In recent years, crowdfunding has emerged as a popular method for startups and small businesses to raise capital without relying on traditional bank financing or venture capital. For Alberta entrepreneurs, platforms like Kickstarter, GoFundMe, Indiegogo, and StartEngine may appear to offer a fast and accessible path to funding. However, crowdfunding, especially when it involves the issuance of securities, is subject to complex legal and regulatory obligations. Failure to comply can result in fines, reputational damage, and even civil or criminal liability.

This blog explores the legal risks associated with crowdfunding in Canada, focusing on what Alberta-based companies need to understand to stay compliant with business and securities law and avoid legal pitfalls.

Understanding the Types of Crowdfunding

Before diving into the legal risks, it’s important to understand that not all crowdfunding is created equal. In Canada, there are generally four categories:

1. Donation-based crowdfunding, where contributors give money without expecting anything in return.
2. Reward-based crowdfunding, where contributors receive a token or product (often used for creative projects or pre-orders).
3. Lending-based crowdfunding, where investors are repaid with interest.
4. Equity-based crowdfunding, where contributors receive shares or other securities in the business.

The first two forms typically fall outside the purview of securities regulation. However, the latter two, especially equity-based crowdfunding, are considered securities offerings tightly regulated under Canadian and provincial securities laws.

Securities Law and Crowdfunding in Alberta

In Canada, securities are regulated provincially. Alberta companies are governed by the Alberta Securities Commission (ASC), which enforces the Securities Act (Alberta) and related rules. When a company issues shares or debt instruments to raise money, even through a crowdfunding platform, it typically engages in a securities distribution, which must either be done under a prospectus or qualify for an exemption.

The 232 was introduced to facilitate small investments from a broad group of people, but it comes with strict rules. Alberta is a participating member of the Multilateral Instrument 45-108: Crowdfunding, which outlines the parameters companies must follow when raising capital this way.

Key Legal Requirements Under 45-108

To use the crowdfunding exemption, Alberta issuers must meet several conditions:

• They must use a registered crowdfunding portal.
• They must provide investors with a document of offering in the prescribed form.
• They must adhere to maximum offering limits (currently $1.5 million per 12-month period).
• Investment limits apply to individuals, particularly non-accredited investors.
• Advertising and promotional efforts are heavily restricted and must direct potential investors to the funding portal.

Failing to comply with any of these conditions can result in regulatory enforcement and potential rescission rights for investors, exposing the company to financial and legal liability.

Risks of Failing to Comply with Securities Regulations

The consequences of non-compliance can be severe. Regulatory penalties, including fines and cease-trade orders, are among the most immediate risks. The ASC has the authority to investigate and sanction companies that conduct improper securities offerings, even if done unintentionally.

Investor lawsuits are also possible. If an investor suffers a loss and believes they were misled or were not provided adequate disclosure, they may bring a claim for rescission or damages. In some cases, company directors and officers may be held personally liable.

Moreover, a crowdfunding misstep can have long-term consequences for the business’s reputation and ability to raise capital. A company that demonstrates a poor track record with securities compliance may find it more challenging to attract professional investors down the line.

Risks Related to Disclosure and Misrepresentation

Crowdfunding investors rely heavily on the information provided by the company in its offering document. If that disclosure is inaccurate, misleading, or incomplete, the company could be liable for misrepresentation under the Securities Act.

This risk is compounded by early-stage companies often operating with limited financial history, fluctuating business plans, and untested products. Without careful drafting and legal review of the offering materials, the potential for misstatements is significant.

Even optimistic projections or vague claims about future success can be risky. Regulators expect these documents to include balanced, factual information that clearly outlines the company’s risks, business model, and financial position.

Risks Arising from Use of Unregistered Platforms

Another area of legal exposure comes from using unregistered crowdfunding platforms. Under Canadian law, equity crowdfunding must be conducted through a portal that is registered as an exempt market dealer (EMD) or meets the portal registration requirements outlined in 45-108.

Many foreign platforms do not meet Canadian registration standards. The entire distribution could be deemed illegal if an Alberta company raises money using a non-compliant portal. This would potentially void the offering and trigger enforcement action from the ASC.

