The main conditions of ASC Rule 45-517 are as follows:

• the issuer can only distribute “eligible securities”[1];
• the issuer is an “eligible issuer”, which is an issuer that is not an investment fund or a reporting issuer in a Canadian or foreign jurisdiction;
• the issuer’s head office is located in Alberta or a corresponding jurisdiction;
• the issuer, including other members of its “issuer group”[2], are subject to a $1,000,000 lifetime limit on the amount they can raise under ASC Rule 45-517 and a corresponding start-up exemption;
• the issuer group cannot raise in aggregate more than $250,000 per distribution and is limited to two start-up distributions in a calendar year;
• the issuer must prepare an offering document in the required form, Form 45-517F1 Start-Up Business Offering Document, which includes information about the business, the management, the offering, and the intended use of funds;
• the issuer must provide investors with 48 hours to cancel their agreement to purchase securities;
• the issuer must obtain a signed risk acknowledgement from investors in the required form, Form 45-517F2 Start-Up Business Risk Acknowledgment;
• the maximum amount that an issuer can accept from an investor in a single investment is $1500, unless a registered dealer provides the investor with suitability advice, then the maximum amount increases to $5000 for that investor; and
• the offering must close within 90 days.

[1]  Eligible securities are common shares, non-convertible preference shares, securities convertible into the foregoing, non-convertible debt securities linked to a fixed or floating interest rate, limited partnership units or investment shares that are non-convertible preference shares issued by a cooperative under the Cooperatives Act (Alberta).

[2] An “issuer group” means the issuer together with its affiliate(s), each other issuer that is engaged in a common enterprise with the issuer or its affiliate(s), or each other issuer that has a founder that is the issuer’s founder.

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

The post Alberta Adopts a New Exemption for Start-Up Businesses appeared first on Thauli Law.

Summary of the OM Exemption
The OM exemption will be available across Canada once Ontario adopts its OM exemption. Ontario’s new OM exemption and the amendments in the other Participating Jurisdictions have new conditions including new investment limits, certain continuous disclosure obligations, and rules on marketing material.

New Investment Limits
Individual investors will be limited in the amount that they can invest in any 12 month period in the Participating Jurisdictions. The limits are as follows:
• an investor who is not an “eligible investor” may invest a maximum of $10,000. An “eligible investor” is someone whose (i) net assets, alone or with a spouse, exceed $400,000; or (ii) net income before taxes exceeds $75,000 (or $125,000 with a spouse) for the two previous calendar years, and a reasonable expectation of exceeding those levels in the current calendar year;
• an investor who is an “eligible investor” may invest a maximum of $30,000; and
• an investor who is an “eligible investor” and receives suitability advice from a registered professional may invest a maximum of $100,000.

If, for example, an eligible investor invests $15,000 under the OM exemption in a Participating Jurisdiction, that investor may invest a maximum of an additional $15,000 in any other issuer under the OM exemption during the following year.

There will be no investment limits on non-individual investors such as companies or investors who satisfy other prospectus exemptions such as the accredited investor exemption or the family, friends and business associates exemption.

Please note that in British Columbia and Newfoundland, there is no limit on investment by non-eligible investors whereas in Manitoba, PEI, and the Territories, the investment limit is different from the Participating Jurisdictions.

Continuous Disclosure Obligations
Other than Nova Scotia, non-reporting issuers that use the OM exemption must file with or deliver to the securities regulator in the Participating Jurisdiction annual audited financial statements within 120 days of that issuer’s year-end together with a notice that describes how the money raised under the OM exemption has been used. These issuers must make the audited annual financial statements “reasonably available” to investors.

In New Brunswick, Nova Scotia and Ontario, non-reporting issuers will also be required to provide notice to investors of a discontinuation of the issuer’s business, a change in the issuer’s industry, or a change of control of the issuer, within 10 days of the event occurring.

Marketing Materials
Marketing materials used by issuers in distributions under the OM exemption must be incorporated by reference into the OM. The purpose of incorporating by reference is to give investors a right of action against the issuer in the event of a misstatement in the marketing materials.

