Crowdfunding Mining Exploration in Canada
In an already risky and expensive business, true innovation can be hard to justify, as proven technologies are an easier sell than those requiring a leap of faith. With the mining industry experiencing a decline in productivity over the past decade, adopting innovative approaches is crucial for the sector’s continued success.
However, innovation is not limited to the physical work of mining operations. Stakeholders from across the sector are now exploring new ways of structuring their business and financing their operations, understanding that innovation should not be restricted to technology, but should also apply to the way a company operates.
The IGF recently released a report, Innovation in Mining: Report to the 2018 International Mines Ministers Summit, that shows how innovation can take many forms, including crowdfunding. This is a means of raising capital from the general public via Internet-based platforms, potentially expanding the investor pool for mineral investments.
Fostering Business Innovation Through Crowdfunding
Minerals exploration is costly and risky; for some companies operating in this space, it can be easier to solicit a number of smaller investments from a variety of stakeholders through crowdfunding than to raise money through larger investments from a more limited pool of investors.
For mining, there are high administrative costs and requirements related to establishing and maintaining a public listing. Crowdfunding allows companies to access public funding while bypassing these costs and requirements. Although there are some limitations, such as investors being limited by the allowable size of their investment and lacking legislative protection, crowdfunding platforms bundle investment information online and play the role of a typical brokerage firm, enabling broader community access to retail investment.
Crowdfunding Exemptions in Canada
In Canada, available crowdfunding exemptions come attached with various conditions used to protect both the investor and the company. In 2015, several provinces adopted a harmonized registration and prospectus exemption, known together as the “start-up crowdfunding exemption.” This exemption permits non-reporting issuers to issue eligible securities, subject to a number of conditions. An Internet-based portal can be either registered or unregistered. If the portal decides to take advantage of the prospectus exemption, it must be a registered dealer that meets the obligations under the securities legislation. Alternatively, a portal can take advantage of the combined start-up crowdfunding exemption, in which case it is unregistered via the registration exemption. Under this exemption, funding portals are prohibited from providing advice to the purchaser on the merits of the investment and from receiving a commission or fee from the purchaser of eligible securities. The start-up crowdfunding exemption includes a cap of CAD 250,000 on the size of a distribution (and an annual limit of two distributions) and limits investors to a maximum CAD 1,500 investment per distribution.
Crowdfunding Exemptions Fostering Job Creation
The Ontario government has also approved several new prospectus exemptions that are designed to facilitate capital formation and job creation. These include a new crowdfunding prospectus exemption regime, which took effect in 2016, and allows businesses, particularly those in the early stages of development, to raise up to CAD 1.5 million annually by distributing securities on a prospectus-exempt basis through a registered Internet funding portal. Issuers can only distribute their securities through a single registered funding portal unrelated to the issuer. Investors utilizing these portals are subject to limitations. Non-accredited investors are limited to CAD 2,500 per investment and an annual limit of CAD 10,000. Accredited investors are permitted to invest CAD 25,000 per investment with an annual limit of CAD 50,000. There are no limits for permitted clients such as institutional investors.
Crowdfunding in Canada’s Mining Sector
Business innovation involves new ways of thinking about project financing, which we can see in three notable Canadian examples.
Ontario-based Red Cloud Klondike Strike was the first platform to launch in Canada that is specific to the mining sector and uses an online issuance of securities; however, it does not use the combined crowdfunding exemption. Rather, this company is registered as an exempt dealer with the securities regulator and offers an online issuance of securities on behalf of issuing companies.
Red Pine Exploration Inc. was listed on the platform on May 26, 2016, to raise CAD 2 million. On June 3, 2016, Red Pine announced that it had closed the brokered private placement financing with total gross proceeds of CAD 2,158,008.
Similarly, Vested, another Canadian crowdfunding platform, helped Kal Minerals Corporation become the first ever fully online crowdfunding mineral development company.
Innovation may not come easily to the mining sector, but it is clear companies need to address inefficiencies in their operations to stay competitive. While the challenges may be great, innovation is a key component to success in the mining industry.
To learn more, please read our report “Innovation in Mining: Report to the 2018 International Mines Ministers Summit” and follow IGF on Twitter and Facebook.