September 03, 2015

Crowdfunding in New Brunswick

 Legal Issues to Consider

Equity crowdfunding provides an innovative, fresh and new opportunity for entrepreneurs to fund their start up corporations in New Brunswick.  However, the legal implications and ramifications can be complicated.  Outlined below are a few issues that any entrepreneur will want to consider before entering the equity crowdfunding universe.

1.     Structure

How is the share capital of your corporation structured?  Because a potential “funder” will be subscribing for equity in your corporation, the share capital structure should be organized appropriately.  Before deciding to offer shares to the “crowd”, make sure you know what you are offering.  Consider whether the shares being offered should be a separate class than those held by other current shareholders.  You may want to restrict the new shareholder’s ability to vote, and/or ensure that existing shareholders have “super-voting” shares to ensure that the new shareholders so not have stronger voting power than the founders.

In New Brunswick, unless otherwise stated, all shareholders of a corporation enjoy pre-emptive rights upon the issuance of additional shares of a corporation.  This can prove to be problematic for a corporation where there are a large number of shareholders.  Consequently, you may wish to consider eliminating shareholders’ pre-emptive rights by amending the articles of incorporation before approaching the “crowd” for funding.

You should also consider whether the by-laws of the corporation are conducive to handle shareholders that are not active in the day-to-day operations of the corporation.  Before equity crowdfunding, consider whether timelines for calling meetings are appropriate and build in time limitations so that shareholders are deemed to consent in the event that they fail to respond within the allotted timeline.

2.    Governance

Every entrepreneur who is considering equity crowdfunding should also be prepared for the increase in the importance of good corporate governance once many shareholders are brought to the table.

A solid and well thought-out unanimous shareholders agreement is a must.  Every person that subscribes for shares needs to become a party to the unanimous shareholders agreement.  This requirement and the contents of the agreement will need to be made available for all potential shareholders prior to the issuance of any securities.

Any unanimous shareholders agreement needs to contain customary language that is designed to protect a corporation from issues that can arise between shareholders (among other things).  This is particularly important where the corporation does not have a personal relationship with the shareholders from the “crowd” that are subscribing for shares.  For example, any wise entrepreneur will ensure that their unanimous shareholders agreement includes a right of first refusal and drag along rights which are tailored to protect the corporation.  The agreement should also address the issue of what happens in the event of a buyout of the corporation.

When dealing with a large number of passive shareholders (which will be the case for those coming from a round of equity crowdfunding), an entrepreneur should consider implementing a voting trust agreement to ensure that one person acts as the proxy for a specific group of shareholders and votes all shares (if voting shares are offered) on its behalf.  This will avoid having to chase shareholders that do not respond in a timely fashion, and may avoid the need for the calling of formal meetings in certain cases.

When a large number of shareholders own a corporation, the entrepreneur at the helm needs to have strong communication and reporting skills.  Every entrepreneur considering equity crowdfunding needs to understand what needs to be communicated to the shareholders and when to avoid the possibility of a disgruntled person alleging minority shareholder oppression and consequently putting the corporation at risk.

Also, once a corporation has more than 50 shareholders, the reporting requirements are required to be made with the Financial and Consumer Services Commission.  Depending on the residence of the investors subscribing for shares, multiple filings with regulatory authorities in different jurisdictions may be required.  Make sure you understand your filing obligations in all applicable jurisdictions.

Although equity crowdfunding may prove to be an effective tool for entrepreneurs in their quest to finance a corporation, if not properly thought through, it can turn an entrepreneur’s dream of building a successful corporation into an overwhelming challenge.  Make sure that, prior to going to the “crowd”, you have received sound legal advice.  A qualified securities lawyer is an excellent resource and an investment worth making.

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Crowdfunding in New Brunswick

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Cox & Palmer publications are intended to provide information of a general nature only and not legal advice. The information presented is current to the date of publication and may be subject to change following the publication date.