“The exemption permits listed issuers to issue listed securities to their existing security holders, subject to a number of conditions. The key conditions are:

• the issuer must have a class of equity securities listed on the TSXV, TSX or CSE;

• the offering can consist only of a class of equity securities listed on the TSXV, TSX, or CSE, or units consisting of the listed security and a warrant to acquire the listed security;

• the issuer must make the offering available to all existing security holders that hold the same type of listed security;

• unless the investor has obtained suitability advice from a registered investment dealer, the investor can only invest a maximum of $15,000 per issuer under the exemption in a 12-month period;

• the issuer must have filed all timely and periodic disclosure documents as required under applicable securities laws;

• the issuer must issue a news release disclosing the proposed offering, including details of the use of proceeds;

• each investor must confirm in writing to the issuer that, as at the record date, they held the type of listed security offered under the exemption;

• an investor must be provided with certain rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record; and

• although an offering document is not required, if an issuer voluntarily provides one, the issuer must file the offering document with the securities regulatory authority and an investor will have certain rights of action in the event of a misrepresentation in it.” (Multilateral CSA Notice 45-313)

The record date must be a date that is at least one day prior to the day that the issuer issues the offering news release.

The offering news release must include reasonable detail of the proposed distribution, including the minimum and maximum number of securities an issuer proposes to distribute. Issuers must also describe in the offering news release how they intend to allocate oversubscriptions.

An issuer is only required to make the offer available to security holders who reside in jurisdictions where the exemption or a similar exemption is available.

Securities issued under the exemption will be subject to a four-month hold period like most other capital-raising prospectus exemptions and issuers are required to file a report of exempt distribution within 10 days after each distribution under the exemption.

With respect to Ontario, the Ontario Securities Commission (OSC) announced on December 4, 2013 that it would publish for comment four new capital raising prospectus exemptions in the first quarter of 2014, including a proposed prospectus exemption for distributions to existing security holders. According to Multilateral CSA Notice 45-313, the OSC intends to publish the proposed prospectus exemptions on or around March 20, 2014.

Prior to the adoption of this exemption, retail security holders who wanted to make an additional investment in an issuer they had already invested in usually had to buy the securities on the secondary market at the market price and pay brokerage fees. This meant that issuers did not have access to their existing shareholders as an additional source of capital.

This summary is intended to provide general comment only and should not be relied upon as legal advice. For more information, contact Genesis Law Corporation at 1-604-669-8843 x22 or info @ genesislaw.ca.  

To get listed on the Canadian Securities Exchange (CSE), formerly known as CNSX, a company must meet a number of key listing requirements including:

1. status as a reporting issuer in good standing;
2. a minimum of $100,000 working capital (or $50,000 and recent history as a listed company, or demonstrable revenues); and
3. a minimum of 150 public securityholders who each hold at least one board lot of shares.

1.              Reporting Issuer Status

A company can become a reporting issuer either by filing a prospectus or by merging with an existing reporting issuer.

Prospectus Filing

The traditional approach to going public is to file a prospectus with the applicable securities regulator(s).  The filing can be in the form of either an offering prospectus or a non-offering prospectus.

(a)            Offering Prospectus

An offering prospectus enables a company to raise funds via an agent (stock broker), create a shareholder base and become a reporting issuer. Typically an agent will charge corporate finance fees ($25,000 to $50,000 or more), agent’s commissions (6% to 8%+ of the IPO financing), broker warrants, administration fees, and legal fees (which could be $25,000 or more) to pay the agent’s lawyer to review the work done by the company’s lawyer.

(b)            Non-Offering Prospectus

If a company is able to raise funds on its own, then it can use a non-offering prospectus to become a reporting issuer, which can easily save $50,000 or more in agent’s fees and expenses.  A non-offering prospectus is often used to qualify the shares underlying special warrants so that these shares are free-trading once the prospectus has been receipted.

