The province of Saskatchewan today joined the league of various state regulators who have adopted an intra-state equity crowdfunding exemption by adopting a Saskatchewan only intra-province equity crowdfunding exemption: General Order 45-925 Saskatchewan Equity Crowdfunding Exemption. These trail blazers have forged ahead with adopting equity crowdfunding rules they believe will work for the constituent groups in their state or province now versus waiting for a federal or harmonized rule to be adopted at a later date. I applaud their initiative.
The province of Saskatchewan has taken a light hand in crafting its equity crowdfunding regulations and filing documents. For starters:
- No complicated private placement memorandum;
- No long disclaimers;
- No mandatory financial statements in offering documents or on an ongoing basis;
- No statutory right of action against the issuer as part of the exemption;
- No certifications by the issuer, directors, officers, promotors, or investors;
- No investor questionnaire;
- No complicated investment formulas for investors;
- No need for a portal to be registered; and
- No “know your client” or “client suitability” rules for portal operators.
Time will tell if the Saskatchewan Financial and Consumer Affairs Authority (FCAA) hit the right note in drafting this legislation. Will a portal emerge to facilitate Saskatchewan equity crowdfunding trades? Will companies/issuers use it? Will potential investors invest in issuers using equity crowdfunding to raise capital? Are there enough potential investors in Saskatchewan to make equity crowdfunding work? Will fraud and business failure run rampant like the naysayers who oppose equity crowdfunding believe is inevitable?
Saskatchewan’s equity crowdfunding exemption has a three year sunset clause. It’s an experiment; and the rules and related filing documents will likely be tweaked as the FCAA gets real world feedback on the exemption and how it is working for issuers, investors and portal operators.
The remainder of this article, in a question and answer format, will discuss how Saskatchewan’s equity crowdfunding exemption works. A link to the final Saskatchewan crowdfunding rule, related documents and forms can be found at the end of this article.
What Part of the Capital Raising Market is Saskatchewan’s Equity Crowdfunding Rule Aimed At?
The Saskatchewan equity crowdfunding exemption is aimed at private start-up companies and small businesses in the pre-seed, seed and early life cycle of their business. These entities may be formed as a corporation, partnership, limited partnership or any other legal entity. The rule is not available to reporting issuers or investment funds. Only issuers resident with a physical street address in Saskatchewan may use this exemption to raise capital.
How Much Can an Issuer Raise Under the Saskatchewan Crowdfunding Exemption?
Issuers may raise up to $150,000 per offering under this exemption. Issuers and their promoters, directors, officers and control persons may not use this exemption more than twice in a calendar year. This means they can raise an aggregate total of up to $300,000 in a calendar year utilizing this exemption in two separate offerings for either the same issuer or two separate issuers. There also cannot be any concurrent offering by the issuer or any other issuer for the same project under the exemption.
Please note: Issuers can also rely on other private placement exemptions such as the accredited investor or offering memorandum exemption during the year to raise more capital if needed.
Who Can Invest?
Anyone resident in Saskatchewan and over the age of 18 may invest up to $1,500 in an offering under the Saskatchewan crowdfunding exemption. There is no limit on the number of equity crowdfunding offerings by different issuers an investor can invest in under the rule.
What Type of Securities Can Issuers Offer Investors Under this Exemption?
Issuers may offer common shares, preferred shares, debentures, convertible debentures, bonds, partnership units, limited partnership units, promissory notes and any other security instrument other than derivative type securities.
What Must an Issuer Do or Provide to Use this Exemption?
To use the Saskatchewan equity crowdfunding exemption issuers must:
- Give FCAA notice of their intention to issue an offering 10 business days before commencing the offering by filing the following documents:
- Use an online funding portal to sell their securities;
- Not pay a commission or other amounts to its promoters, directors, officers, control persons, employees or agents for the offering. (Issuers may however pay a fee or a commission to the online funding portal); and
- Report their sales to FCAA on Form GO 45-925F4 Report of Trades within 30 days of the offering’s close. (There is no filing fee payable to the FCAA associated with this exemption.)
