Crowdfunding in the mining sector: will the UK be next to join this trend?
At a time when companies in the mining sector are struggling to raise capital to finance their ventures, some Canadian mining companies have turned to crowdfunding platforms as an innovative solution. The concept has been around for some time in various fields, including new technology, entertainment and media, and has been relatively successful. As a result, some mining companies have decided to utilise it.
The Toronto-based company Klondike Strike Inc. was the first to offer a mining-centric equity crowdfunding platform. Its platform, Red Cloud, operates in Canada through the offering memorandum exemption under section 2.9 of National Instrument 45-106 Prospectus Exemptions ("NI 45-106") and as an exempt market dealer through National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Exemptions ("NI 31-103").
Bianca D?(C)pr?(C)s is an avocate at Gowling WLG, Montreal
By relying on NI 45-106 as opposed to a crowdfunding exemption, Red Cloud allows mining companies to solicit investments from a wider range of investors. For instance, the platform requires a minimum of two thousand five hundred Canadian dollars (CND$2,500) per investor and the maximum amount depends on whether the investor qualifies as non-eligible investor or eligible investor. Non-eligible investors may invest a maximum of ten thousand Canadian dollars (CND$10,000), cumulatively, for all investments made within a 12-month period. Alternatively, eligible investors may invest a maximum of thirty thousand Canadian dollars (CND$30,000), cumulatively, for all investments made within a 12-month period. Furthermore, those who qualify as institutional investors, accredited investors1 or family, friends and business associates may invest without any amount limitations. Currently, the various mining companies listed on the Red Cloud platform rely on an equity-based model, whereby investors receive shares and/or flow-through shares in the company in exchange for their investment. However, the company Klondike Strike wants to offer streaming agreements and other financing tools on the Red Cloud platform in the near future.
The Australian online platform Mineral Intelligence is hoping to do the same. The founders, Cameron McLean and Joe Treacy, have recently launched a five hundred thousand Australian dollar (A$500,000) capital raising campaign on the crowdfunding platform, Equitise in order to commercialise its own mining-centric equity portal. The Mineral Intelligence platform would allow mining companies to list their mining projects free of charge, allowing them to raise funds from a large number of small investors. Investors on their end would be required to pay a US$5000 annual fee to access the database. This is to ensure that only genuine investors with the capacity to invest would participate. The founders envision investments ranging typically from US$250 to five hundred thousand US$500,000 via a significantly larger pool of retail investors.
Currently, Australia has no laws or regulations that facilitate investment through crowdfunding and their securities regulatory regime is poorly suited to such a financing model. For instance, the Corporations Act2 has stringent disclosure requirements. While it ensures investors' protection by giving them access to detailed information about a company's historical performance, assets, operations, risks, funding and so on, it also imposes on companies the costs of gathering, processing and generally auditing the information. While a crowd-sourced equity funding bill had been presented to the Australian parliament in December 2015, it silently died in the Senate.
As for the UK, it the structure falls somewhere between Canada and Australia. While there are currently no crowdfunding platforms for the mining sector, there are numerous ones in various other sectors, including renewable energy. These are regulated by the Financial Conduct Authority ("FCA") and fall within the scope of the Financial Services and Markets Act 20002 Furthermore, in April 2014 the FCA introduced new rules for investment through crowdfunding that apply to "non-readily realisable securities". These types of securities are regarded as illiquid, hard-to-price securities for which there is no, or only a limited, secondary market. From a crowdfunding perspective, this implies equity products and structured equity products, such as convertible notes or structured debt products. Under the rules, direct offer financial promotions3 for non-readily realisable securities may only be made to the following types of investors:
Retail clients that confirm that they will receive regulated investment advice or investment management services from an authorised personRetail clients that are venture capital or corporate finance contactsRetail clients who are certified or self-certify as sophisticated investorsRetail clients who are certified as high net worth investorsRetail clients who certify that they have not invested, and will not invest, more than 10% of their net investible financial assets in non-readily realisable securities.Similarly to Canada, a UK crowdfunding platform could be mining-centric and be overseen by the FCA. In such a context, the minimum amount required to be invested could be determined by the platform and the maximum could be based on the category within which the investor falls, based on the regulations. Introducing a crowdfunding platform for mining companies in the UK would allow junior exploration companies to seek funds from a larger pool of investors generally not reachable through traditional financing sources. It would also allow smaller retail investors to have access to early stage investment opportunities in the sector that have historically only been accessible to larger financial players.
It is clear that the legal framework still needs to be adjusted in the UK in order for the mining sector to turn to crowdfunding platforms. However with the constant growth of the start-up community in the area of payments and web-based platforms and the fintech industry becoming increasingly present, it seems to only be a matter of time before crowdfunding becomes a popular tool to raise funds in this sector.
Bianca D?(C)pr?(C)s is an avocate at Gowling WLG, Montreal