Merger with a Reporting Issuer

Many companies have listed on CSE by merging with a reporting issuer.  The reporting issuer is usually a listed company, but it may also be an unlisted reporting issuer or a new company that has been created pursuant to a plan of arrangement.

(a)            Reverse Take Over of a Listed or Unlisted Reporting Issuer

Under a reverse takeover, a reporting issuer issues a significant number of shares to acquire a project or a company that holds a project.  At closing, the owners of the project typically end up holding a majority of the shares of the reporting issuer, which now owns the project. Often, a financing is closed at the same time. The resulting issuer files CSE listing documents, pays the listing fees and, provided that all listing requirements are met, the shares resume or commence trading.

(b)            Plan of Arrangement

Under a plan of arrangement a reporting issuer, such as a listed company, establishes a subsidiary company and enters into an agreement with a private company that wishes to go public on the CSE. Pursuant to the plan of arrangement, the shares of the subsidiary are distributed to the shareholders of the reporting issuer and the subsidiary inherits the reporting issuer status of the parent company.

An initial court application is made to obtain an interim order for the plan of arrangement. A comprehensive information circular and proxy materials are then sent to the shareholders of the reporting issuer and a shareholder meeting is held to approve the terms of the plan of arrangement. After the meeting, another court application is made where the results of the shareholder meeting are reported and a final order is obtained to approve the transaction.

The shares of the former subsidiary are free of trading restrictions and are distributed to the shareholders of the reporting issuer (the parent company), who end up owning, pro-rata, the shares of the former subsidiary and continue to hold their shares in the reporting issuer. The former subsidiary then files its listing application with the CSE.

2.              Working Capital

In order to meet the CSE working capital requirements, the company can raise money in reliance on applicable prospectus exemptions.  The exemptions vary from jurisdiction to jurisdiction, but include exemptions available for:

• officers, directors and founders of the company;
• close relatives, friends and business associates of an insider; and
• accredited investors.

Another exemption, that’s available right across Canada (other than Ontario), is the offering memorandum exemption. An offering memorandum is a document that discloses statutorily mandated information including summaries of the company’s business, management’s experience and the securities offered, the risk factors and audited financial statements. Provided that certain conditions are met, the offering memorandum exemption enables companies to raise money from investors and build its shareholder base.  The conditions include the requirement that each investor receives a copy of the offering memorandum and signs a risk acknowledgment form, and that the company files a report of exempt distribution.

3.              Minimum Shareholder Base

There are a few alternatives one can use to meet the requirement of having a minimum of 150 public securityholders:

(a)            The company can merge with or be acquired by an existing company that has at least 150 public securityholders. For example, this can occur as part of a reverse takeover of a public company.

(b)            An agent can be retained to bring in the shareholder base as part of an initial public offering.

(c)             A company can use an offering memorandum (other than in Ontario) to raise any amount of money from any number of investors. Although less expensive than retaining an agent, it can be a time consuming and cumbersome process to sign up 150 public securityholders.

(d)            Another approach is to allow a company that already has a large shareholder base to acquire a share position, either via a private placement or from an existing shareholder. Once the shares of the company that’s going public are free of trading restrictions (such as after a prospectus receipt has been issued or after a plan of arrangement has been completed) then the company with the shareholder base declares a stock dividend on those shares and distributes them, pro-rata, to all of its shareholders. This immediately gives the company that’s going public the shareholder base it needs to get listed.

This summary is intended to provide general comment only and should not be relied upon as legal advice. For more information, contact Genesis Law Corporation at 1-604-669-8843 x22 or info @ genesislaw.ca.  

• the Toronto Stock Exchange (TSX), where Canada’s largest companies are listed;
• the TSX Venture Exchange (TSX-V), which lists emerging companies; and
• the Canadian Securities Exchange (CSE) formerly known as CNSX, which is Canada’s newest stock exchange.

Canadian securities regulators require a high degree of transparency for listed companies. Listed companies are required to provide continuous disclosure in the form of news releases, and the filing of financial statements and reports in statutory form. All news releases, financial statements and reports must be uploaded to the www.SEDAR.com website where they can be accessed by securities regulators and the public.