All of the Saskatchewan equity crowdfunding filing forms are set-up to be easily understood without the need of the assistance of a lawyer or other professional to complete them. These forms are short and require only the minimum information necessary for accurate disclosure. The FCAA expects that issuers and portals will expand on the minimum disclosure necessary as investors request more information and best practice norms emerge organically from the equity crowdfunding community.
What Are the Requirements for Online Funding Portals?
Portals are not required to be registered as a broker dealer or in any other capacity. Portals are, however, required to provide 30 days advance notice of their intent to act as a Saskatchewan equity crowdfunding portal by filing the following forms:
- Form GO 45-925F5 Portal Information (2 page PDF Form); and
- Form GO 45-925F6 Portal Individual Information for each promoter, director, officer and control person of the owner of the portal (2 page PDF Form).
Portals are not subject to the “know your client” and “client suitability” rules imposed on all other registrants. They are however subject to certain other requirements such as:
- The portal cannot be related to businesses making offerings through them;
- The portal must ensure that both the issuer and the investor have an address in Saskatchewan;
- The portal must not allow an investment until the investor confirms online that they have read and understood the issuer’s Offering Document and Important Risk Warnings;
- The portal must provide the issuer’s Offering Document and Important Risk Warnings to investors online;
- The portal must not provide advice to potential investors;
- Funds received for an offering through the portal must be held in a lawyer’s trust account for investors until the close or abandonment of the offering;
- The portal must not release funds to the issuer until the minimum amount to close the offering has been reached; and
- The portal must provide the issuer with each investor’s name, address, telephone number, email address and the details of the purchase within 15 days of closing the offering.
Portals may receive a fee or a commission based on the amount raised for their services. Portals are not required to be residents of Saskatchewan.
A few of my peers are adamantly against Saskatchewan’s new equity crowdfunding exemption. It cuts out, or significantly reduces, the need of lawyers in the capital raising process. It also cuts out broker dealers, exempt market dealers, financial advisors and other gatekeepers to capital. It assumes issuers looking for capital are legitimate companies. It also assumes investors are smart enough to invest in things and people they know and like in their community; and that they won’t invest their life savings on long shots or scam artists. People from Saskatchewan are smart (it is where my roots are). Almost everyone in the province comes from entrepreneurial families as farmers, niche business owners, road bosses and others. They also come from a culture of hard times and making do. I can’t think of a better group to try out equity crowdfunding.
I liken the emerging rules of equity crowdfunding to the early days of the curb stockmarket or mutual fund industry. The equity crowdfunding industry and rules need room to grow and evolve. I see different jurisdictions adopting different crowdfunding rules as being no different than how start-ups sample what works and what doesn’t. At this point it is all good information and I look forward to learning what evolves from these new rules in Saskatchewan over the next three years.
Saskatchewan Crowdfunding Rules and Forms as of December 6, 2013
Equity Crowdfunding Information for Investors.pdf ( 227.9 KB )
Equity Crowdfunding Information for Websites.pdf ( 868.9 KB )
Equity Crowdfunding Information for Businesses.pdf ( 882.6 KB )
Issuer Information Form (For Businesses).pdf ( 192 KB )
Offering Document (For Businesses).pdf ( 238.8 KB )
Report of Trades Form (For Businesses).pdf ( 210.9 KB )
- Securities – Notice of Implementation – Saskatchewan Equity Crowdfunding Exemption
- Wisconsin, Georgia, Kansas have adopted intrastate equity crowdfunding exemptions. Washington, North Carolina and New Jersey have proposed intrastate equity crowdfunding exemptions working there way through the legal process to approval.↩
- Canadian private and public issuers currently can “crowdfund” using either the accredited investor or offering memorandum exemption together with listing the securities being offered on an online funding portal associated with an exempt market dealer. Examples of these platforms in Canada include: Optimize Capital Markets; Exempt Capital Networks; SeedsupCanada; and Social Venture Connexion/MaRs SVX. These existing exemptions and exempt market dealer requirements are less than ideal for true crowdfunding as 95% of the crowd is left out of accredited investor crowdfunding, the offering memorandum approach is too expensive and exempt market dealers are subject to “know your client” and “client suitability” rules that don’t fit the online funding portal model.↩
* * *
DisclaimerThe articles on this blog are not intended to create and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.