Issuers will have to file with or deliver to the securities regulator of the Participating Jurisdiction these marketing materials.

Risk Acknowledgement Form
Two new schedules have been added to the risk acknowledgement form. One schedule asks investors to confirm their status, as an eligible investor, a non-eligible investor, an accredited investor, or an investor who would qualify to purchase securities under the family, friends and business associates exemption. The other schedule requires confirmation that the investment is within the limits, where applicable. Non-individual investors do not have to complete these schedules.

Other Amendments
Issuers will be not be able to use the OM exemption to distribute specified derivatives or structured finance products in the Participating Jurisdictions. In Alberta, Nova Scotia and Saskatchewan, the OM exemption will continue to be available to investment funds only if they are non-redeemable investment funds or mutual funds that are reporting issuers. In New Brunswick, Ontario and Québec, the OM exemption will not be available to investment funds.

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.

The post The Offering Memorandum Exemption is Introduced in Ontario and Amended in Five Provinces appeared first on Thauli Law.

• Non-investment fund issuers raised approximately $41 billion through prospectus-exempt distributions in Ontario from approximately 22,000 purchases made by Ontario residents.
• The accredited investor exemption was the most widely used prospectus exemption in Ontario. In 2014 it represented 92% of the capital raised, 74% of filings and almost two-thirds of purchases.
• The minimum amount investment exemption was the second most used prospectus exemption by number of filings and amount raised.
• Although equity securities represented close to two-thirds of purchases and filings, debt-related securities raised a larger proportion of capital (approximately 68%).
• Issuers in the energy and materials industry group were the most active group of non-financial issuers in the exempt market.
• Only about a quarter of the capital raised was by reporting issuers.
• Among filings by non-reporting issuers, only about half were from issuers that were headquartered in Canada.

Most of the prospectus exemptions are now in force in Ontario except for the offering memorandum (OM) and the crowdfunding exemptions, which are expected to come into force in January 2016 as set out in the below table:

The OSC is currently developing a compliance and oversight program to monitor distributions under the OM and crowdfunding exemptions.

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.

The post The Ontario Securities Commission (OSC) – Exempt Market Review appeared first on Thauli Law.

The summaries include the following information about the distribution:
• the submission date of the report;
• the name of the issuer of the securities;
• the distribution date (or first distribution date where there are multiple distribution dates identified in a single report);
• the amount of capital raised in Ontario; and
• the number of purchasers in Ontario.

The summaries are in an Excel format to facilitate access to and analysis of data.

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.

The post The Ontario Securities Commission Post Summaries of Reported Exempt Distributions appeared first on Thauli Law.

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.

The post Securities Law and Equine Law – There is a Connection! appeared first on Thauli Law.

Certain key conditions of the prospectus exemption in BCI 45-535 are as follows:

• the issuer distributes its own eligible security through an online funding portal, which is relying on the registration exemption or operated by a registered dealer;
• an issuer is required to use an offering document in the required form to conduct the distribution and make it available to an investor through the funding portal’s website;
• the issuer’s head office is located in a participating jurisdiction;
• the issuer may raise a maximum of $250,000 per offering and is restricted to no more than two distributions in a calendar year;
• an investor may not invest more than $1,500 per distribution;
• the distribution may remain open up to a maximum of 90 days from the first date the offering document is made available on its funding portal’s website;
• the issuer is required to provide each investor with a contractual right to withdraw his/her offer to purchase securities within 48 hours of the purchaser’s subscription or notification to the purchaser of an amendment to the offering document; and
• none of the promoters, directors, officers and control persons (collectively, the principals) of the issuer is permitted to be a principal of the online funding portal.

The securities are subject to resale restrictions. They can only be resold under another prospectus exemption, under a prospectus, or four months after the issuer becomes a reporting issuer.

