If your company is looking to raise money in Canada, then you’ll want to familiarize yourself with the rules set out in National Instrument 45-106 Capital Raising Exemptions (NI 45-106), which sets out the exemptions from the prospectus requirement.
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.
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 1-604-669-8843 x22 or info @ genesislaw.ca.