Common Capital Raising Prospectus Exemptions

The private issuer exemption is the exemption that most small businesses will use first when they are just incorporating or organizing their business and getting their initial seed investment. Businesses may have relied on this exemption without even knowing they were subject to securities law.

The private issuer exemption has two main requirements:

1. the issuer must be a “private issuer”
2. the investor must be one of the persons or companies on a specific list of investors

Requirement #1: Key aspects of the “private issuer” definition

• The issuer cannot be a reporting issuer or an investment fund

(Note: An investment fund may be able to rely on a similar exemption that is provided for private investment clubs. See section 2.20 of National Instrument 45-106 Prospectus Exemptions (NI 45-106))

• The issuer must have less than 50 security holders. However, employees and holders of non-convertible debt securities are not counted in the 50. Note that if a company is set up solely to hold securities of the private issuer, each beneficial owner of that company will be counted as a separate security holder.
• The documents used to create the business (e.g. the articles of incorporation, articles of amalgamation, bylaws, declaration of trust, partnership agreement) must state that the securities of the business are subject to restrictions on transfer. Often this will mean that they cannot be resold without approval of the board of directors.

Requirement #2: The business can only sell securities to a specific list of investors as identified in section 2.4 of NI 45-106.

In general terms, that list includes:

• a director, officer, employee, founder or control person of the business (“control person” typically refers to a holder of at least 20 per cent of the voting securities)
• a director, officer or employee of an affiliate of the business
• a spouse, parent, grandparent, brother, sister, child or grandchild of a director, officer, founder or control person of the business
• a parent, grandparent, brother, sister, child or grandchild of the spouse of a director, officer, founder or control person of the business
• a “close personal friend” of a director, executive officer, founder or control person of the issuer (see "close personal friends" in family, friends and business associates exemption)
• a “close business associate” of a director, officer, founder or control person of the issuer (see “close business associate”)
• a spouse, parent, grandparent, brother, sister, child or grandchild of the selling security holder or of the selling security holder's spouse
• a security holder of the issuer
• an accredited investor (see accredited investor definition below)
• a person or company of which a majority of the voting securities are beneficially owned by, or a majority of the directors are persons described above
• a trust or estate of which all of the beneficiaries or a majority of the trustees or executors are persons described above
• a person or company that is “not the public”.

An issuer that ceases to be a private issuer can still sell its securities to many of the same people by relying on the accredited investor or family, friends and business associates exemption. However, the private issuer exemption affords a bit of additional flexibility e.g. allowing the sale of securities to existing security holders and to any one else who is “not the public”. (The term “the public” is not defined by Alberta’s securities laws. However, there are some court cases that help interpret this term.) The private issuer exemption also allows transfers of securities among the list of permitted investors. 

Unlike most other prospectus exemptions that can be used to raise money, if a business uses the private issuer exemption, there is no requirement to file a Form 406-F1 Report of Exempt Distribution with the ASC and pay the associated fee.

Securities acquired under this exemption are subject to restrictions on resale.

PRIVATE ISSUER EXEMPTION presentation

This exemption is often relied on to grant stock options or similar compensation-related securities to employees in order to align the employees’ interests with those of the employer. In that respect, it might not strictly-speaking be considered a “capital-raising” prospectus exemption. However, it is worth including here as it is sometimes used to sell securities to directors and executive officers, particularly where the issuer is no longer a “private issuer”.

The employee exemption is set out in Division 4 of National Instrument 45-106 Prospectus Exemptions. It allows an issuer (and a control person of the issuer) to sell or otherwise distribute securities of the issuer to the employees, directors, executive officers and certain consultants of the issuer or its affiliates. It also permits the securities to be distributed or transferred to certain “permitted assigns” of those individuals (or of the individuals' spouses) e.g. plan administrators, RRSPs, RRIFs, TFSA and holding entities.

In addition, in the case of non-reporting issuers, the exemption permits the transfer from a current or former employee, director, executive officer or consultant or their permitted assign to an existing employee, director, executive officer, consultant or their permitted assign. This exemption could be useful to issuers that are no longer “private issuers” but are not reporting issuers.

There are certain conditions when distributing securities to consultants, for example:

• The consultant provides consulting, technical, management or other services and cannot be providing services in relation to a distribution
• There must be a written contract for the services
• The consultant must spend a significant amount of time and attention on the affairs and business of the issuer

This exemption is only available if the securities are acquired voluntarily. Being coerced to buy or accept securities in order to get hired or to keep a job would not be considered voluntary.

