Equity Crowdfunding for Junior Resource Issuers

by Alixe CormickVenture Law Corporation

Continuing Legal Education British Columbia– November 5, 2014

Equity Crowdfunding for Junior Resource Issuers

by Alixe CormickVenture Law Corporation

Disclaimer

• Information purposes only: The materials and information contained in this presentation are intended to provide information (not advice) about equity crowdfunding and related matters. You should not act on this information presented without first consulting with an attorney.

• No Attorney-Client Relationship Created: This information on this presentation is not intended to create, and receipt of it does not constitute, an attorney-client relationship having been created by us with you or anyone else. Do not send us confidential information until you speak with us and receive our authorization to send that information to us. The act of talking to us informally or sending an email to us will not create an attorney-client relationship. If you are not currently a client of Venture Law Corporation, your email will be not considered privileged and may be disclosed to other persons. We promise, however, to keep your name confidential unless you tell us otherwise when talking to any regulators or third parties about securities law matters.

• No Warranties: The information provided in this presentation is provided “as is”. We make no warranties, representations, or claims of any kind concerning the information presented is complete. We are not responsible for any errors or omissions in the content of this presentation or for damages arising from the use of the information provided under any circumstances.

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Outline of Discussion

• Equity Crowdfunding – What it is and Why it is Taking Off.

• What is Happening Now in Equity Crowdfunding.• Proposed Equity Crowdfunding Specific Rules in Canada.• Current Rules Issuers Can Use When Equity

Crowdfunding in Canada.• Exemptions Issuers Can Use When Equity Crowdfunding

in the U.S.• Preparing Your Client for an Equity Crowdfunding

Campaign.• Equity Crowdfunding and Junior Resource Issuers.• Closing Comments.

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Equity Crowdfunding – What is it and Why it is Taking

OffWhat is Equity Crowdfunding?• Equity crowdfunding is the offering of unregistered

securities through a registered funding portal to raise small amounts of money from a large pool of non-accredited and/or accredited investors. These securities may be common shares, non-convertible preferred shares, convertible preferred shares, non-convertible debt securities, convertible debt securities, limited partnership units, trust units, or flow-through shares.

• Other terms used to describe equity crowdfunding are investment crowdfunding, securities-based crowdfunding or distributing securities over the internet.

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Equity Crowdfunding – What is it and Why it is Taking

OffWhy is Equity Crowdfunding Taking Off?• Part of wave of internet disrupting traditional industries

inefficiencies.• Part of wave of cultural disruption of people wanting to

connect in a meaningful way to the things we buy, do and invest in.

• Over all leveling of access to capital and investment. • It works.

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What is Happening Now in Equity Crowdfunding

• Overview of Crowdfunding Portals• European Seed and Early Stage Equity Crowdfunding

Portals• U.S. Accredited Investor Equity Crowdfunding Portals• Canadian Equity Crowdfunding Portals Operating Now• Equity Crowdfunding Portals Available to Junior

Resource Issuers

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Overview of Crowdfunding Portals

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All Crowdfunding Portals(930)Donation &

Product Presale Crowdfunding

(675)

Equity Crowdfunding

(225)

Debt Crowdfunding

(30)

Early Stage Non-accredited

Investor(100)

Early Stage Accredited

Investor(75)

Later Stage Accredited

Investor(35)

Portals worldwide May 2014

European Seed and Early StageEquity Crowdfunding Portals

(CDN$ - October 15, 2014)

PortalHomeCountry

TotalRaised onPlatform

Number of

Offerings

Mean Offering

Size

Anaxago France $12,942,381 21 $616,304

CrowdCubeUnited Kingdom

$73,602,325 116 $634,503

Companisto Germany $17,251,830 30 $575,061

Invesdor Finland $4,041,240 11 $367,385

OurCrowd(1) Israel $62,466,196 37 $1,688,276

Seedmatch Germany $28,812,237 60 $480,204

SeedrsUnited Kingdom

$14,920,000 96 $155,417

SyndicateRoom(1

)

United Kingdom

$18,765,304 19 $987,647

Symbid Netherlands $7,796,300 78 $99,953

WiSeed France $14,738,980 46 $320,413

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U.S. Accredited InvestorEquity Crowdfunding Portals

(CDN$ - October 15, 2014)

