Canadian securities commissions protect investors’ interests by regulating the sale of securities.
The misconception that securities laws only apply to public companies leads to many businesses inadvertently violating the law.
If your transaction involves a trade in securities that would be a distribution of securities within the meaning of the Ontario Securities Act (the “Act”), the prospectus requirements will be triggered.
Though the laws in Canada are numerous, varied and complex, the commissions in Canada try to ensure efficient raising of capital by recognizing situations where the prospectus requirements of securities laws are not necessary as alternate protection is available. For these reasons, the Act contains a number of exemptions from the prospectus requirements.
Certain businesses will want to avoid the prospectus requirements of the Act, while ensuring compliance with it, as clearing a prospectus with the Ontario Securities Commission (the “Commission”) can be difficult, expensive and time-consuming. Accordingly, this is where an understanding of the numerous exemptions from the prospectus requirements of the Act are vital as violations of the Act are illegal and may give rise to criminal and civil penalties.
Though not exhaustive, the intent of this article is to highlight an important exemption that can be used by a private issuer, as defined under securities laws, allowing a business to issue and trade securities, of any value (there is no limit on the amount of capital raised under this exemption), to certain specified investors purchasing as principals. This exemption is a valuable window for startups and early stage business to raise capital.
The benefit of using this exemption is that no approval of the Commission is required, no offering memorandum is required and no reports to the Commission are required.
It is possible for businesses to remain private issuers, as defined under securities laws, and never have to use any other exemption. As mentioned, this is a very important window for businesses to raise capital. However, if care is not taken, this opportunity can quickly dissipate because once you lose your private issuer status, for example by distributing securities to a person not specified under the relevant section, you cannot regain it. Though businesses that cease to be private issuers under securities laws will still be able to use other exemptions to distribute their securities, in most cases, the use of these alternate exemptions triggers other requirements; for example, a requirement to file a report of exempt distribution with the securities regulatory authority or regulator in each jurisdiction in which the distribution took place.
Raising capital is a difficult task and trusted advisors are vital in the process.
Authored by Johnny Jaswal, Managing Director of the Jaswal Institute. If you require further information, please contact Johnny Jaswal.