Changes to Startup Crowdfunding in BC
July 30, 2015 
Business Law
Startups can raise up to half a million dollars a year through online equity crowdfunding in BC as of May 14, 2015.
The British Columbia Securities Commission joins the provinces of Saskatchewan, Manitoba, Québec, New Brunswick, and Nova Scotia to allow startups the ability to access online equity crowdfunding through funding portals such as Kickstarter, Indiegogo, or GoFundMe.
Qualifying startups will be allowed to offer share subscriptions to residents of participating provinces through qualifying funding portals in order to raise equity of up to $500,000 a year (up to $250,000 per distribution, with a maximum 2 distributions per year). However, individual investments will be capped at $1,500 and startup issuers will be required to provide a contractual right to withdraw from the purchase with notice to the funding portal within 48 hours of the subscription.
Startup Crowdfunding Exemptions
Under the British Columbia Startup Crowdfunding Registration and Prospectus Exemptions (BC 45-535) (the “Crowdfunding Exemptions”), non-reporting startups and early stage companies may become exempt under Section 76 of the Securities Act RSBC 1996 (the “Act”) from the Act’s prospectus requirements. Qualifying crowdfunding portals may also apply to become exempt from the registration requirements, under Section 48(1) of the Act.
The prospectus and registration exemptions will only apply to Canadian issuers and funding portals whose head offices are located in participating Canadian provincial jurisdictions. Funding portals will have to meet additional requirements, including that:
- a majority of the members of their Board of Directors be Canadian residents; and
- all funds raised through crowdfunding be kept in trust at a Canadian financial institution until the closing of the distribution (a maximum of 90 days after the offering document is first made available on the funding portal’s website) and all purchasers’ 48 hour withdrawal rights have expired.
Funding portals will have to apply to the securities regulator in their provincial jurisdiction to be considered for the exemption and adhere to an extensive list of conditions which are outlined in detail in the Crowdfunding Exemptions.
Before You Embark on a Crowdfunding Campaign
Startups and their legal advisers will have to navigate certain issues relating to Canadian federal and provincial corporate law before embarking on a crowdfunding campaign. In particular, a corporation existing under BC or federal law is required to have audited financial statements each year unless 100% of its shareholders waive the requirement. It will be difficult for corporations to obtain this waiver if they have relied on the Crowdfunding Exemptions to raise money and create dozens or hundreds of shareholders in the process.
Issuers relying on the Crowdfunding Exemptions will also need to consider, for example:
- the administrative burden and cost of dealing with a high number of shareholders;
- the likely and potential loss of the ability to rely on the Private Issuer Exemption;
- whether having a large number of crowdfunding investors puts the issuer’s confidential information at risk; and
- whether crowdfunding investors have the potential to veto important corporate decisions in the future (such as selling the company).
Appropriately drafted subscription and shareholders’ agreements and a carefully planned authorized share structure can mitigate the potential risks involved in adding large numbers of new shareholders via online funding portals.