PortalMarketFocus

TotalRaised onPlatform

Number of

Offerings

Mean Offering

SizeCircleUp Consume

r $ 33,798,000 30 $1,126,600

Equity Net All $279,121,910 27,492 $10,152

Crowdfunder All $116,039,800 15,355 $7,557

Fundable All $155,470,800 651 $238,818

Microventures All $45,064,000 75 $600,853

Realty Mogul Realty $40,597,031 98 $414,255

Fundrise Realty $34,924,600 19 $1,838,136

OneVest(FKA Rock the Post)

All $111,272,948 62 $181,822

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Canadian Equity Crowdfunding Portals Operating Now

(October 15, 2014)

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Accredited Investor Portals

Offering Memorandum Portals

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Equity Crowdfunding Portals Available to Junior Resource

IssuersExisting Portals Available to Junior Resource Issuers• All portals operating in Canada but SVX.• All accredited investor portals in U.S. with open market focus.• Mining specific equity crowdfunding portals:

– ExplorationFunder.com – U.S. based accredited investor portal

Pending Mining Specific Portals• KlondikeStrike.com – Canadian portal based in Ontario.• Aware of two other portals – one in Ontario and one in

British Columbia under development by two groups with active history in the junior resource market.

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Proposed Equity Crowdfunding Specific Rules In Canada

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Proposed Equity Crowdfunding Specific Rules in Canada

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Start-Up Crowdfunding Exemption: (BC, SK, MB, QU, NB, and NS - SK version available now!)

• issuer may raise $150,000 in two separate offerings in 12 month period;

• investor has 12 month cap of $1,500 per issuer in 12 month period;

• issuer and investor both must reside in jurisdiction; • not available to reporting issuers or investment funds; • portal cannot be related to issuer of securities; and • portal is not required to be registered as a dealer but must

file notice and related forms 30 days in advance before commencing business.

Proposed Equity Crowdfunding Specific Rules in Canada

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Integrated Crowdfunding Exemption: (SK, MB, ON, QU, NB, and NS)

• issuer may raise $1,500,000 in 12 month period; • investor has 12 month cap of $2,500 per issuer and max of

$10,000 under exemption in 12 month period; • issuer and investor both must reside in jurisdiction;• available to reporting and non-reporting issuers involved in

all business sectors except investment funds, issuers with a unstated business purpose (blind pools) and real estate issuers that are not a reporting issuer.

• portal cannot be related to issuer of securities; and• portal must be registered as a restricted funding portal and

cannot be an exempt market dealer or investment dealer.

Current Rules Issuers Can Use When Equity Crowdfunding in

CanadaAccredited Investor Exemption: (Available in every province & territory in Canada)

• no limit on how much an issuer may raise; • available to all issuers regardless of business sector or

residency;• no investment cap on investors; • Investor must meet income, financial asset or net asset test:

– annual income of $200,000 individually or $300,000 with spouse; or– net financial assets of $1 million+ excluding home; or – net assets of $5 million+.

• portal relationship to issuer of securities to be managed; and• portal must be registered as an exempt market dealer,

investment dealer or restricted dealer.

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Current Rules Issuers Can Use When Equity Crowdfunding in

CanadaOffering Memorandum Exemption: (Available in every province & territory in Canada, but ON. ON considering)

• no limit on how much an issuer may raise;

• available to all issuers regardless of business sector or residency;

• offering memorandum and financial statements required;

• AB, SK, MB, QU, PEI, NU, YK or NWT residents if investing $10,000+ must be an eligible investor based on: annual income ($75,000

individually or $125,000 with spouse); or net assets ($400,000); or a close friend, family or business associate; or have obtained advice from an eligible adviser on suitability;

• portal relationship to issuer of securities to be managed; and

• portal must be registered as an exempt market dealer, investment dealer or restricted dealer.

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Current Rules Issuers Can Use When Equity Crowdfunding in Canada

Existing Security Holder Exemption:(Available in every province & territory in Canada, but ON. ON considering)

• no limit on how much an issuer may raise;• available to all reporting issuers listed on TSX, TSX-V or CSE;• requires news release, investor confirmation of status, and

right of action for misrepresentation;• investor has 12 month cap of $15,000 per issuer unless they

obtain suitability advice from registered investment dealer; • portal relationship to issuer of securities to be managed; and• portal must be registered as an exempt market dealer,

investment dealer or restricted dealer.

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Exemptions Issuers Can Use When Equity Crowdfunding in the U.S.

Rule 506(c) Accredited Investor Exemption• no limit on how much an issuer may raise;• available to all issuers regardless of business sector or

residency except for “bad actors”;• no investment cap on investors; • Investor must meet income, financial asset or net asset test:

– annual income of U.S. $200,000 individually or U.S.$300,000 with spouse; or

– net financial assets of $1 million+ excluding home; or – net assets of $5 million+ if a trust.

