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Your business may wish to raise money by selling shares, debt or other securities to investors. Securities law provides that in order to do this the business, the “issuer” of the securities, must use a prospectus, i.e., a prescribed comprehensive disclosure document. This is called the prospectus requirement. Filing a prospectus and obtaining a receipt for it will result in your business becoming a “reporting issuer.”
Filing a prospectus and fulfilling the ongoing disclosure obligations of a reporting issuer involve significant time and cost. If your business only needs a relatively small amount of money, you may not want to incur these costs. And, in some cases, the investors your business is targeting may not require the protections of a prospectus. In these situations, both public and private businesses of all sizes will often rely on exemptions from the prospectus requirement to sell their securities.
There are a number of different prospectus exemptions that may be available for your business. Most of them are set out in NI 45-106 Prospectus Exemptions.
It is necessary to comply with the securities laws in each jurisdiction in which a distribution of securities occurs. All Canadian jurisdictions have adopted NI 45-106.
If your business is not a reporting issuer and investors do not have access to ongoing information about the business, the resale of securities acquired under a prospectus exemption is typically restricted. Unless the business becomes a reporting issuer, these restrictions continue indefinitely.
In most cases if you rely on a prospectus exemption there is a requirement to file a report, typically a Form 45-106F1, with the ASC reporting use of the exemption. The report is filed electronically through SEDAR and also requires payment of a fee.
Whether or not you rely on a prospectus exemption, the prohibitions against fraud and misleading statements apply to any information provided to investors.
Please note: the information available on this website provides only a high-level general summary. It is not legal advice. We encourage all businesses to seek their own legal guidance.
Most small businesses will use the private issuer exemption when they’re initially creating their company and obtaining their initial seed investment. In fact, they may have relied on this exemption before they knew they were subject to securities laws.
The private issuer exemption is not available to a reporting issuer, commonly referred to as a public company, nor to an investment fund. (See the Securities Act (Alberta) for the definitions of these terms.)
The private issuer exemption is only available if the business has less than 50 security holders, not including employees and holders of simple debt securities.
In order to rely on this exemption, the documents used to create the business must state that the securities of the business are subject to restrictions on transfer. Often this will mean the securities cannot be resold without approval of the board of directors. The private issuer exemption allows a business that qualifies as a private issuer to sell its securities to a specific list of investors. The specific list of permitted investors is set out in section 2.4 of NI 45-106. An issuer that sells securities to other investors will no longer be a private issuer.
Securities sold under this exemption are subject to restrictions on resale. There is no reporting requirement to the ASC.
The family, friends and business associates exemption permits the sale of securities of an issuer to the principals of that business (e.g. directors and executives). In addition, it permits the sale of a business’ securities to persons or companies that have one of the following relationships with one of the principals:
Refer to sections 2.5, 2.6 and 2.6.1 of NI 45-106 Prospectus Exemptions for further details.
The Companion Policy to NI 45-106 provides guidance about who can be classified as a close personal friend or close business associate.
It’s not enough to simply belong to the same religious organization or team, be a client or customer, or have a social connection. There has to be a relationship of trust and both parties should believe they have that relationship.
When an issuer relies on this exemption, it must file a Form 45-106F1 with the ASC within 10 days.
Securities sold under this exemption are subject to restrictions on resale.
The employee exemption allows a business to sell its securities to its employees, including directors, officers and certain consultants. Businesses often rely on this exemption to grant stock options or similar compensatory securities to employees to align the employees’ interests with those of the employer. The exemption is only available if the purchaser acquires the securities voluntarily. There is no specific disclosure required to be provided to employee investors.
The employee exemption can be used to sell securities to certain consultants. This is only possible if the individual provides consulting, technical, management or other services to the business under a written contract and spends a significant amount of their time and attention on the affairs of the business.
For further details refer to Division 4 of NI 45-106 Prospectus Exemptions.
When an issuer uses this exemption, there is no requirement to file a report with the ASC.
Securities sold under this exemption are subject to restrictions on resale unless the issuer has been a reporting issuer for at least four months.
The most commonly used prospectus exemption is the accredited investor exemption. It is available to any business.
Section 2.3 of NI 45-106 Prospectus Exemptions provides further details on the accredited investor exemption. Section 1.1 of NI 45-106 identifies certain institutions, financially sophisticated individuals and wealthy individuals as accredited investors. In the case of individuals, to qualify as an accredited investor, they must meet at least one of the following:
The accredited investor exemption does not apply if a person is used, or a company created, solely to take advantage of this exemption. For individual investors that qualify for this exemption based on one of the income or asset thresholds, a business is not permitted to sell them securities under this exemption unless the accredited investor provides a signed risk acknowledgement form (Form 45-106F9) at the time of purchase.
The accredited investor exemption can be used for crowdfunding, provided the crowdfunding portal is registered as a dealer.
Alberta businesses attract significant foreign investment. ASC Rule 72-501 Distributions to Purchasers Outside Alberta provides a number of prospectus exemptions that allow an Alberta business to sell securities to investors outside of Canada. To rely on these prospectus exemptions, the business must comply with securities laws in the jurisdiction of the purchaser.
