YES, YOU CAN CROWDFUND AN ENERGY FIRM
Yes, you can crowdfund your energy company. But not all funders should be treated the same
FOR COMPANIES, THE TWO PRIMARY
methods of raising capital are borrowing or selling equity. Given that lenders are becoming increasingly reluctant to lend to energy companies as their asset values decrease, those companies are increasingly turning to equity issuances to raise capital.
Under Canadian law, any company selling their own securities is required to provide the buyer with a prospectus. But recent amendments to the law have provided an exemption from the prospectus requirement for “crowdfunding,” or raising small amounts of money from many distinct investors, often through a website. While these crowdfunding exemptions provide increased flexibility for energy companies looking to raise money, different rules have been put into place in various jurisdictions such that companies hoping to use these new exemptions should be mindful of where their investors are located to ensure compliance with the law. This makes it somewhat cumbersome for companies looking to raise capital as they will need to ensure that they are complying with the rules in each jurisdiction where they are issuing securities.
The legislation in many Canadian provinces (including Manitoba, Ontario, Québec, New Brunswick and Nova Scotia), seems to provide greater flexibility for raising money from wealthy individuals than others. They also have a higher lifetime capital-raising limit, provided there is ongoing disclosure from the issuer, including potentially having to prepare audited financial statements. That can be a time-consuming and expensive process for the issuer long after the offering has concluded, and it requires the funding portal to be registered as an adviser. Meanwhile, proposed legislation in Alberta and Nunavut provides for little in the way of ongoing disclosure, but offers less funding flexibility and doesn’t appear to recognize the concept of registering an online funding portal as an investment advisor. Only the legislation in Manitoba, Ontario, Québec, New Brunswick, and Nova Scotia allow fundraising by publicly listed companies. The result is a confusing patchwork of regulations which create uncertainty in the market.
There are other practical concerns about using crowdfunding as a potential source of funds for your business. Corporate law provides shareholders with identical rights, regardless of the size of their investment. Therefore, before using this exemption to raise funds for your business, it is important to consider if the risks associated with introducing potentially low net worth and unsophisticated shareholders will unnecessarily complicate your shareholder relationships. Further, such investors may not have the risk tolerance for the investment, and they may require far more information on an ongoing basis than high-net worth investors. Lastly, your business should consider whether the ongoing disclosure requirements imposed by some jurisdictions will be too onerous for your business and, if so, efforts should be made to avoid raising funds in those jurisdictions.
Issuers and funding portals should seek legal advice to determine which jurisdictions best suit their needs, and where the smart money can be raised. The most prudent course of action for, say, an oil and gas company headquartered in Alberta may be to wait until the legislation is solidified and harmonized with other jurisdictions before attempting to take advantage of this new regime.