• portal relationship to issuer of securities to be managed; and• portal must be registered with SEC and FINRA as a U.S. broker

dealer.

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Exemptions Issuers Can Use When Equity Crowdfunding in the U.S.

Regulation A+ (no hold period in U.S.)

• issuer may raise up to U.S. $50 million in 12 month period; • available to issuers organized or having their principal place of

business in the U.S. or Canada who are not a reporting issuer under the U.S. Securities Exchange Act of 1934 and are not an investment company or blank check company or offering fractional interests in oil and gas rights or similar interests in mineral rights or a “bad actor”;

• requires Form 1-A offering statement and circular; vetted by SEC, no state review if raising over $5 million or election;

• investor has 12 month cap of 10% or less of the greater of investor’s annual income or net worth per issuer if issuer raising over $5 million;

• portal relationship to issuer of securities to be managed; and• portal must be registered with SEC and FINRA as a U.S. broker dealer.

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Preparing Your Client for an Equity Crowdfunding Campaign

Business, Legal, and Financial Readiness• Complete a due diligence review of issuer and correct any

legacy issues not compatible with raising capital or crowdfunding.

• Assist client in deciding if exemption available to them and what interest is to be sold in issuer.

• Put all material documents together in one place.• Review key documents for any changes necessary before

launching campaign.• Obtain CVs from each insider and have them complete a

questionnaire.

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Preparing Your Client for an Equity Crowdfunding Campaign

Business, Legal, and Financial Readiness (2)• Update, review or prepare:– Business plan;– Financial statements;– Business summary;– Elevator pitch; – Pitch deck;– Term sheet;– Offering documents (OM, limited partnership agreement,

subscription agreement , etc.)• Review website and social media for securities law non-

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Preparing Your Client for an Equity Crowdfunding Campaign

Review or Assist with Drafting Support Material

• Review draft campaign email messages, Tweets, and posts.– All of this material should be scripted before hand and

reviewed by legal counsel.– Tip: Email is #1 tool, then Facebook #2 and Twitter #3 in

raising capital in a crowdfunding campaign. - Average contribution through email is 20% higher than contributions through other sources. Campaigns that send out at least 3 or more updates raise about 239% more than campaigns that do not send out updates.

• Review landing page(s) and funnel pages for compliance issues.

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Preparing Your Client for an Equity Crowdfunding Campaign

Review or Assist with Drafting Support Material (2)

• Review or draft media articles and press release(s).– These should be short factual and clear. – The Integrated and Start-Up Exemptions prohibit discussing an

offering beyond pointing to a funding portal.– Tip: Securities laws in Canada also prohibit making a listing

representation, or offering a guarantee of profit, among other things.• Review campaign videos.

– Pitch deck provides natural topic breaks. Encourage issuer to include a video on risk factors to keep it balanced.

– Tip: Campaigns with pitch videos raise 115% more money. Campaigns posting 1 to 5 video updates a week raise 218% more.

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Preparing Your Client for an Equity Crowdfunding Campaign

Draft or Review Issuer’s Application to Funding Portal

• Issuer should complete and submit application well in advance of campaign to ensure any background checks and reviews are completed and they are ready to launch on target date.

Obtain CUSIP # from CUSIP Private Market Services if Private Issuer

Encourage Issuers to Keep Track of Their Actions• BaseCamp or a similar program can log and track all actions.• Track commitments from the pre-sale stage to final investment.

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After the Campaign

Share Register• Investors may hold securities directly or through an intermediary.• Issuers should be encouraged to use electronic shares and send

confirmation to each shareholder.• Transfer agents in Canada and U.S. are providing services to private

market.

Investor Portal on Issuer’s Website or 3rd Party Website

• Inexpensive to create a secured portal for investors only.• Portal should include regular financial and other updates. Corporate

statute may allow posting on portal as delivery of AGM materials.

Confirm Investors Receive All Consideration Promised

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EQUITY CROWDFUNDING AND JUNIOR REOURCE ISSUERS

Benefits of Equity Crowdfunding to Junior Resource Issuers• New avenue to access capital for private and public issuers.• Early exploration expenses can be crowdfunded.• Eliminates risk of existing exemptions being improperly

used by issuers and broadens investor base.• Boosts investor relations best practices.• Opportunity to establish loyal repeat investors. • Streamlines traditional forms of capital raising.• Provides transparency that currently does not exist.• Most all or nothing platforms do not a charge fee unless

issuer reaches funding goal.