There is no specific disclosure required to be provided when relying on this exemption.

When selling securities to directors and executive officers, issuers may prefer this exemption to the family, friends and business associates exemption because:

• there is no requirement to file a Form 45-106F1 Report of Exempt Distribution with or pay a fee to the ASC when this exemption is relied on, and
• if the issuer has been a reporting issuer for at least four months, the securities acquired will generally not be subject to resale restrictions. However, if the issuer is not a reporting issuer, the resale restrictions still continue indefinitely.

The family, friends and business associates exemption is set out in sections 2.5, 2.6 and 2.6.1 of National Instrument 45-106 Prospectus Exemptions (NI 45-106). It permits the distribution of securities of an issuer to certain principals of the issuer, i.e., the issuer’s directors, executive officers, founders and control persons (typically, a holder of 20 per cent of the voting securities).

In addition, it permits the sale of an issuer’s securities to persons or companies that have one of the following relationships with one of those principals:

• a specified family member
• close personal friend
• close business associate

Specified family members include a spouse, parent, grandparent, brother, sister, child or grandchild of a principal or the principal’s spouse.

There is no definition of the terms “close personal friend” and “close business associate”; however, the Companion Policy to NI 45-106 provides certain guidance. Generally:

• A “close personal friend” means an individual who knows the principal well enough and has known them for long enough to be able to assess their capabilities and trustworthiness and to obtain information from them on the investment.
• A "close business associate” means someone who has had sufficient prior business dealings with a principal of the issuer, to be able to assess that person's capabilities and trustworthiness.

It is not enough to simply belong to the same religious organization, team or other group. It is not enough to just be a client or customer. It is not enough to just have a social media connection. There should be a relationship of trust and both parties should believe that such a relationship exists.

If this exemption is relied on for distributions into Saskatchewan or Ontario, a special form of risk acknowledgement is required from the investor.

No commissions or finder’s fees can be paid to the principals of the issuer under this exemption. The payment of a commission to other parties may give rise to concern as to whether the exemption was appropriately relied on as it would be unlikely that a third party would be required to identify an investor who qualified to invest.

An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.

Securities acquired under this exemption are subject to restrictions on resale. In the case of a reporting issuer these will usually continue for a period of four months. In the case of a business that is not a reporting issuer, these resale restrictions continue indefinitely.

FAMILY, FRIENDS and BUSINESS ASSOCIATES EXEMPTION presentation

According to reports of exempt distribution filed with the ASC, the most commonly used prospectus exemption is the accredited investor exemption set out at section 2.3 of National Instrument 45-106 Prospectus Exemptions (NI 45-106).

The principal requirement of this exemption is that the investor be an “accredited investor”.

The definition of “accredited investor” is set out in section 1.1 of NI 45-106. In general terms, it includes various institutions such as banks, trust companies, pension funds, municipalities, certain investment funds, as well as entities (other than investment funds) that have net assets of at least $5 million (as shown on their most recent financial statements). It also includes persons or companies (including individuals) registered, or previously registered, under applicable securities laws in Canada as a dealer or adviser.

The definition also includes individuals where the individual meet certain income or asset tests:

• Based on their own net income if it has exceeded $200,000, before taxes, in each of the two most recent calendar years and the individual reasonably expects to also exceed $200,000 in the current calendar year.
• Based on their combined net income with their spouse if it has exceeded $300,000, before taxes, in each of the two most recent calendar years and the individual reasonably expects to also exceed $300,000 in the current calendar year.
• Based on the aggregate realizable value of financial assets (cash, securities, deposits, contract of insurance) they hold on their own or with a spouse exceeds $1,000,000, calculated before taxes but net of any related liabilities.
• Based on the net assets (any assets) they hold on their own or with a spouse being at least $5,000,000, calculated net of related liabilities.

The definition also contemplates certain companies and trusts (e.g. wholly-owned or directed by accredited investors).

There is no required disclosure document when using this exemption. However, if an investor is an individual then, unless the individual has net financial assets exceeding $5,000,000, the issuer must obtain a specified form of risk acknowledgement from the investor. The required form of risk acknowledgement is Form 45-106F9 Form for Individual Accredited Investors.

An investor investing as an accredited investor must be investing as principal; however, a trust company or registered portfolio manager operating on behalf of a fully managed account of a client is generally deemed to be acting as principal.

The accredited investor exemption is not available for a distribution to a person or company if the person or company was created, or is used, solely to take advantage of the exemption.

An issuer that relies on this exemption must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.

Securities acquired under this exemption are subject to restrictions on resale. In the case of a non-reporting issuer, they will continue indefinitely.