Corporation in Good Standing

One of the requirements for listing is that the applicant corporation is in good standing under and not in default of applicable corporate law or other applicable laws of establishment and has the corporate power and capacity to own its properties and assets and to carry on its business as it is currently being conducted.

If the company applying for listing is not incorporated or created under the laws of Canada or any Canadian province, then the company may be required to complete and provide a jurisdictional reconciliation of its articles, bylaws and other constating documents and the corporate or equivalent law regimes of its home jurisdiction with that of the Canada Business Corporations Act. Such a reconciliation will be reviewed to determine whether significant deficiencies exist with respect to overall market and investor protections when compared with similar provisions in Canadian corporate law. If there are any significant deficiencies, then the company may be required to amend its articles, by-laws, any declaration of trust or equivalent documents.

Management

Management of a listed company should have adequate experience and technical expertise relevant to the company’s business and industry. The stock exchange will review the conduct of related persons (including directors, officers, 10%+ shareholders, promoters or investor relations persons) as well as the company’s employees, agents, and consultants in order to satisfy itself that the business of the company is and will be conducted with integrity and in the best interests of its security holders and the investing public. The exchange may require that the company’s management has adequate public company experience and that at least two of the directors are independent of management.

Directors, officers, 10%+ shareholders, promoters and investor relations persons are required to file personal information forms (PIFs) with the stock exchange and may also be required to file PIFs with Canadian securities regulators.

A company will not be approved for listing if any related persons have been convicted of fraud, breach of fiduciary duty, violations of securities legislation or any other activity that concerns integrity of conduct, or if related persons have entered into a settlement agreement with a securities regulator or other authority, or have been prohibited or disqualified by a court or regulatory agency from acting as a director or officer, or are known to be associated with other offenders, or have a consistent record of business failures, particularly failures involving public companies.

The absence of evidence satisfactory to the exchange of a positive legal and regulatory track record can also constitute grounds for disqualification as a director or officer of a listed company.

Annual Shareholder Meetings

Public companies, like private companies, are required to have an annual meeting of the company’s shareholders. At each annual meeting of shareholders, the board of directors must:

1. present the audited annual financial statements to the shareholders for review;
2. permit the shareholders to vote on the appointment of an auditor; and
3. permit the shareholders to vote on the election of directors.

Often the directors will table other matters at an annual meeting such as seeking shareholder approval for the company’s stock option plan.

Financial Statements

Listed companies are required to prepare and file audited annual financial statements, together with an auditor’s report, after each financial year-end. Companies are also required to file interim financial statements for each quarter. Financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS).

Auditor’s reports must be issued by an auditing firm that is registered with the Canadian Public Accountability Board (CPAB).

The foregoing requirements will apply no matter on which Canadian stock exchange the company’s shares are listed. In addition, each stock exchange has its own specific listing requirements.

Stock Exchange Listing

A stock exchange listing can be effected either via a prospectus filing or via a merger with a reporting issuer. There are advantages and disadvantages of each approach and these should be carefully reviewed with your company’s securities lawyer.

This summary is intended to provide general comment only and should not be relied upon as legal advice. For more information, contact Genesis Law Corporation at 1-604-669-8843 x22 or info @ genesislaw.ca.  

Under NI 45-106, issuers can take advantage of a number of exemptions including the following:

1.     Private Issuer Exemption

A “Private Issuer” is a company that is not a reporting issuer, a mutual fund or a non-redeemable investment fund whose shares are (i) subject to restrictions on transfer that are contained in the issuer’s incorporating documents or security holders’ agreements, and (ii) are beneficially owned, directly or indirectly, by not more than 50 persons or companies.  A Private Issuer can only distribute its shares only to certain persons including

(a) directors, officers, employees, founders or control persons;

(b) a spouse, parent, grandparent, brother, sister or child of a director, senior officer, founder or control person;

(c) close personal friends, or close business associates of a director, senior officer, founder or control person;

(d) current shareholders;

(e) accredited investors (see below);

(f) companies of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons or companies listed in (a) to (e) above; and

(g) persons that are “not the public”.