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EQUITY CROWDFUNDING AND JUNIOR REOURCE ISSUERS

Drawbacks of Equity Crowdfunding to Junior Resource Issuers• Equity crowdfunding does not guarantee investors.• Successful equity crowdfunding requires planning and

work.• Equity crowdfunding favors those who have a crowd and

use social media.• Crowding funding using the integrated crowdfunding

exemption and offering memorandum exemption is expensive.

• Online fundraising can mean negative as well as positive exposure.

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Closing Remarks

Equity Crowdfunding is Here and Growing Fast• Equity crowdfunding specific exemptions are pending. The

market in interim is crowdfunding using existing exemptions.• Issuers using Rule 506(c) in the U.S. since Sept. 23, 2013 have

raised approximately $385,840,413 (Crowdnetics 10/08/14).

• Canadian issuers, including resource issuers, are raising capital on U.S. accredited investor crowdfunding portals.

• Institutional investors are active on equity crowdfunding portals.

• NASDAQ, NYSE, TSX and Aequitas are all interested in providing a secondary market for private issuers who crowdfund.

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Thank-you

Thank you to David Nguyen for his research assistance and to each attendee for participating in this seminar.

Venture Law Corporation618-688 West Hastings Street

Vancouver, BC V6B 1P1Phone: 604-659-9188

Fax: 604-659-9178Email: acormick@venturelawcorp.com

Website: www.venturelawcorp.comBlog: www.AlixeCormick.com

Twitter: @AlixeCormickGoogle+: AlixeCormick

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Resources

Canadian Crowdfunding Specific Exemptions• British Columbia Release (Start-Up Crowdfunding

Exemption Only)– BC Securities Commission publishes new securities cro

wdfunding exemption for comment– BC Notice 2014/03 – Notice and Request for Comment

on Start-Up Crowdfunding• Manitoba, New Brunswick, Nova Scotia, Quebec, and

Saskatchewan Releases (Start-Up Crowdfunding Exemption and Integrated (Ontario) Crowdfunding Exemption)– CSA New Release

• Manitoba- Multilateral CSA Notice of Publication and Request for Comment – Proposed Multilateral Instrument 45-108 Crowd funding and Propose Blanket Order 45-506: Reference Site

.

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Resources

Canadian Crowdfunding Specific Exemptions• New Brunswick -

Multilateral CSA Notice of Publication and Request for Comment – Proposed Multilateral Instrument 45-108 Crowd funding and Propose Blanket Order 45-506: Reference Site

• Nova Scotia - Multilateral CSA Notice of Publication and Request for Comment – Proposed Multilateral Instrument 45-108 Crowd funding and Propose Blanket Order 45-506: Reference Site

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ResourcesCanadian Crowdfunding Specific Exemptions• Quebec - Draft Regulation 45-108 respecting Crowdfunding and

Draft Blanket Orders on the Start-Up Crowdfunding Prospectus and Registration Exemption in Québec: Reference Site – Regulatory Notice– Multilateral CSA Notice– Summary of the proposed crowdfunding prospectus exemption– Summary of the proposed registration framework– Regulation 45-108 respecting Crowdfunding– Policy Statement to Regulation 45-108 respecting Crowdfundin

g– Blanket Orders on the Start-Up Crowdfunding Prospectus and R

egistration Exemption in Québec and Forms– CSA Staff Notice 45-314: Consolidated List of Current CSA Exem

pt Market Initiatives

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Resources

Canadian Crowdfunding Specific Exemptions• Saskatchewan - Multilateral CSA Notice of Publication and

Request for Comment – Proposed Multilateral Instrument 45-108 Crowdfunding and Propose Blanket Order 45-506: Reference Site (Main Reference Page) – Multilateral CSA Notice– Notice of Proposed MI 45-108 and Amendments to GO-

45-925 March 20 2014• Annex A1 – Provisions of the proposed Crowdfundi

ng Exemption• Annex A2 – Key Provisions of the proposed Crowdfu

nding Portal requirements• Annex A3 – Proposed Multilateral Instrument 45-10

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Resources

Canadian Crowdfunding Specific Exemptions• Saskatchewan - Multilateral CSA Notice of Publication and

Request for Comment – Proposed Multilateral Instrument 45-108 Crowdfunding and Propose Blanket Order 45-506: (Continued)

• Annex A4 – Proposed Companion Policy 45-108CP Crowdfunding

• Annex B1 Amended General Order 45-925 Saskatchewan Equity Crowdfunding Exemption

