Offering Memorandum (OM) exemption and the Accredited Investor exemption. The OM exemption requires potential investors be provided with both a risk warning and a document that contains a fair bit of disclosure about the investment including audited financial statements. However, this disclosure is definitely less extensive than in a prospectus, less expensive to prepare and the company will be not be required to submit as much ongoing disclosure as it would were it not using the exemption. To off-set the reduced disclosure, there are criteria that govern how much can be raised from any one individual under a specific exemption. These exemptions could be used to crowdfund through a registered portal. However, for financings involving very small amounts, the costs associated with complying with this exemptions may not be efficient.
Read our next installment in our crowdfunding series to see how the ASC proposes to address crowdfunding for smaller companies.
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