Watch this video - introduction to the accredited investor exemption.

The self-certified investor prospectus exemption was adopted in Alberta and Saskatchewan on March 31, 2021 and amended on July, 28, 2022. The exemption was adopted for a three year period, and will expire on April 1, 2024.  It can be found respectively in Alberta and Saskatchewan Orders 45-538 Self-Certified Investor Prospectus Exemption.

This exemption is intended to allow purchasers who do not meet the financial thresholds or other criteria required to qualify as an accredited investor to participate in private placements alongside accredited investors provided that they meet other criteria intended to demonstrate the purchaser's financial and investment knowledge. The intent of this exemption is for self-certified investors to be treated in a generally similar manner to accredited investors. 

There are three types of investors under this exemption: individual investors, non-individual investors, and qualifying special purpose vehicles (a “Qualifying SPV”, discussed below).

Key elements of the exemption are as follows:

• there is no specified offering document required but an offering from an issuer must be made concurrently with a distribution to an accredited investor.
• a self-certified investor must receive substantially the same information as would be provided to an accredited investor (whether in a distribution by an issuer or in a resale of securities).
• within the prior 36 months, an individual or non-individual self-certified investor must have solemnly declared (before a commissioner for oaths, or if it is to be used outside the province, a notary public) a Statutory Declaration (in the specified form) to which is attached a completed Acknowledgement (in the specified form) that confirms that the individual or non-individual self-certified investor
  • meets the “qualifying criteria” for a self-certified investor, and
  • has read and understood the various risks and investment considerations set out in the Acknowledgement.
• a Qualifying SPV itself is not required to complete a Statutory Declaration or Acknowledgement.

The “qualifying criteria” that an investor must confirm are set out in Annex 2 to the Acknowledgement. In general terms, they include certain financial or investment education or experience such as:

• CFA designation
• CIM designation
• CBV designation
• CPA designation
• CIWM designation
• admitted to practice law in Canada and at least 1/3 of practice relates to securities financings or M&A transactions
• MBA or degree in Finance or in Business or Commerce with a finance or investment specialization
• passed the Canadian Securities Course exam (or the U.S. Series 7 exam and the New Entrants exam) but only if the investor either
  • has had net income of at least $75,000 in the last two years and reasonably expects to have at least that in the current year, or 
  • has had net income of at least $125,000 in the last two years, when combined with a spouse, and reasonably expects to have at least that in the current year

The issuer is not expected to independently verify the matters that the individual or non-individual self-certified investor solemnly declares to in the Statutory Declaration; however, if the issuer knows that the Statutory Declaration is false or would reasonably be expected to know that, it cannot rely on the Statutory Declaration.  Similarly, an issuer can rely on the investor’s representation about the amount invested in other issuers under the exemption, provided that the issuer does not know or would not reasonably be expected to know that the representation is false. 

Under this exemption, investment limits apply to the amount of investment that can be accepted from an investor (1) except in the case of a “Listed Issuer Investment”  and (2) for investments made by Qualifying SPVs. These limits are:

• the total investment by purchaser in that issuer (under this exemption) in the calendar year doesn’t exceed $10,000, and
• the purchaser or non-individual self-certified investor represents to the issuer that the total amount invested by the investor in all issuers (under this exemption and not including Listed Issuer Investments) in the calendar year does not exceed $30,000.

A distribution to a Listed Issuer Investment does not have any investment limits. A "Listed Issuer Investment” refers to an investment where both:

• the issuer’s common shares (or other equity securities) are listed on one of the Canadian stock exchanges (TSX, TSXV, CSE, NEO) and the issuer is not off-side its securities law requirements to file certain periodic and timely disclosure (e.g., financial statements and material change reporting), and 
• the individual or non-individual self-certified investor receives advice from a registered dealer or registered adviser who is qualified to provide the advice (e.g., a mutual fund dealer is not permitted to provide advice except in relation to mutual funds) regarding whether or not the investment is suitable for the investor. 

The exemption also allows for the distribution of securities to a Qualifying SPV, without subjecting the SPV to investment limits outlined below, provided that all of the following conditions apply:

1. Accredited investors and self-certified investors must own all of the interests (direct, indirect or beneficial), except the voting securities that are legally required to be owned by the directors, 
2. The SPV distributes its securities to self-certified investors in compliance with the exemption (meaning that all requirements of the exemption are met when investors invest into the SPV), and
3. Self-certified investors have not contributed in aggregate more than 25% of the total funds invested in the SPV.

