New registration and prospectus exemptions adopted in British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia permit startups (and other companies) to crowdfund investment in exchange for equity.  Importantly, investors do not need to be accredited or have a previous relationship with the company.

What are the company requirements?

1.  Have a head office located in one of the above provinces;

2.  Conduct crowdfunding through an online funding portal that meets certain requirements (to be detailed in our next blog post); and

3.  Use, and post on the online funding portal, the required offering document form that details, for example, certain information about your company, the securities being offered, the minimum offering amount and how funds will be used.  The offering document is available at https://www.bcsc.bc.ca/45-535_[F]_Form_1_05142015/.

How much can your company raise?

You can raise up to $250,000.00 per distribution in up to two crowd funding distributions a year.    As such, you can crowdfund a total of $500,00.00 a year (in two separate distributions).

What type of securities can you offer?

Common and preferred shares, convertible securities (that convert into common or preferred shares), non-convertible debt securities (fixed or floating interest rates) and limited partnership units.

Do the investors need to be accredited?

No.  However, each investor is limited to invest up to $1,500.00 per distribution.  As such, one person could invest a total of $3,000.00/year in your company where they invest the total permitted amount in two separate distributions.

You can receive concurrent investments under other securities exemptions, such as from accredited investors, and put these investments toward the minimum offering amount.

Do I need to raise the minimum offering amount?

Yes.  Like a Kickstarter campaign, the crowdfunding exemption requires that you raise the minimum offering amount.  Where you fail to raise the minimum amount, you cannot complete the offering.  Nonetheless, as noted above, concurrent investments under other securities law exemptions can assist with raising the minimum amount.

Are there other requirements?

Of course – this involves law, remember?  Other requirements include, but are not limited to:

1.  The crowdfunding campaign has a maximum duration of 90 days;

2.  Each investor has a right to withdraw their commitment within 48 hours of: (a) their subscription or (b) upon receiving notification that the offering document has been amended; and

3.  A report of exempt distribution and the offering document must be filed with the applicable securities commission no later than 30 days after closing.

The full text of the exemption is available at: https://www.bcsc.bc.ca/Securities_Law/Policies/Policy4/PDF/45-535__BCI___May_14__2015/

In upcoming blog posts, I will discuss funding portals as well as aspects to consider when structuring a crowdfunded investment round.

1.  Securities Law:  If your startup is selling shares or other forms of investment, securities law applies.  In the cross-border context, you may need to comply with the securities laws of your jurisdiction AND those of the purchaser’s jurisdiction.  For example, if a B.C. company sells shares to a U.S. investor, both B.C. and U.S. securities law applies.

Ultimately, as a startup founder, your role is to understand that the securities laws of multiple jurisdictions may apply to a transaction and ensure that your legal advisors address these laws.

2.  Privacy Law:  The privacy laws of every jurisdiction in which your startup has users (theoretically) apply.  In this respect, every startup has cross-border privacy law issues.  Nonetheless, to comply with the privacy laws of every  jurisdiction from which your users originate is, for an early-stage startup, incredibly expensive and time-consuming.

In my opinion, it makes financial sense to comply with the privacy laws of your startup’s jurisdiction and, as your company grows, the privacy laws of each jurisdiction in which you gain traction.  The basis for this approach being the assumption that a company may only face privacy law issues when it achieves traction in a particular market.

3.  Tax:  Need I say more?  Cross-border taxation issues are always a concern when your startup is doing business outside its home jurisdiction.  Tax is far too complex for a brief blog post – simply put, always keep tax in mind.

In sum, all startups face cross-border legal issues, if only due to the borderless nature of the Internet.  At a minimum, it’s important for startups to recognize the potential for the laws of other jurisdictions to impact their company and to plan compliance with these laws.

In previous blog posts I suggested that incorporating in Canada is not a substantial hindrance to receiving U.S. investment.  In some situations, the U.S. investor could require the Canadian company to become a U.S. (likely Delaware) company.  While this sounds simple in practice, how does this Canadian-U.S. company swap work?

While each investment is different, one approach is as follows:

1.  The investor and Canadian company reach an agreement on investment terms.  This agreement also lays out the steps that must be completed as part of the deal (both before the deal is closed, and after) to facilitate the swap.

2.  A U.S. company is incorporated (likely Delaware).  This company will receive investment from the U.S. investor.

3.  The U.S. company acquires the Canadian company through a share exchange whereby shares of the U.S. company are exchanged for shares of the Canadian company.  Through this exchange, the Canadian founders/other shareholders receive equivalent equity in the U.S. company as they had in the Canadian company and the Canadian company becomes owned, 100%, by the U.S. company.

4.  Investment is made in the U.S. company.

There are also additional considerations, such as how the Canadian subsidiary will be used going forward and ownership of intellectual property.  Ultimately, the steps above aim to show you that a Canadian incorporated startup can be later swapped for a U.S. company to satisfy an investor.

Online agreements require an electronic form of your signature, whether you click “I agree” or use a digital version of your offline signature.  Electronic signature laws in the U.S. and Canada do not address the correct signature format.  Instead, these laws focus on the correct process for creating an enforceable signature.

Three key considerations guide the electronic signature process:

1.  Identification

How do you identify the signatory?  In the case of a prospective user agreeing to a Terms of Service, identification may come in the form of an email address, first and last name and IP address.  Given the impersonal nature of online agreements, the identification challenge is establishing that signatory is, in fact, the signatory.

2.  Intention

How do you establish intention to sign?  Intention could be established through a digital version of your offline signature applied to a document or a user clicking “I agree.”  Ultimately, the user must understand what they are agreeing to and that they are, in fact, agreeing.  For example, placing the “I agree” button after the agreement provides the user an opportunity to understand the agreement before being asked to agree to it.

3. Integrity

How are electronic signature records retained to ensure originality and ease of production? Integrity may be established through a fixed user acceptance process whereby any user, in order to access a website, was required to accept certain terms.  Alternatively, in the case of a more traditional signed agreement, the agreement copy was retained in a locked file format, with date and time of signature logged.  In both cases, establish an electronic audit trail.

While there is no correct type of online signature, there is a correct process for online signatures that should be considered whenever an online agreement is required.