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An avid racetrack fan decides that she would like to own her own race horses, but the problem is she doesn’t have enough money to pay for their training and boarding as well as all of the entrance fees. As she contemplates how to fulfill her dream of owning horses, it strikes her that if she incorporates a company, she could then sell shares to raise money. The proceeds would be used to care for, train and enter the horses in races. She remembers, however, that her friend, a securities lawyer once told her that certain rules have to be followed before the sale of any shares.

The shares described in this scenario fall within the definition of a “security” in the provincial Securities Acts across Canada. Before the sale of any shares, the person wanting to sell the shares must file a prospectus unless she is relying on an exemption from that requirement. Since the avid racetrack fan in this example would only sell to people she knows, there is an exemption available to her in National Instrument 45-106 – Prospectus and Registration Exemptions (“NI 45-106”), which is law across Canada. Section 2.20 of NI 45-106 is known as the “private investment club” exemption and would permit our racetrack fan to sell shares to certain people who are not considered members of the “public” such as those related to her, close personal friends or close business associates. Although it may sound simple, I highly recommend speaking to an experienced securities lawyer who can guide you through the complicated world of securities regulation. More often than not, I’ve seen many people try to figure out the rules on their own only to find themselves explaining their intentions before an investigator in the Enforcement department of a securities regulator.

This article contains general information only and is not intended to provide a legal opinion or advice. Please consult a lawyer or compliance advisor for matters related to your situation before relying on any of the statements made in this article.