The corresponding CSA notice which provides guidance on this exemption explains use of the exemption by a “private issuer”.  In general terms, it provides that a self-certified investor or a Qualifying SPV would be considered “not the public” so that an investment by a self-certified investor or a Qualifying SPV would not by itself prevent the issuer from otherwise being considered a "private issuer".

Except in the case of a “private issuer”, an issuer that relies on this exemption must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.

Securities acquired under this exemption are subject to restrictions on resale. In the case of a non-reporting issuer, these restrictions will continue indefinitely.

If a registered dealer or other registrant is involved with the distribution of securities under the Exemption, the registrant's typical obligations and responsibilities e.g., relating to know-your client, know-your-product, suitability, and conflicts of interest, will continue to apply.

Listed issuer financing exemption and self-certified investor exemption webinar session

Alberta businesses attract significant foreign investment. ASC Rule 72-501 Distributions to Purchasers Outside Alberta (ASC Rule 72-501) 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 the securities laws in the jurisdiction of the purchaser.

When a non-reporting issuer sells securities privately to foreign investors (e.g. not under a prospectus), securities acquired by those investors will generally be subject to restrictions on resale that limit their resale back into Canada. However, resales can generally be made in a market outside of Canada.

In most cases, there will be a requirement to file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days. However, ASC Rule 72-501 provides certain reporting exemptions (e.g. relating to purchaser information).

The exemption in section 2.10 of National Instrument 45-106 Prospectus Exemptions allows a business to sell securities to persons or companies - other than individuals - provided that the acquisition cost is at least $150,000.

The securities must be those of a single issuer and each purchaser must purchase as principal (i.e. on their own account) and the purchaser cannot have been created, or used, solely to take advantage of the exemption.

An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.

Securities acquired under this exemption are subject to restrictions on resale. In the case of a reporting issuer these will usually continue for a period of four months. In the case of a business that is not a reporting issuer, these resale restrictions continue indefinitely.

The offering memorandum (OM) exemption in section 2.9 of National Instrument 45-106 Prospectus Exemptions (NI 45-106) allows a business to sell its securities to the general public without filing a prospectus and becoming a reporting issuer. Although a prospectus is not required, investors must be provided with a disclosure document called an “offering memorandum” (see “What’s the difference between a prospectus and an offering memorandum or other offering document?” under this section).

Form of offering memorandum

Assuming that the issuer is not a reporting issuer, the offering memorandum must be prepared in accordance with the requirements of Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers.

The offering memorandum is required to describes the business, its management, the offering and the risks and, significantly, requires that audited annual financial statements of the business be included.

Looking for an example of a form of offering memorandum to use under the offering memorandum exemption? The ASC doesn’t recommend or endorse any particular issuer’s offering memorandum however, you can find examples that have been filed by others by searching the SEDAR website.

Click on “Search Database” then click on either:

• “Search for COMPANY Documents” if looking for examples from issuers that are not an investment fund
• “Search for INVESTMENT FUND Documents” if looking for examples from investment funds

Under Document Type, search for the type of offering document and specify the time period.

We encourage issuers to seek advice from qualified legal counsel to assist them in preparing an offering memorandum.

Risk acknowledgement

An issuer relying on the OM exemption must also obtain a specified risk acknowledgement form from each investor. The required form of risk acknowledgement is Form 45-106F4. There are two schedules to Form 45-106F4 that must be completed by investors that are individuals. One schedule asks the investor to indicate whether they are an “eligible investor”, an “accredited investor” (see "Accredited Investor exemption" under this section), an investor that would qualify under the family, friends or business associates exemption (see "Family, Friends and Business Associates exemption" under this section) or an investor that is none of those. The other schedule requires the investor to acknowledge that in certain circumstances there are limits on how much they can invest and confirm that limit has not been exceeded.

Limits on who can use the exemption

In Alberta, the offering memorandum exemption is not available for use by a mutual fund, other than a mutual fund that is a reporting issuer. In some jurisdictions (e.g. Ontario), the exemption is not available to any investment funds. The exemption is not available for the sale of a short-term securitized product, a specified derivative or a structured finance product.

Investor rights

Similar to a prospectus, an investor investing under the offering memorandum exemption can sue the issuer and its directors, CEO and CFO if the offering memorandum or any marketing materials used in association with the offering memorandum contains a misrepresentation. Investors also have a two day "cooling off period" in which they can cancel their investment.

