102 Private Capital Markets | Fall 2014 | www.pcmacanada.com
economic viability depends on whether they can also raise capital
through a related EMD under other prospectus exemptions.
Based on the foregoing, the PCMA submits that a holding
company should be able to own a portal that is registered as a
restricted dealer as well as an EMD provided that they are each a
separate legal entity that is operating and regulated in two different
manners under Canadian securities law. In these scenarios, it is
very important that executive oversight, board governance and
compliant processes be shared (e.g., shared Chief Compliance
Officer) in order to ensure the business viability of the emerging
registrants in the crowdfunding portal operator marketplace.
The PCMA submits that this related company ownership model is
a viable solution and reduces the risk of any public confusion involving
a dually registered firm which we understand is the CSA’s concern.
(c) Other Matters
Lastly, we would appreciate if the Participating Jurisdictions
could clarify whether a single EMD can act as a registered dealer
for more than one unregistered funding portal. We understand
certain portals want to work with one EMD who has the necessary
infrastructure, experience, knowledge and scale to act as a
registered dealer in connection with the on-line sale of securities.
These funding portals would prominently display on their website
the name of the EMD they are working with. A discussion of this
practice and what information would have to be displayed on the
funding portal’s website would be appreciated.
19) Considering that the Start-Up Exemption will be
substantially harmonized amongst the Participating
Jurisdictions, it is our intention to allow a portal established
in one Participating Jurisdiction to post offerings from issuers
established in another Participating Jurisdiction. Also, portals
established in one Participating Jurisdiction would be allowed
to open their offerings to investors from other Participating
Jurisdictions. Do you see any problems with this approach?
The PCMA does not see any problem with cross-jurisdictional
offerings between the Participating Jurisdictions provided the
portal is registered as a restricted dealer under applicable securities
law. The Participating Jurisdictions should provide guidance on
what type of disclosure should be provided by a portal to ensure
that investors in non-Participating Jurisdictions cannot complete
transactions on the portal.
20) One of the major differences between the Crowdfunding
Prospectus Exemption and the Start-Up Exemption is that
there is no registration requirement for the portal under the
Start-Up Exemption. (a) Do you think there are appropriate
safeguards to protect investors without the registration of the
portal? (b) If not, please indicate what requirements should be
imposed to the portal in order to adequately protect investors.
(a) No, the PCMA does not believe having an unregistered
funding portal under the Start-Up Exemption adequately protects
investors for the following reasons:
i. An unregistered funding portal would have no liability in
the event of fraud. If a fraud did occur, the CSA membersin the
Participating Jurisdictions would have little or no recourse against
the unregistered portal.
ii. It is important to establish trust in capital raising and an
unregistered funding portal increases the risk that trust will be
lost if fraud does occur on its platform and adversely impact all
equity crowdfunding. The media and public will not distinguish
between a regulated portal raising capital under the Crowdfunding
Prospectus Exemption and an unregulated portal raising capital
under the Start-Up Exemption if fraud takes place. The potential
damage this could cause to the equity crowdfunding industry
is not fair to those regulated portals raising capital under the
Crowdfunding Prospectus Exemption.
iii. Unregulated equity crowdfunding portals are akin to
unregulated donation or rewards-based non-equity crowdfunding
portals. The PCMA is concerned that non-equity rewards-based
crowdfunding portals will be actively involved in providing equity
crowdfunding under the Start-up Exemption. There is a big
difference between regulated and unregulated crowdfunding.
iv. PCMA believes the public will be confused when an
unregulated non-equity funding portal is involved in equity
crowdfunding. Simply, the PCMA does not believe unregulated
non-equity funding portals should also be allowed to engage in
equity crowdfunding under the Start-Up Exemption. This is no
different than the prohibition against a restricted dealer being dually
registered as an exempt market dealer, as discussed in proposed
Multilateral Instrument 45-108 Crowdfunding. Accordingly, we
believe a non-equity crowdfunding portal should be prohibited
from selling securities on the internet unless it is registered with
an applicable Canadian securities regulator. Otherwise, we believe
the Participating Jurisdictions would be inviting fraud which is not
in the public interest and be generally bad for the capital markets.
v. An unregistered funding portal under the Start-up Exemption is
contrary to the “business trigger” test which would ordinarily require
a funding portal selling securities on the internet to be registered as a
dealer under applicable securities law. We are of the view that a portal
distributing securities and posting offering materials on the internet
for valuable consideration triggers dealer registration. This would be
a fundamental deviation from existing securities laws involving the
registration requirement and cause public confusion.
vi. Lastly, the Start-Up Exemption requires an issuer to
pre-file its offering document with its principal regulator and for
officers, directors and certain other prescribed individuals of an
issuer (the Prescribed Individuals) to provide its principal regulator
with certain background information in order to allow its principal
regulator to do background checks.
PCMA believes investors may incorrectly assume a principal
regulator’s review of an issuer’s offering document and background
checks will be interpreted as having ‘approved’ an offering and