When securities are sold privately to foreign investors (i.e. not under a prospectus) there may be a requirement to report certain details using a Form 45-106F1. Resale restrictions will typically prohibit the resale back into Alberta when the business is not a reporting issuer.
The minimum amount exemption in section 2.10 of NI 45-106 Prospectus Exemptions allows a business to sell securities to non-individuals that invest a minimum of $150,000. The investment must be paid in cash at the time of purchase and must be for securities of just one issuer. Each purchaser must purchase only on their own account and the purchaser cannot have been created, or used, solely to take advantage of the exemption.
The offering memorandum exemption in section 2.9 of NI 45-106 Prospectus Exemptions allows a business to sell its securities to the general public without filing a prospectus and becoming a reporting issuer or a public company. Although a prospectus isn’t required, the business must provide investors with a disclosure document called an Offering Memorandum (OM) containing specified information. The OM describes the company, the securities being offered and requires audited financial statements of the business be included. Although using the OM exemption doesn’t make the business become a reporting issuer, it does create a requirement to file and provide investors annually with audited financial statements and a notice of how the proceeds of the offering were used. (Additional disclosure will be required if securities are distributed in New Brunswick, Nova Scotia or Ontario.)
Similar to a prospectus, an investor under an OM can sue the business and its directors, Chief Executive Officer and Chief Financial Officer, if the OM or any marketing materials used in association with the OM contains a misrepresentation. Investors also have a two-day “cooling-off period” in which they can cancel their investment.
Although anyone can invest in an OM offering, there are limits on how much can be invested by an individual, depending on the nature of the investor.
A business relying on the OM exemption must obtain a risk acknowledgement form (Form 45-106F4) from each individual investor.
When an issuer relies on this exemption, it must file a Form 45-106F1 with the ASC within 10 days. It must also file the OM and any marketing materials within that same time period.
If a business wants to raise money from the general public but can't afford the costs of preparing an offering memorandum under the OM exemption, the business may wish to consider the start-up exemption Rule 45-517. This exemption is directed at small and very early-stage businesses.
The exemption can be used by Alberta businesses to sell “simple” securities to Alberta investors in a traditional manner, such as through their contacts in the community or through a registered dealer. Alberta, British Columbia and Saskatchewan-based businesses can also use the exemption to conduct small crowdfunding financings from investors in one or more of these jurisdictions.
The key conditions of the start-up business exemption are:
When an issuer relies on this exemption, it must file a Form 45-106F1 with the ASC within 30 days. It must also file the offering document within that same time period.
Crowdfunding refers to raising money online, typically through a website or social media. There are different types of crowdfunding, such as raising money by donation, pre-selling of products or by the sale of securities.
Crowdfunding campaigns that involve the sale of securities such as shares or loans must comply with securities laws. The businesses raising money through securities crowdfunding will typically be subject to the prospectus requirement but rely on prospectus exemptions such as the accredited investor, offering memorandum or start-up exemptions.
The crowdfunding portal or website that facilitates a securities crowdfunding offering typically constitute a party "in the business" of trading securities and is therefore subject to the registration requirement.
The ASC adopted Blanket Order 45-520 to facilitate access to capital for Alberta cooperatives and corporations that qualify as community economic development corporations (CEDC). The blanket order offers CEDCs a limited exception to the financial statement requirements of the OM exemption. The blanket order is designed to advance the CEDC program by reducing costly financial reporting obligations for small, community businesses, facilitating their access to capital while providing investor protection.
There are additional exemptions intended solely for cooperatives. Please refer to ASC Rule 45-511 for more information.
In addition to the common capital raising exemptions, described above, certain additional prospectus exemptions are available to certain reporting issuers. Rather than requiring a prospectus be delivered to investors, these exemptions rely on the fact that the issuer is a reporting issuer and is subject to certain ongoing disclosure obligations.
Section 2.1 of NI 45-106 provides an exemption that allows a reporting issuer to distribute rights to acquire additional securities to its security holders. One of the key conditions to the exemption is that the issuer has to be current in its continuous disclosure obligations. In lieu of a prospectus, the issuer only needs to file an abbreviated rights offering circular and a notice to security holders informing them how to access the circular. Investors obtain free-trading securities, similar to securities sold under a prospectus.
ASC Rule 45-516 Prospectus Exemptions for Retail Investors and Existing Security Holders provides two prospectus exemptions that allow a reporting issuer listed on one of the identified stock exchanges in Canada to conduct a broad offering. The issuer has to be current in its continuous disclosure obligations and must issue a news release providing information about the financing and confirming that there is no misrepresentation in its continuous disclosure. The issuer can only sell the same type of securities as are listed on the exchange or a combination of those securities and warrants.
The issuer can rely on these exemptions to sell
An issuer that relies on either of the prospectus exemptions in ASC Rule 45-516 must file a report of exempt distribution with the ASC within 10 days and pay a small fee. Investors under these exemptions will typically obtain securities subject to a four month resale restriction.
Similar prospectus exemptions exist in the other jurisdictions of Canada to facilitate the sale of securities to existing security holders. Similar prospectus exemptions exist in British Columbia, Saskatchewan, Manitoba and New Brunswick to facilitate the sale of securities to other investors when an investment dealer is involved.