Investment limits

The OM exemption is designed to facilitate capital-raising by allowing businesses to solicit investments from a wider range of investors than under other prospectus exemptions. However, because the offering disclosure may be less extensive than a prospectus and the issuer will not become a reporting issuer, there are limits that apply on how much can be invested by individuals. The limits vary depending on the financial circumstances of the investor, their relationship to the issuer, and whether or not they have received advice from a registered dealer regarding the suitability of the investment.

There are no investment limits under the OM exemption for investors:

• that are not individuals,
• that are accredited investors (see “Accredited Investor exemption” under this section) or
• who would qualify to invest under the Family, Friends and Business Associates exemption.

Unless one of those exceptions apply, the investment limits under Alberta securities law for individuals are as follows:

• For an individual that does not meet the definition of an “eligible investor”, the purchase price for all securities purchased under the exemption in the preceding 12 months cannot be more than $10,000.
• For an investor that meets the definition of an “eligible investor”, the purchase price for all securities purchased under the exemption in the preceding 12 months cannot be more than $30,000.
• For an eligible investor that receives advice from a portfolio manager, investment dealer or exempt market dealer that an investment above $30,000 is suitable, the price for all the securities purchased by the investor under the exemption in the preceding 12 months cannot be more than $100,000.

The term “eligible investor” is defined in National Instrument 45-106 Prospectus Exemptions and may vary slightly between jurisdictions. Under Alberta securities law, the term “eligible investor” generally refers to an individual whose:

• net assets, alone or with a spouse, exceed $400,000.
• net income before taxes exceeded $75,000 in each of the two most recent calendar years and who reasonably expects to exceed that level in the current calendar year, or
• net income before taxes, alone or with a spouse, exceeded $125,000 in each of the two most recent calendar years and who reasonably expects to exceed that income level in the current calendar year.

Not all jurisdictions of Canada impose these same investment limits under the offering memorandum prospectus exemption. In order to reduce regulatory burden for Alberta issuers, section 7 of ASC Rule 72-501 Distributions to Purchasers Outside Alberta allows an Alberta issuer to sell securities to a Canadian investor who is not a resident of Alberta by complying with the terms of the offering memorandum exemption as it exists in the jurisdiction in which the investor is resident.

Ongoing filing requirements

Although the OM exemption allows sales of securities to the general public, using the OM exemption will not result in the issuer becoming a reporting issuer. However, after using the exemption, the business will be required to annually file audited financial statements and a notice of its use of proceeds prepared in accordance with Form 45-106F16 Notice of Use of Proceeds.

If the exemption is used in New Brunswick, Nova Scotia or Ontario, the business will also be required to provide notice of certain "significant events" by filing a Form 45-106F17 NB, NS & ON Notice of Specified Key Events.

Reporting use of exemption

An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.

Resale restrictions

Securities acquired under this exemption are subject to restrictions on resale (see "Restrictions on reselling securities acquired under prospectus exemptions"). In the case of a reporting issuer, these will usually continue for a period of four months. In the case of a business that is not a reporting issuer, these resale restrictions continue indefinitely.

Another option for businesses that want to raise money from the general public but one that might be less expensive than using a prospectus or the offering memorandum exemption, is the start-up crowdfunding regime. The offering document required under the start-up crowdfunding regime is less extensive than an offering memorandum under the offering memorandum exemption and, significantly, is not required to contain any financial statements. Further, use of the start-up crowdfunding regime does not trigger a requirement under securities law to continue to file annual audited financial statements. (Note, however, that a requirement may exist under applicable corporate law.)

All of the securities regulators in Canada adopted effective September 21, 2021 National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions (NI 45-110) to facilitate crowdfunding by start-up or early stage businesses. 

This is not the only exemption (see “Online financing/Crowdfunding”) that can be relied on for crowdfunding but it is one that was especially designed with early stage businesses that have crowdfunding in mind.

The key conditions of the start-up crowdfunding prospectus exemption are as follows:

• The securities must be distributed through an online funding portal that is either registered as a dealer or that is relying on the dealer registration exemption provided in NI 45-110 .
• The issuer must provide investors with an offering document that complies with Form 45-110F1, which includes certain information about its business, its management and the offering, including how it intends to use the funds raised, and the minimum offering amount.
• The issuer’s head office must be in a jurisdiction of Canada.
• The issuer can sell only "simple" securities (i.e. common shares, non-convertible preferred shares, securities that can be converted into any of those, non-convertible debt, certain shares of cooperatives and limited partnership units).
• Each investor must confirm they have read and understood the offering document and the risk warning that is in the form specified by Form 45-110F2.
• The issuer, including other members of its “issuer group” (i.e. the issuer, each affiliate of the issuer and any other issuer that is engaged in a common enterprise with the issuer or who has a founder that is also a founder of the issuer), can raise up to a maximum of $1,500,000 in 12 months.
• The maximum investment by any investor in an offering is $2,500 unless the investor receives advice from a registered dealer that the investment is suitable for them, in which case an investment of $10,000 can be made.
• The offering must close within 90 days.
• Principals of the issuer cannot be principals of the funding portal.
• The offering document is deemed to be an offering memorandum which means that investors have a 2 day period in which to cancel their agreement to purchase securities and have a special statutory right to sue for damages or rescission in the event there is a misrepresentation in the offering document. 