Companies must also be cautious when promoting their fundraising campaigns. Public solicitation is only allowed through registered platforms, and other promotional efforts—such as social media posts or email marketing—must be reviewed for compliance.

Risks Related to Investor Relations and Corporate Governance

After a successful crowdfunding campaign, companies often find themselves with many small, passive investors. This can create logistical and legal complications for corporate governance.

For example, equity crowdfunding can complicate shareholder voting, financial reporting obligations, and future rounds of financing. Some investors may be unfamiliar with the risks of startup investing and may later feel misled or dissatisfied if the business underperforms.

In some cases, companies may need to amend their shareholder agreements or articles of incorporation to address new classes of shareholders. Without proper planning, managing this increased complexity can be time-consuming and costly.

Cross-Border Legal Issues

While crowdfunding platforms are global in reach, the laws governing securities offerings are not. Alberta companies that attract investors from other provinces or countries must be aware of cross-jurisdictional compliance obligations.

For instance, an Alberta-based offering that is promoted to U.S. investors may inadvertently trigger U.S. securities law obligations, including registration under the Securities Act of 1933 or compliance with Regulation D exemptions. Canadian law may offer no protection against claims brought by foreign regulators or investors.

Alternatives to Equity Crowdfunding

While equity crowdfunding may seem appealing, it is not the only option. Alberta companies should consider whether other forms of financing may better suit their business and risk profile. These may include:

• Raising capital through the private issuer exemption allows fundraising from friends, family, and close business associates without needing a prospectus.
• Seeking angel investment or venture capital, where fewer but more sophisticated investors may offer larger sums.
• Exploring government grants, loans, or tax credits (such as those offered by Alberta Innovates or the Scientific Research and Experimental Development (SR&ED) program).

Each option carries its own legal considerations, but often with fewer regulatory burdens than equity crowdfunding.

Best Practices for Alberta Companies Considering Crowdfunding

To mitigate risk, Alberta businesses should take the following steps before launching a crowdfunding campaign:

• Consult legal counsel early to assess whether the proposed campaign involves a distribution of securities.
• Confirm portal registration and ensure the platform complies with Canadian regulations.
• Draft clear and accurate offering documents, with appropriate legal review.
• Limit promotional activity to avoid violating solicitation restrictions.
• Plan for investor relations, including how shareholders will be managed and informed post-funding.

Companies should also incorporate compliance into their business plans. Proper record-keeping, transparency, and timely disclosure are not just good practices; they are legal obligations.

Navigating Crowdfunding’s Legal Landscape in Alberta

Crowdfunding can be an effective tool for raising capital, particularly for early-stage businesses that lack access to traditional financing. However, it is far from a legal shortcut. For Alberta companies, understanding and navigating the legal risks of crowdfunding is essential to ensure long-term success and regulatory compliance.

Securities law in Canada, especially with respect to crowdfunding, is evolving and complex. Businesses that fail to take their legal obligations seriously may face costly consequences. By seeking legal advice early and conducting thorough due diligence, Alberta entrepreneurs can harness the potential of crowdfunding while minimizing the associated legal risk.

Alberta Business Lawyers Helping You Protect Your Crowdfunding Success

Navigating Canadian securities law’s evolving and complex crowdfunding landscape requires meticulous attention to detail and proactive legal counsel. At Getz Collins and Associates, we’ve been a trusted partner for Alberta businesses since 1984, delivering innovative and pragmatic legal strategies. Our team of business lawyers deeply understands the nuances of crowdfunding regulations. We’re dedicated to helping you achieve compliance and minimize risks, combining the professionalism and resources of a large firm with a truly community-focused approach.

With offices in Calgary and Strathmore, we proudly serve a wide range of communities across the province, including Airdrie, Cochrane, Okotoks, Drumheller, Chestermere, Hussar, and surrounding areas. To discuss your crowdfunding plans and ensure their legal soundness, reach out for a confidential consultation by contacting us online or calling 587-391-5600.