A close personal friend is an individual who has known the director, senior officer, founder or control person for a sufficient period of time to be in a position to assess the capabilities and trustworthiness of the director, senior officer, founder or control person.

A close business associate is an individual who has had sufficient prior business dealings with the director, senior officer, founder or control person to be in a position to assess the capabilities and trustworthiness of the director, senior officer, founder or control person.

2.     Family, Friends and Business Associates Exemption

Any company (other than Ontario issuers) can use this exemption, even a company that no longer meets the definition of a private issuer.  The purchaser must be either:

(a) a director, senior officer, or control person;

(b) a close relative, close personal friend, or a close business associate of a director, senior officer, founder or control person;

(c) a close relative of the spouse of a founder;

(d) a company of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons or companies listed in (a) to (c); or

(e) a trust or estate of which all of the beneficiaries or a majority of the trustees are persons or companies listed in (a) to (c).

If a company is relying on either the Private Issuer exemption or the Family, Friends and Business Associates exemption, then it should ensure that each investor completes and signs a subscription agreement that sets out in detail the relationship of the investor to a director, senior officer, founder or control person of the issuer.  No commission or finder’s fee may be paid to any director, officer, founder or control person in connection with a trade under this exemption.  In Saskatchewan, the close personal friend and close business associate exemptions may only be used if the purchaser qualifies under one of the exemptions listed in subparagraphs (d) or (e) and the seller obtains signed risk acknowledgement form from the close personal friend or close business associate.

3.    Accredited Investor exemption

An “Accredited Investor” includes the following:

●    a person or company registered under the securities legislation … as a representative of an adviser or dealer (e.g., a stockbroker);

●    an individual who, either alone or jointly with a spouse, beneficially owns financial assets (i.e., cash and securities) having an aggregate realizable value before taxes, but net of any related liabilities, exceeding $1,000,000;

●    an individual whose net income before taxes exceeded $200,000 in each of the last two years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the last two years and who, in either case, reasonably expects to exceed that net income level in the current year.

If a company is relying on this exemption, then the purchaser’s subscription agreement should specifically state how the purchaser meets the definition of an Accredited Investor.

4.    Offering Memorandum Exemption

Under this exemption (which incidentally is not available in Ontario), the company delivers an offering memorandum (drafted in accordance with Form 45-106 F2 or F3) to each purchaser, and has each purchaser sign a risk acknowledgement form.  If a material change occurs in the company’s affairs prior to closing of the offering, then the company will need to give each purchaser an updated offering memorandum.  The purchaser’s subscription agreement should include an acknowledgment by the purchaser that he or she has received a copy of the offering memorandum.

Payment for the securities must be held in trust for a two-day “cooling-off period” during which the purchaser has the right to cancel his or her investment.  In Alberta, Manitoba, Saskatchewan, Newfoundland & Labrador, P.E.I., N.W.T, and Nunavut, unlike B.C. and Nova Scotia, if an investor wants to subscribe for more than $10,000 worth of securities, he or she must qualify as an “eligible investor”.  In Saskatchewan, N.W.T., and Nunavut, no commission or finder’s fee may be paid to anyone other than a registered dealer in connection with a trade, under this exemption, to a purchaser in that jurisdiction.

Filing Requirements

If a company has raised funds pursuant to one of the exemptions set out in sections 2, 3, or 4 above, it will need to file, within 10 days after the closing of the offering, a report of exempt distribution with the applicable securities regulatory authority(ies) and, if applicable, a copy of the offering memorandum.

This summary is intended to provide general comment only and should not be relied upon as legal advice. For more information, contact Genesis Law Corporation at 1-604-618-2366 or info @ genesislaw.ca.