Capital Raising Exemptions

In Canada, shares and other securities to be issued by any organization may only be issued through a qualified prospectus approved by the jurisdiction which a purchaser is resident. There are however, broad exemptions from this prospectus requirement, commonly referred to as “Capital Raising Exemptions”. There are four main Capital Raising Exemptions in use:

  1. Accredited Investor Exemption;
  2. Family, Friends and Business Associates Exemption
  3. Private Issuer Exemption
  4. Offering Memorandum Exemption.

Details of each of these exemptions follows:

1.       Accredited Investor Exemption

Certain investors are deemed to be sufficiently knowledgeable of investment matters that they do not need the protection of the securities legislation.  Accordingly, securities can be sold to these accredited investors at any time, without any particular procedures or disclosure being required under the securities legislation.

It is the Issuer’s responsibility to make sure that the particular purchaser in fact fits within the definition of “accredited investor” (also sometimes referred to as an “exempt purchaser”) in the applicable jurisdiction.  “Accredited Investor” generally includes the following:

  • financial institutions including banks, loan and trust corporations, cooperative credit societies and credit unions, and their respective subsidiaries
  • any national, federal, state, provincial, territorial, or municipal government of Canada or of a foreign jurisdiction including their agencies
  • registered charities under the Income Tax Act (Canada), provided that they have the advice of an eligibility or registered advisors
  • persons registered as securities advisors or dealers and their representatives
  • an individual who, either alone or jointly with their spouse, beneficially owns, directly or indirectly, financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1 million dollars
  • an individual whose net income before taxes exceeded $200,000 in each of the two most recent years, or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent years, and who, in either case, reasonably expects to exceed that net income level in the current year
  • a person or company, other than a mutual fund or non-redeemable investment fund, that has net assets of at least $5 million dollars as shown on its most recently prepared financial statements
  • a mutual fund or non-redeemable investment fund that distributes its securities only to accredited investors or only under a prospectus
  • a person or company in respect of which all the owners of interests, direct or indirect, legal or beneficial, (other than qualifying directors), are persons or companies that are accredited investors.

The Issuer must file a report on the trade with the appropriate Securities Commission within ten days after effecting the trade.

2.    Family, Friends, and Business Associates Exemption

In Ontario, the following persons are deemed to be accredited investors and as such they are exempt purchasers:

  • a promoter of the Issuer or of an affiliated entity of a promoter of the Issuer
  • a spouse, parent, grandparent or child of an officer, director or promoter of the Issuer
  • a person or company that, in relation to the Issuer, is an affiliated entity or control person of the Issuer.

It is important to note that the Ontario exemption does not extend to business associates or in-laws of the officers, directors or promoters.

In jurisdictions, other than Ontario, the following persons are exempt if they purchase the security as principal:

  • directors, senior officers, founders or control persons of the Issuer or of an affiliate of the Issuer
  • a spouse, parent, grandparent, brother, sister or child, or a parent, grandparent, brother, sister or child of a spouse, or a close personal friend, or a close business associate, of a director, senior officer, founder, or control person of the Issuer or of an affiliate of the Issuer
  •  a person or company that is wholly owned by any combination of persons or companies described above.

No commission or finder’s fee may be paid to any director, officer, founder or control person (or to any person in Saskatchewan) in connection with the trade. In Saskatchewan, the Issuer must obtain and retain for 8 years a Risk Acknowledgment form signed by the purchaser. The Issuer must file a report on the trade with the appropriate Securities Commission within ten days after effecting the trade.

3.      Private Issuer Exemption

A “closely held issuer” in Ontario and a “private issuer“ in other jurisdictions, is defined as an issuer, other than a mutual fund or a non-redeemable investment fund whose voting shares are subject to restrictions on transfer, as contained in their constating documents or by agreement of the parties, and whose shares are beneficially owned, directly or indirectly,

  • in jurisdictions other than Ontario, by not more than 50 persons or companies, not counting employees and former employees of the Issuer or its affiliates;
  • in Ontario, by not more than 35 persons or companies not counting accredited investors and current or  former directors, officers or employees of the Issuer or an affiliated entity of the Issuer.