• Annex B2 – Form 1 – Issuer Information• Annex B2 – Form 2 – Individual Information• Annex B2 – Form 3 – Offering Document• Annex B2 – Form 4 – Report of Distribution• Annex B2 – Form 5 – Portal Information• Annex B2 – Form 6 – Portal Individual Information

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Resources

Canadian Crowdfunding Specific Exemptions• Saskatchewan’s Crowdfunding Exemption

– Saskatchewan Equity Crowdfunding Exemption - General Order - Updated July 17, 2014

– Equity Crowdfunding Information for Businesses– Equity Crowdfunding Information for Investors– Equity Crowdfunding Information for Websites– Issuer Information Form (For Businesses)– Individual Information Form (For Businesses)– Offering Document G045-925F3 (For Businesses)– Report of Trades Form (For Businesses)– Portal Information Form (For Websites)– Portal Individual Information Form (For Websites)– Saskatchewan Equity Crowdfunding - How It Works

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ResourcesCanadian Crowdfunding Specific Exemptions• Ontario Release (Integrated (Ontario) Crowdfunding Exemption Only)

– Introduction of Proposed Prospectus Exemptions and Proposed Reports of Exempt Distribution in Ontario PDF Version of Entire Proposal

– OSC Notice and Request for Comment – Proposed Amendments to National Instrument 45-106 Prospectus and Registration Exemptions and Companion Policy 45-106CP Prospectus and Registration Exemptions, Proposed Amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions, Proposed Multilateral Instrument 45-108 Crowdfunding and Companion Policy 45-108CP Crowdfunding, and Proposed Form 45-106F10 Report of Exempt Distribution For Investment Fund Issuers (Alberta, New Brunswick, Ontario and Saskatchewan) and Form 45-106F11 Report of Exempt Distribution For Issuers Other Than Investment Funds (Alberta, New Brunswick, Ontario and Saskatchewan)05/11/2014 Venture Law Corporation @AlixeCormick 36

Resources

Canadian Crowdfunding Specific Exemptions• Ontario Release (Integrated (Ontario) Crowdfunding Exemption

Only) (continued)– Appendix D — Crowdfunding

• Annex D-1 Key Provisions of the Proposed Crowdfunding Prospectus Exemption

• Annex D-2 Key Provisions of the Proposed Crowdfunding Portal Requirements

• Annex D-3 Proposed Multilateral Instrument 45-108 Crowdfunding

• Annex D-4 Proposed Form 45-108F1 Crowdfunding Offering Document

• Annex D-5 Proposed Form 45-108F2 Risk Acknowledgement Form for Crowdfunding Investors

• Annex D-6 Proposed Companion Policy 45-108CP Crowdfunding

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ResourcesCanadian Existing Security Holder Exemption• Multilateral

CSA Notice 45-313 - Prospectus Exemption for Distributions to Existing Security Holder (March 13, 2014);

• List of Commenters to Prospectus Exemption for Distributions to Existing Security Holder (March 13, 2014);

• Summary of Comments to Prospectus Exemption for Distributions to Existing Security Holder (March 13, 2014);

• BC Securities Commission Local Matter (March 13, 2014);• BCI 45-534 Exemption from prospectus requirement for cer

tain trades to existing security holder (March 13, 2014);

• Multilateral CSA Notice 45-312 Proposed Prospectus Exemption for Distributions to Existing Security Holder (November 21, 2013); and

• Draft BCI 45-5XX Exemption from Prospectus Requirement for Certain Trades to Existing Security Holders (November 21, 2013)

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Resources

U.S. Crowdfunding Specific Exemptions• Jumpstart Our Business Startups Act• FINRA Crowdfunding Portal Proposals

U.S. Regulation D – Rule 506(c)• Regulation D –Rule 506 • Rule 506(c): Eliminating the Prohibition Against General Sol

icitation and General Advertising in Rule 506 and Rule 144A Offerings

• Form D Notice of Exempt Securities Offering

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Resources

U.S. Regulation A and Regulation A+• Regulation A Conditional Small Issuer Exemption • Form 1-A – Regulation A Offering Statement • Regulation A+ - Proposed Rule Amendments for Small and

Additional Issues Exemptions Under Section 3(b) of the Securities Act

General Information About Equity Crowdfunding• Crowdnetic’s Quarterly PIPR (“

Private Issuers Publicly Raising”) Data Analysis October 8, 2014

• National Crowdfunding Association of Canada eBook on Equity Crowdfunding

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