A funding portal operating under the start-up crowdfunding regime must either be registered as a dealer or rely on an exemption from the registration requirement. A funding portal operating under a registration exemption is subject to certain conditions, including a prohibition on offering investment advice.

We understand that the following funding portals are operating in Alberta offering securities under the start-up crowdfunding regime:

The ASC doesn’t recommend or endorse any particular funding portal.

There are other funding portals offering securities under other prospectus exemptions. You can check the CSA’s Check Registration site to see whether a funding portal is registered as a dealer. (That site does not identify funding portals operating under an exemption from registration.)

An issuer that relies on the start-up crowdfunding regime, must file a Form 45-106F1 Report of Exempt Distribution (see “What are the required Forms and Filings?") with the ASC (and each other jurisdiction in which the distribution occurred) within 30 days.

Securities acquired under this exemption are subject to restrictions on resale. These resale restrictions will continue indefinitely unless the issuer becomes a reporting issuer.

Looking for an example of a form of offering document to use under the start-up crowdfunding regime?

The ASC doesn’t recommend or endorse any particular issuer’s offering document, however, you can find examples that have been filed by others by searching the SEDAR+ website.

Click on “Search Database”  then click on either:

• “Search for COMPANY Documents” if looking for examples from issuers that are not an investment fund
• “Search for INVESTMENT FUND Documents” if looking for examples from investment funds

Under Document Type, search for “offering document” and specify the time period.

The securities regulators in all of the jurisdictions of Canada adopted National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions effective September 21, 2021. That instrument expanded the start-up crowdfunding regime across Canada and liberalized the investment and offering limits that previously existed. 

ASC Blanket Order 45-521 Start-up Crowdfunding Registration and Prospectus Exemptions was the local predecessor to NI 45-110. By its terms it was designed to expire 90 days following the effective date of NI 45-110, i.e., on December 20, 2021.

Another prospectus exemption that is targeted at start-up and early stage businesses, but that is available only in Alberta and Saskatchewan, is the exemption provided by ASC Blanket Order 45-539 Small Business Financing (and Saskatchewan General Order 45-539 Small Business Financing). 

This exemption is not available to investment funds or reporting issuers.

The key conditions of the start-up business exemption are as follows:

• The issuer’s head office must be in Alberta or Saskatchewan.
• The issuer must provide investors with an offering document that complies with Form 45-539F1 Small Business Offering Document, which includes certain information about its business, its management and the offering, including how it intends to use the funds raised, and the minimum offering amount.
• The issuer can sell only "simple" securities that meet the definition of “Eligible Security”.
• Each investor must confirm they have read and understood the offering document and the enhanced risk warning in Form 45-539F2 Small Business Risk Acknowledgement.
• If the issuer, including other members of its “Issuer Group” (i.e. the issuer, each affiliate of the issuer and any other issuer that is engaged in a common enterprise with the issuer or who has a founder that is also a founder of the issuer), raises less than $1,500,000 under the exemption in a 12-month period (not including investments by investors who are qualified to invest under one of the other prospectus exemptions contemplated in the exemption) (a Tier 1 Raise) financial statements are not required to be provided with the offering document.
• If the Issuer Group raises more than $1,500,000 under the exemption in a 12-month period (not including investments by investors who are qualified to invest under another exemption specified in the exemption) (a Tier 2 Raise) financial statements are required to be provided with the Offering Document. However:
  • rather than providing financial statements prepared in accordance with generally accepted accounting principles (GAAP) for publicly accountable enterprises, the issuer may provide financial statements prepared in accordance with Canadian GAAP for private enterprises, provided that any subsidiaries are consolidated and any significantly influenced investees and joint ventures are accounted for using the equity method; and
  • rather than providing audited annual financial statements, the issuer may provide annual financial statements that have been subject to a review engagement by a chartered professional accountant.
    (together, the Specified Financial Statements).

