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 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 people or companies that have one of the following relationships with one of the principals:
- specified family member
- close personal friend
- close business associate
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 individual is or has been registered under securities law as an adviser or dealing representative with an investment dealer, exempt market dealer or mutual fund dealer.
- The individual has net realizable financial assets (i.e. cash and liquid securities only, not other assets) in excess of $1,000,000 before taxes, net of any related debts.
- The individual has earned net income before taxes of more than $200,000 in each of the two most recent calendar years or, whose net income combined with their spouse in each of the two most recent calendar years exceeded $300,000. In either case, there is a reasonable expectation that net income level will continue or be exceeded.
- The individual has net assets (all assets can be included) of $5,000,000 or more.
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.
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.
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.
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 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.
Securities sold under this exemption are subject to restrictions on resale.
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:
- The head office of the company must be located in Alberta, or in the case of a crowdfunding offering, Alberta, British Columbia or Saskatchewan.
- The business must prepare an offering document with the information specified by Form 45-517F1. The required offering document is simpler than an OM and, significantly, does not require financial statements to be included.
- The maximum that can be raised in any one offering is $250,000 and no more than $500,000 in a year.
- The total lifetime amount that can ever be raised under this exemption is $1,000,000.
- An investor can invest up to $1,500 or if a registered dealer provides advice that the investment is suitable to the investor, up to $5,000.
- If a crowdfunding portal is used, the portal must be a registered dealer.
- Purchasers have 48 hours to cancel their agreement to purchase securities.
- The business must obtain from each investor a risk acknowledgement form (Form 45-517F2), that explains certain risks of investing and acknowledges having read and understood the contents of the form.
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.
Securities sold under this exemption are subject to restrictions on resale.