A company which is a private issuer may sell shares in non-Ontario jurisdictions to

  • its directors, officers, employees, founders or control persons;
  • a spouse, parent, grandparent, brother, sister or child, or a parent, grandparent, brother, sister or child of a spouse, or a close personal friend, or a close business associate, of a director, senior officer, founder, or control person of the Issuer or of an affiliate of the Issuer,
  • an accredited investor
  • a person or company that is wholly owned by any combination of persons or companies described above or any person or company that is not the public.

Except for a trade to an accredited investor, no commission or finder’s fee may be paid to any director, officer, founder or control person.  No report on trade is required under the private Issuer exemption.

In Ontario, a closely-held Issuer may issue securities so long as following the trade, the aggregate proceeds received by the Issuer and any other Issuer engaged in a common enterprise under the closely held Issuer exemption, do not exceed $3 million, and no promoter of the Issuer has acted as a promoter of any other Issuer that has issueda security in reliance upon this exemption within the twelve months preceding the trade, and no selling or promotion expenses are paid or incurredin connection with the trade, except for the services performed by a registered dealer.

In addition, at least four days before the trade, the prospective purchaser must be provided with an information statement in prescribedform, unless, following the trade, the Issuer will have not more than five beneficial holders of its securities.  No report on a closely-held issuer trade is required in Ontario.

It is important to note that contrary to Ontario, in other jurisdictions, so long as the Issuer remains a private Issuer, there is no restriction imposed on selling or promotional expenses or the maximum proceeds which may be received.

4.      The Offering Memorandum Exemption

The Offering Memorandum exemption is only available in non-Ontario jurisdictions.  In effect, trades and offerings are exempt from the prospectus requirements of the securities legislation if the Issuer delivers to the prospective purchaser an offering memorandum in prescribed form and obtains a risk acknowledgement form signed by the purchaser.

In jurisdictions other than Ontario, British Columbia, and Nova Scotia, the offering memorandum exemption is restricted to transactions where the purchaser’s aggregate acquisition cost does not exceed $10,000 or where the purchaser is an eligible investor.

An eligible investor is defined as:

  • a person or company whose:
    • net assets alone or with a spouse exceed $400,000;
    • net income before taxes exceeds $75,000 in each of the two most recent years and is reasonably expected to exceed that level in the current year, or
    • net income before taxes combined with that of a spouse exceeds $125,000 in each of the two most recent years and is reasonably expected to exceed that income level in the current year;
  • a person or company where the majority of voting securities are held by eligible investors;
  • a general partnership where all of the partners are eligible investors;
  • a limited partnership where the majority of general partners are eligible investors;
  • a trust or estate where all of the beneficiaries or a majority of the trustees are eligible investors;
  • an accredited investor, or
  • a person or company that has obtained advice regarding the suitability of the investment from a registered advisor or, in Manitoba and Saskatchewan, an eligibility advisor ( a lawyer or accountant).

The offering memorandum must contain a certificate stating: “This offering memorandum does not contain a misrepresentation” and must be signed by:

  • the Issuer’s chief executive officer and chief financial officer,
  • any two directors other than the chief executive officer and chief financial officer, on behalf of the board of directors, and
  • each promoter of the Issuer.

If the certificate ceases to be true after delivery of the offering memorandum, an Issuer cannot accept a subscription unless an updated offering memorandum is delivered to the purchaser and a new subscription agreement is signed.

The subscription price must be held in trust by the Issuer until midnight on the second business day after the purchaser signs the agreement to purchase, and must be returned to the purchaser promptly if the purchaser exercises his right to cancel the agreement before that time.

Finally, the offering memorandum must set out the purchaser’s statutory right of action in the event of misrepresentation, of if there is no such statutory right, must give the purchaser a contractual right of action for rescission and damages.  The right of action for rescission expires 180 days after the purchaser signs the subscription agreement, whereas the right of action for damages expires after the earlier of 180 days after the purchaser first has knowledge of the facts giving rise to the cause of action or three years after the date that the purchaser signedthe subscription agreement.  Damages are limited to the price at which the securities were offered and liability is subject to the defence that the purchaser had knowledge of the misrepresentation.  This statutory or contractual right is in addition to any other rights which the purchaser may have.

The risk acknowledgement in prescribedform basically sets out the rights of the purchaser and must be signedby the purchaser.