For a Tier 1 Raise, the maximum that an investor (who would not qualify to invest under another specified exemption) could invest in the Issuer Group in a 12 month period is

• $2,500, or
• $10,000 if either:
  • the investor is a “Minimum Income Investor” (as defined in the exemption generally as those having had for the last two years’ annual net income in excess of $75,000 or $125,000 with their spouse and, in the case of non-individuals, generally to persons or companies that are controlled by a Minimum Income Investor), or
  • the investor has obtained advice from a registered dealer that the investment is suitable for the investor.

For a Tier 2 Raise, the maximum that a investor (who would not qualify to invest under another specified exemption) could invest in the Issuer Group in a 12 month period is:

• $5,000, or
• $20,000 if either:
  • the investor is a Minimum Income Investor, or
  • the investor has obtained advice from a registered dealer that the investment is suitable for the investor.

• The aggregate lifetime maximum that an Issuer Group can raise under the exemption from investors who would not qualify to invest under another specified exemption is $5,000,000.
• The offering must close within 120 days.
• For a Tier 2 Raise, the issuer must deliver to the applicable securities regulators an undertaking as specified by Form 45-539F3 Small Business Undertaking to deliver annually its annual financial statements and to file a Form 45-106F16 Notice of Use of Proceeds and make them both reasonably available to each holder of a security distributed under the exemption. The annual financial statements may be Specified Financial Statements.

This exemption has many similarities to the start-up crowdfunding regime e.g., a streamlined offering document without a requirement for financial statements (below certain limits). However, there are a few key distinctions:

• There is the additional flexibility of doing a Tier 2 Raise, which allows issuers to raise up to $5M if they provide the Specified Financial Statements.
• The issuer is not required to conduct the distribution through an online funding portal.
• There is no corresponding dealer registration exemption.
• The required form of offering document and risk acknowledgement have some differences.
• There are certain ongoing reporting requirements when an issuer does a Tier 2 Raise.

An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 30 days.

Securities acquired under this exemption are subject to restrictions on resale. These restrictions will continue indefinitely unless the issuer becomes a reporting issuer.

Cooperatives can use any of the common capital raising exemptions described above; however, cooperatives incorporated under the Cooperatives Act (Alberta) can also use exemptions intended solely for cooperatives.

Section 2.1 of  ASC Rule 45-511 Local Prospectus Exemptions and Related Requirements contains special prospectus exemptions that permit these cooperatives to sell member shares and investment shares in certain circumstances.

There is no prescribed disclosure document required. Further, there is no requirement to file a Form 45-106F1 Report of Exempt Distribution with the ASC and pay the associated fee when these exemptions are used.

Section 2.1 of NI 45-106 Prospectus Exemptions provides an exemption that allows an issuer - provided it is a reporting issuer - to distribute rights to acquire additional securities to its securityholders. Generally, those rights are distributed on a pro rata basis to existing security holders.

One of the key conditions to this exemption is that the business has to be current in its continuous disclosure obligations. Investors are provided with similar statutory rights to those they would have if they acquired the securities in the secondary market.

In lieu of a prospectus, the issuer is required to:

• file an abbreviated circular prepared in accordance with Form 45-106F15 Rights Offering Circular for Reporting Issuers, and
• file and send to securityholders a notice prepared in accordance with Form 45-106F14 Rights Offering Notice for Reporting Issuers providing notice to securityholders of how to access the circular.

The rights offering exemption has a few key distinctions from other capital raising exemptions: 

• the exemption is intended to be for distributions to existing security holders
• investors will generally obtain free-trading securities, similar to securities sold under a prospectus
• there is no requirement to file a 45-106F1 Report of Exempt Distribution following use of this exemption

Because the securities are offered to all existing security holders, in proportion to their existing holdings, if the issuer’s securities are listed on a stock exchange, the exchange may have more liberal rules with respect to pricing of the securities than would apply to other financings.

ASC Rule 45-516 Prospectus Exemptions for Retail Investors and Existing Security Holders (ASC Rule 45-516) 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 listed, reporting issuer has to be current in its continuous disclosure obligations and trading in its securities must not be suspended for failure to comply.

The issuer must issue a news release providing information about the financing and confirming that there is no misrepresentation in its continuous disclosure. The business can only sell the same type of securities as are listed on the exchange or a combination of those securities and warrants.

An issuer can rely on these exemptions to sell:

• up to $15,000 of securities to an existing security holder
• an unlimited amount of securities to an existing security holder who received suitability advice from a registered investment dealer
• up to $15,000 of securities to a new investor who received suitability advice from a registered investment dealer

Any offering material (other than a subscription agreement) provided to an investor must be filed with the ASC when the material is first provided to an investor.

