Law Times

Law Times • July 27, 2015 Page 9 www.lawtimesnews.com OSC crowdfunding rules What do proposals mean for entertainment companies? By yamri Taddese Law Times n Kickstarter, there are thousands of live video game projects seeking to fund what they're pitching as the next big hit in gaming. For some, it's a highly successful endeavour with companies accepting mil- lions of dollars in pledges from anyone who'll give it to them. But will those companies want to sell equities online to ordinary people? That's a question lawyers are entertaining as the Ontario Securities Commission mulls over rules for selling equities for crowdfunded projects. In Ontario, it's illegal to sell equity to unregistered inves- tors, but a potential exemption is coming down the pipes as the OSC considers an exemption for crowdfunded projects. In February, the OSC re- leased proposed rules for crowd- funding. "The proposed crowdfund- ing regime would allow busi- nesses to raise capital from a potentially large number of in- vestors through an online por- tal registered with the securities regulatory authorities," the OSC said in its announcement. "Businesses could raise up to $1.5 million during a 12-month period. The proposed crowd- funding regime is aimed pri- marily at startups and small- and medium-sized enterprises based in Canada." The amounts are modest giv- en the obvious risks, says David Zitzerman, a partner and head of the entertainment law group at Goodmans LLP. "You can see the numbers are very low because they're talking about little old ladies in Barrie, Ont., who are getting solicited online to invest in video game companies or film projects," he says. "So you can imagine, if you're a little old lady in Barrie, you don't know much about video games, and now you've gone online and someone says, 'You can invest in this fabulous video game project,' how dangerous it can be for someone of modest income and not very sophisti- cated." After receiving 45 comment letters on the topic, the OSC says it's reviewing the sugges- tions and will announce either final rules or a second comment period this summer. With a cap of $1.5 million per calendar year per project, it's unlikely big companies would take an interest in using the pro- posed exemption to sell equities, according to Zitzerman. "If you're Ubisoft, this is ob- viously less attractive because A, you don't really want to sell a 50-per-cent interest in your game to a bunch of people in Orillia and Barrie who give you $10,000 each," he says. "And B, it's only $1.5 mil- lion, but your game is more than that and now you're just raising small money. The headache of it and dealing with all these third parties and having a sharehold- ers agreement is not worth it if you're doing, you know, Call of Duty 5. You're not going to eq- uity crowdfund for Call of Duty 5." In the event that new rules take effect soon, it's hard to pre- dict whether video game com- panies would jump at the op- portunity to sell equities online, says Zitzerman, but he notes there are several factors lawyers may want to consider when ad- vising their clients about what to do. "There's a lot of issues to think through," he says. "If this proposal becomes law, then I expect that we'll be dis- cussing with our clients whether they're prepared to share equity with the public in this manner, how much they're prepared to share. "And then, of course . . . what exactly are we selling? What kind of equities are we going to sell? Are they common shares? Are they preferred shares? What rights do they carry? Are they voting, are they non-voting?" In addition to regulating how much money companies can raise and how much inves- tors can invest, another key pro- posal would govern the portals through which they sell equities, says Zitzerman, noting the OSC is looking at ensuring they can sell equities for crowdfunded projects only via registered on- line portals. According to the proposal, those portals would have obliga- tions to do background checks, avoid fraud, and make sure the offering documents are only on that site and nowhere else, ac- cording to Zitzerman. Toronto business lawyer John Wires agrees the decision to sell equities to non-registered investors isn't something com- panies should take lightly. "It's going to be very interest- ing and very, very difficult for these new companies to man- age a large number of investors," says Wires, adding that compa- nies would need a well-thought- out structure to deal with the investors. "I mean, we're talking about small companies with three or four directors and at the time probably three or four share- holders or smaller in some cas- es. How does a company like that manage and deal with 600 or even more investors in their company?" The implications are signifi- cant, according to Wires. "I can see a lot of room for disputes and disagreements," he says, noting it would be important to decide the kind of shareholder management system that would work for small companies. It's important to note the pro- posed rules don't apply to reward crowdfunding where compa- nies seek donations in exchange for something like a T-shirt via portals like Kickstarter and Indiegogo. That practice remains legal in Ontario, says Zitzerman. In May, securities regulators in British Columbia, Saskatch- ewan, Manitoba, Quebec, New Brunswick, and Nova Scotia announced they'd implement exemptions that would allow startups and early-stage com- panies to raise capital through crowdfunding. In British Columbia, the ex- emption puts the cap for a single investment at just $1,500, and aggregate funds raised in any startup crowdfunding may not exceed $250,000. The existence of the different regimes adds complexity, says Wires. "Some people are a little bit concerned that it's adding confusion to an area that start- ups and small business would already be confused in," says Wires. "It's a little confusing right now as to whether an Ontario- based company is going to be able to raise crowdfunding investor money across Canada or if they'd be restricted to raising that money here in Ontario." LT FOCUS NOT TOO BIG. NOT TOO SMALL. ;IEVIEPE[½VQXLEXGSQFMRIWI\TIVMIRGIPIEHIVWLMTERHXIEQ[SVO ;IEPMKRFIWXTVEGXMGIW[MXL¾I\MFMPMX]ERHTVEKQEXMWQ ;ILEZIERMRREXIETTVIGMEXMSRJSVIEGLGPMIRX´WYRMUYIGLEPPIRKIW -JXLMWWSYRHWPMOIXLIVMKLX½XJSV]SY]SY´ZIHMWGSZIVIH6MKLXWM^IH8LMROMRK ® . *MRHSYXLS[XLMWETTVSEGLGEREWWMWX]SY &YWMRIWW0E['SQQIVGMEP0MXMKEXMSR'SQQIVGMEP6IEP)WXEXI 'SRWXVYGXMSR -RWSPZIRG] 'SVTSVEXI 6IWXVYGXYVMRK )QTPS]QIRX 0EFSYV ;MPPW )WXEXIW 8VYWXW ® Untitled-4 1 2015-07-22 2:16 PM O It's unlikely big companies would take an inter- est in using the proposed exemption to sell equities, says David Zitzerman. "The default position in common law is that contracts with mi- nors generally can't be enforced against the minor," says Tarantino, adding jurisdictions such as British Columbia and California have created an approval mechanism to do away with that uncertainty. "In Ontario, we still don't have that, so it's still sort of an open is- sue every time a producer enters into a contract with a minor wheth- er that contract is going to be enforceable. "To me, it's a bit of a mystery as to why the government didn't in- clude that mechanism in this act because it seemed to me to be the perfect time to be introduced. I think, unfortunately, it's a missed opportunity." LT Continued from page 8 Uncertainty remains

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