checks for potential directors who seek to be on the board of an
issuer listed on a stock exchange. The OSC needs to balance the
costs for these international background checks with the need to
protect investor from individuals who are bad actors.
15) The Crowdfunding Portal Requirements would allow
portal fees to be paid in securities of the issuer so long as
the portal’s investment in the issuer does not exceed 10%.
(a) Is the investment threshold appropriate? (b) In light of the
potential conflicts of interest from the portal’s ownership of an
issuer, should portals be prohibited from receiving fees in the
form of securities?
(a) The PCMA believes that the 10% ownership limit for a portal
in an issuer is acceptable. PCMA believes any conflicts of interest
in obtaining such an equity interest in an issuer is adequately
addressed under the Crowdfunding Prospectus Exemption since
a portal is prohibited from:
(i) providing specific recommendations or advice to investors
about specific securities;
(ii) soliciting purchases or sales of securities offered on its
platform (other than through posting an offering on its platform);
(iii) compensating employees or agents to solicit the sale of
securities on their platform, the PCMA does not believe that portals
should be prohibited from receiving fees in the form of securities.
Some portals in other parts of the world have raised capital for
themselves on their own portal, such as Crowdcube in the United
Kingdom. We believe a portal should be able to raise capital
on its own portal for itself subject to certain conflicts of interest
disclosure. Many investors may want to invest in a portal and a
portal should not have to go to a dealer and pay a commission in
order to raise capital for itself.
(b) No, a portal should not be prohibited from receiving
securities as compensation for its services. Dealers typically
receive cash and warrants in connection with an offering.
16) The Crowdfunding Portal Requirements restrict portals
from holding, handling or dealing with client funds. Is this
requirement appropriate? How will this impact the portal’s
business operations? Should alternatives be considered?
The PCMA is not clear how a portal cannot hold, manage,
possess or otherwise handle investor funds. For example, if an
escrow account is set up at a financial institution, is this an account
of the portal or that of the issuer? A third party escrow agent will
likely want little to no liability and only take instructions from a
third party. It would make sense that this gate-keeper function
would be handled by the portal and not the issuer. Investors
would also typically expect a portal to be involved in collecting
and disseminating any funds. We respectfully request additional
clarification on this matter.
17) Are there other requirements that should be imposed on
portals to protect the interests of investors?
No, the PCMA believes that the proposed requirements
governing portals are acceptable.
18) Will the regulatory framework applicable to portals permit
a portal to appropriately carry on business?
We are concerned that the proposed regulation of
crowdfunding portals prohibits EMDs and investment fund
dealers from operating a crowdfunding portal and relying on
the Crowdfunding Prospectus Exemption to raise capital. We
believe that these dealers should be able to raise capital under
the Crowdfunding Prospectus Exemption or any other prospectus
exemption. Registered dealers understand corporate finance and
capital raising and have important exempt market experience new
market entrants, such as restricted portal dealers, may not have.
Also, we seek clarity on whether a holding company can
own a restricted dealer, operating as a crowdfunding portal, as
well as an EMD. Some investment groups would like to raise
capital through a crowdfunding portal under the Crowdfunding
Prospectus Exemption and concurrently under existing prospectus
exemptions through an EMD. Moreover, crowdfunding portals
may want to refer accredited investors to a related EMD instead of
a third party EMD. If a portal has to refer an accredited investor to
an EMD, they would receive a smaller referral fee, as opposed to
the full transaction commission, or potentially lose the accredited
investor who may invest directly with an issuer without paying any
fee to the portal. This is concerning since the accredited investor
arguably first became aware of the investment opportunity on the
portal. Many crowdfunding portals believe their 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.