These exemptions allow a public distribution of securities without requiring the issuer to provide a specified disclosure document. The exemptions contemplate that investors will rely on the continuous disclosure available about the issuer. Investors are provided rights of action similar to those they would have if they acquired securities in the secondary market and the issuer is required to represent to investors that certain of the issuer’s core continuous disclosure documents do not contain a misrepresentation and that the issuer has not failed to disclose any material information.

Similar prospectus exemptions exist in the other jurisdictions of Canada to facilitate the sale of securities to existing security holders. See:

• Multilateral CSA Notice 45-313 Prospectus Exemption for Distributions to Existing Security Holders
• OSC Rule 45-501 Ontario Prospectus and Registration Exemptions in respect of the existing securityholder exemption (note that link is to the most recent unofficial consolidation) 
• Multilateral CSA Notice 45-318 Prospectus Exemption for Certain Distributions through an Investment Dealer

CSA Notice 45-321 Frequently Asked Questions about the Investment Dealer Prospectus Exemption addresses many of the common questions raised by issuers looking to use the investment dealer exemption.

An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.

Securities acquired under these exemptions are subject to restrictions on resale that will typically expire after four months.

The listed issuer financing exemption is an addition to National Instrument 45-106 Prospectus Exemptions (NI 45-106), at section 5A.2. The exemption is meant to provide a method of capital raising for reporting issuers that have securities listed on a Canadian stock exchange, without requiring a prospectus. The cost to prepare even a short form prospectus can be a roadblock for capital raising, particularly for smaller issuers, and the exemption was designed with this in mind.

The exemption relies on the issuer’s continuous disclosure record, supplemented with a short offering document that is not intended to be more than five pages. This offering document is meant to be concise and easy to understand.

This exemption allows issuers to distribute freely tradeable listed equity securities to the public, subject to the following:

• The issuer must have been a reporting issuer in a jurisdiction of Canada for at least 12 months.
• The issuer must have listed equity securities on a Canadian stock exchange.
• The issuer must have filled all periodic and timely disclosure that is required.
• Before soliciting an offer to purchase, the issuer must issue a news release and the issuer must close the financing with 45 days of the news release.
• The amount raised, combined with the dollar amount of all other distributions made by the issuer during the 12 months immediately before the date of the news release:
  • is the greater of $5 million or 10% of the issuer’s market capitalization to a maximum total dollar amount of $10 million, in any 12 month period, and
  • must not result in an increase of more than 50% in the issuer's outstanding listed equity securities, as of the date that is 12 months before the date of the news release announcing the distribution.
• The issuer must file a Form 45-106F19 Listed Issuer Financing Document, the offering document under this exemption, which includes information about the business, the securities being offered, the use of proceeds and the statutory rights available to purchasers, among other things. This issuer must ensure that all material facts are discussed and the form does not contain a misrepresentation.

The issuer must have active business operations, and that must have been the case for the 12 months preceding the filing of the news release announcing the distribution. The exemption cannot be used by an issuer whose operations have now or within the last 12 months ceased or whose principal asset is cash, cash equivalents or its exchange listing (e.g. a shell company). The exemption also cannot be used if this was the case for any person or company with whom the issuer completed a restructuring transaction during the past 12 months.

The issuer must reasonably expect that it will have available funds to meet its business objectives and liquidity requirements for a period of 12 months following the distribution. The proceeds of funds raised under this exemption may not be used to finance a significant acquisition, restructuring transaction or any other transaction that requires approval of any security holder. In that case, would expect the issuer to use the prospectus regime in that base in order to ensure potential purchasers have full, true and plain disclosure about the intended use of the proceeds. The purpose of these requirements is to ensure that an issuer using the exemption has an operating business that is already described in the issuer’s current disclosure.

This exemption is not available to investment funds.

An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.

The exemption is an exemption from the prospectus requirement only; it does not provide an exemption from the dealer registration requirement.

Securities acquired under this exemption do fall under the restrictions on resale regime, in that first trades are subject to a four month seasoning period. However, “seasoning period” refers to the time since the issuer became a reporting issuer. In the case of this exemption, as issuer must have been a reporting issuer for 12 months, so the four month seasoning period would always be met. Therefore, resale restrictions as they are typically thought of will not apply.

This exemption was recently introduced and came into effect on November 21, 2022.

Listed issuer financing exemption and self-certified investor exemption webinar session