Certain key conditions of the registration exemption in BCI 45-535 are as follows:

• the funding portal must deliver the required forms for the funding portal and each of the principals to the BC Securities Commission at least 30 days before facilitating its first start-up crowdfunding distribution;
• the head office of the funding portal is located in Canada and the majority of its directors are Canadian residents;
• the funding portal does not provide advice to a purchaser or otherwise recommend or represent that a security is suitable;¹
• the funding portal does not receive a commission, fee or any other amount from an investor;
• the funding portal does not allow a subscription until the investor has confirmed that he/she has read and understood the offering document and the risk warnings;
• the funding portal receives payment electronically through the funding portal’s website and is required to hold the investors’ assets separate and apart from its own property, in trust for the investors and, in the case of cash, at a Canadian financial institution; and
• the funding portal is required to provide an investor with a contractual right to withdraw within 48 hours of the subscription, or return the funds to all investors if the minimum offering amount is not reached.

BCI 45-535 will expire on May 13, 2020.

The Canadian Securities Administrators and the participating jurisdictions are continuing to work with the Ontario Securities Commission in developing proposals for an “integrated crowdfunding proposal” under a multilateral instrument. When adopted, this integrated crowdfunding exemption will apply to both reporting and non-reporting issuers and have a higher offering limit of $1.5 million.

A Few Additional Thoughts

It will be interesting to watch how the crowdfunding craze will unfold. There is no doubt that many investors will believe they are making a worthwhile investment that will eventually generate a large return while not fully comprehending the risky nature of crowdfunding. Most start-up businesses are unfortunately doomed for failure right from the outset. Many of these entrepreneurs have grandiose ideas but lack the business acumen to develop or implement their ideas – lots of puffery but no execution.

Adding to the risk is the online nature of crowdfunding. Although the regulatory authorities in the participating jurisdictions are no doubt high-fiving each other for introducing an exemption that reflects the growth in social media and the US JOBS Act, they obviously did not think about the potential consequences of allowing online investing. Any unscrupulous con artist can make a convincing pitch for support on the Internet – the scripts should be entertaining! They will also have access to potential investors worldwide. This is so despite the condition in the registration exemption that con artists are required to take “reasonable measures” to ensure that an investor is resident in a participating jurisdiction where the offering document is made available.

You may be thinking that the regulators will screen principals by reviewing the individual forms that they are required to file. This is assuming someone is assigned to review them. The form is, however, relatively basic and asks the principal to check a yes or no box to whether he/she has committed any criminal or civil offence. That said, it is comforting to know that even a con artist has to sign the certification page, which states: “IT IS AN OFFENCE TO MAKE A MISREPRESENTATION IN THIS FORM” in bold.

Another risk is that investors will not really know how their money is being spent. The issuer is required to provide information on its intended use of proceeds raised in the offering document. There is no doubt that a lot of money will be used for “marketing”, that is, wild parties in Vegas and extravagant business trips to the Caribbean and “salaries”. Why not pay your spouse $200,000 per year for watering the plants if you can? We’ve already seen this happen during the tech boom. The point is the issuer is not required to provide investors with financial statements at the point of sale or on an ongoing basis.

You are probably thinking, but hold on, there are monetary limits. It is true that that BCI 45-535 and the other local blanket orders stipulate $250,000 is the maximum per offering and investors may only invest $1,500 per distribution. However, it is not entirely clear how the regulators intent to enforce these limits. There has certainly not been any discussion on this point from any of them. Therefore, it is doubtful that an investor would be prevented from investing more than $1,500. In any event, the investor could, for example, invest $1,500 for himself and each of his 25 children.

All of this to say that these potential risks are not good for investors but great for defence lawyers. We should look forward to receiving bulletins on this issue from the Enforcement Directors of the participating jurisdictions.

I am not opposed to the crowdfunding exemption although it probably sounds like I am. There are indeed legitimate start-up businesses that will benefit from this exemption. I am hopeful, too that it will help generate work in our otherwise flat securities industry. I simply wanted to point out that there are potential risks and the likelihood of success for most of these businesses is unfortunately minimal. It may be that investors would have better odds wagering on the worst nag at Hastings Park.

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.

1. The online funding portal is required to deliver the required forms to the securities regulatory authority of Saskatchewan, Manitoba, Québec, New Brunswick or Nova Scotia if it intends to operate in any of these jurisdictions.

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