Yesterday, BetaKit reported the Ontario Securities Commission’s (OSC) decision to allow Ontario investors to lead and participate in AngelList Syndicates as part of a two-year trial program. However, the announcement, specifically focused on the investment of startups from programs such as Creative Destruction Lab (CDL) and NEXT Canada, left many questions as to investing in non-Canadian startups, or startups outside of the OSC’s Approved Incubator List.
The OSC has now published its full AngelList decision here. While we suggest you take a look, BetaKit has done the heavy lifting for you, gleaning all the pertinent information out of the 17-page government document.*
First, if you’re not familiar with syndicates, AngelList has a bunch of information available on its website. A brief overview from AngelList:
- “A syndicate is a single-deal fund created to invest in a startup. Syndicates pool capital from multiple investors into a single fund.
“Syndicates are brought to the platform by syndicate leads — experienced angel investors who have vetted the target investment. Syndicate leads share details on the opportunity with syndicate investors. Investors typically have 5 business days to decide whether they’d like to invest. Investors sign documents online and fund investments via ACH or wire.”
The two-year program makes AngelList Syndicates available to startups and “lead investors”, as well as “quality investors” (we’ll get to what these terms mean in a bit). AngelList’s Professional Investor Program, which allows “quality investors” looking to invest over $600,000 USD on AngelList to be introduced to startups not looking to make it publicly known they are raising via a syndicate, will also be available, but only to those “quality investors” who qualify as “permitted clients.”
While in the U.S., AngelList allows the investment into funds, this is not currently available to Ontario investors (AngelList currently only applied to be a restricted dealer in Ontario, but can apply for additional registration at a later date).
Why a two-year time limit? According to the OSC, the intention was to let the program run in a test environment so the OSC can evaluate and make adjustments as needed. As we get into the weeds of some of the decision’s details, the fact that this is a live and evolving experiment should be kept in mind.
OSC’s Approved Incubator Program
As we mentioned previously, Creative Destruction Lab and NEXT Canada were identified as the two launch members of the OSC’ Approved Incubator Program. OSC LaunchPad Chief Pat Chaukos told BetaKit this was due to a desire to provide approved partners to instill confidence amongst Canadian investors and add a layer of protection atop AngelList vetting process. While any company in Ontario who meets one of the qualifications below can list on the platform, the Approved Incubator Program allows investors to invest in a subset of companies and not count towards the Ontario investor limit (more on this below).
According to the OSC, approved incubators are incubators, accelerators, “technology transfer office” or organization that meets all the following criteria:
- Has a startup program that has been around for at least two years
- Receives funding from (A) a federal/state/provincial/territorial/municipal government, or a crown corporation or government-owned corporation or authority or (B) an accredited university or college
- Has a competitive application process with clear criteria to select startups for its program
- Has a review process for founders and other key individuals to make sure the startup meets admission criteria
- Provides entrepreneurial advice and mentorship
- Has received approval from the OSC
Except for that last point, based on the criteria, it seems safe to say that pretty much any incubator/accelerator program across the nation will fit the bill. As for the approval process, the OSC’s decision states that it can add organizations to the Approved Incubator Program from “time to time” and all conversations we’ve had with the OSC and AngelList indicate that this will happen over the course of the two-year program.
Why is this so important? Well…
AngelList Syndicates: who can do what (with whom)
This is where things get a little complicated. According to the OSC decision, Ontario investors will only be permitted to invest in startups raising through an AngelList Syndicate through one of the following circumstances:
Circumstance A: “permitted clients”
We mentioned “permitted clients” briefly above. Ontario investors who qualify as “permitted clients”, and that waive the requirement for AngelList to conduct a suitability assessment can invest in any syndicate on the platform, and participate in the Professional Investor Program mentioned above.
Now, the conditions to qualify as a “permitted client” either as an individual or an organization is quite involved, but thankfully our friends at PanVest Capital have some handy definitions which can be found here.
Circumstance B: Approved Incubator Program
Here’s where we see how the OSC’s Approved Incubator Program list becomes very powerful. Ontario “quality investors” can invest in AngelList Syndicates for “eligible Canadian startups” that are participating in, or within the past 24 months have successfully completed an Approved Incubator Program.
A “quality investor” in this case is simply an Ontario accredited investor that has also passed AngelList’s screening requirements.
The conditions for “eligible Canadian startups” are more involved (and can be found below), but a useful heuristic may be that if you’re not headquartered in Canada, or have significant operations in Canada, you don’t make the cut.
Circumstance C: Other startups
As the catch-all bracket for all startups not outlined in circumstance B, things here are the most messy, imposing qualifications for the type of startups that can be invested in, as well as rate-limiting the number of investors.
Whereas the theoretical sky is the limit for the number of investors in Circumstances A and B, there is a maximum of 500 “quality investors” who can invest in Circumstance C startups (note, there is no limits on the number of syndicates an investor can participate in).
According to the decision posted by the OSC, the 500 “quality investor” limit lasts the full two-year period of the program experiment.
Those investors that get in under the limit can invest in other startups that meet any of the following criteria:
- Startup founder is an “experienced founder” (see glossary)
- The lead investor of the syndicate or at least one other investor of the startup is a “credible investor” (different from a quality investor, mind you), with the syndicate investing in the startup on the same terms and conditions as the credible investor.
- Within the past three years, the startup has received funding from a federal/state/provincial/territorial government program that supports small business or startups (examples provided: BDC, BDC Capital, IAF, OCE, FedDev).
Is there anything we missed? Any questions that you have about the above? Post a comment below and we’ll try to get them answered via either the OSC or AngelList.
* Disclaimer: This article is not intended to be taken as legal advice. AngelList Syndicate criteria, terms, and conditions have been take from the OSC decision and modified for the purposes of clarity. Use at your own risk (c’mon, we’re tech journalists, not lawyers).
“Credible investor”: (A) a Venture Capital Fund that has at least $10 million in assets under management; or (B) an individual investor who has led or participated in at least five investments in a startup, of which at least two of those startups have completed a Successful Liquidity or Financing Event; or
(C) is an Experienced Founder.
“Lead investors”: Only accredited investors can apply to be lead investors. AngelList retains the right and full discretion to determine whether a person may act as a lead investor, reviewing a potential lead investor for previous experience related to venture capital and angel investing by reviewing the Lead Investor’s activity on relevant social media and other websites (such as Crunchbase and Google). AngelList also reviews references provided by each lead investor related to their prior startup investments.
“Eligible Canadian startup”: a startup that is operating from or doing business in Canada where either (A) or (B) applies:
- (A):(i) the startup is incorporated or organized under the laws of Canada or any jurisdiction of Canada, (ii) the head office of the startup is located in Canada, and (iii) at least 25% of the directors and 25% of the Executive Officers or founders of the startup (or at least one director and one Executive Officer or founder, if there are less than four directors and less than four Executive Officers or founders, respectively) reside in Canada.
- (B): at least 25% of the consolidated payroll of the startup and its subsidiaries is for employees and consultants who reside in Canada.
“Experienced founder”: a founder of a startup who has
(A) management, product or engineering experience, typically with the title of “director” or equivalent, at a large technology company (500+ plus employees), or (B) co-founded, or served at the vice-president level or above of (in either case, with executive responsibilities), a startup that has achieved a Successful Liquidity or Financing Event.
“Permitted clients”: go here (thanks, PanVest Capital!).
“Quality investor”: an accredited investor been determined by AngelList’s procedures to have sufficient experience in venture capital and angel investing.
“Technology transfer office”: an office at a university with an academic research program or at a research institute that is established to handle the intellectual property and licensing rights for faculty and student investors.