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Disclaimer: The following information is intended only as general introductory information to address some common questions. It is not intended to be and must not be relied on as legal advice. Please refer to the specific provisions of Alberta securities laws. We encourage you to seek legal advice from legal counsel familiar with Alberta securities laws.
There are a variety of different prospectus exemptions for different types of transactions. This section focuses on those prospectus exemptions that are most commonly used as a means to raise capital by small businesses.
The prospectus exemptions in Alberta that are commonly relied upon by small businesses for capital raising are:
Cheat sheet: Private company capital-raising prospectus exemptions at a glance
This table provides a quick summary comparison of the key features and requirements of the common capital raising exemptions available under Alberta securities law for businesses that are not reporting issuers. Further details about each of the exemptions are available below.
CHEAT SHEET: Private company capital-raising prospectus exemptions at a glance
The private issuer exemption is the exemption that most small businesses will use first when they are just incorporating or organizing their business and getting their initial seed investment. Businesses may have relied on this exemption without even knowing they were subject to securities law.
The private issuer exemption has two main requirements:
Requirement #1: Key aspects of the “private issuer” definition
(Note: An investment fund may be able to rely on a similar exemption that is provided for private investment clubs. See section 2.20 of National Instrument 45-106 Prospectus Exemptions.)
Requirement #2: The business can only sell securities to a specific list of investors as identified in section 2.4 of National Instrument 45-106 Prospectus Exemptions.
In general terms, that list includes:
An issuer that ceases to be a private issuer can still sell its securities to many of the same people by relying on the accredited investor or family, friends and business associates exemption. However, the private issuer exemption affords a bit of additional flexibility e.g. allowing the sale of securities to existing security holders and to any one else who is “not the public”. (The term “the public” is not defined by Alberta’s securities laws. However, there are some court cases that help interpret this term.) The private issuer exemption also allows transfers of securities among the list of permitted investors.
Unlike most other prospectus exemptions that can be used to raise money, if a business uses the private issuer exemption, there is no requirement to file a Form 406-F1 Report of Exempt Distribution with the ASC and pay the associated fee.
Securities acquired under this exemption are subject to restrictions on resale.
PRIVATE ISSUER EXEMPTION presentation
This exemption is often relied on to grant stock options or similar compensation-related securities to employees in order to align the employees’ interests with those of the employer. In that respect, it might not strictly-speaking be considered a “capital-raising” prospectus exemption. However, it is worth including here as it is sometimes used to sell securities to directors and executive officers, particularly where the issuer is no longer a “private issuer”.
The employee exemption is set out in Division 4 of National Instrument 45-106 Prospectus Exemptions. It allows an issuer (and a control person of the issuer) to sell or otherwise distribute securities of the issuer to the employees, directors, executive officers and certain consultants of the issuer or its affiliates. It also permits the securities to be distributed or transferred to certain “permitted assigns” of those individuals (or of the individuals' spouses) e.g. plan administrators, RRSPs, RRIFs, TFSA and holding entities.
In addition, in the case of non-reporting issuers, the exemption permits the transfer from a current or former employee, director, executive officer or consultant or their permitted assign to an existing employee, director, executive officer, consultant or their permitted assign. This exemption could be useful to issuers that are no longer “private issuers” but are not reporting issuers.
There are certain conditions when distributing securities to consultants, for example:
This exemption is only available if the securities are acquired voluntarily. Being coerced to buy or accept securities in order to get hired or to keep a job would not be considered voluntary.
There is no specific disclosure required to be provided when relying on this exemption.
When selling securities to directors and executive officers, issuers may prefer this exemption to the family, friends and business associates exemption because:
The family, friends and business associates exemption is set out in sections 2.5, 2.6 and 2.6.1 of National Instrument 45-106 Prospectus Exemptions (NI 45-106). It permits the distribution of securities of an issuer to certain principals of the issuer, i.e., the issuer’s directors, executive officers, founders and control persons (typically, a holder of 20 per cent of the voting securities).
In addition, it permits the sale of an issuer’s securities to persons or companies that have one of the following relationships with one of those principals:
Specified family members include a spouse, parent, grandparent, brother, sister, child or grandchild of a principal or the principal’s spouse.
There is no definition of the terms “close personal friend” and “close business associate”; however, the Companion Policy to NI 45-106 provides certain guidance. Generally:
It is not enough to simply belong to the same religious organization, team or other group. It is not enough to just be a client or customer. It is not enough to just have a social media connection. There should be a relationship of trust and both parties should believe that such a relationship exists.
If this exemptions is relied on for distributions into Saskatchewan or Ontario, a special form of risk acknowledgement is required from the investor.
No commissions or finder’s fees can be paid to the principals of the issuer under this exemption. The payment of a commission to other parties may give rise to concern as to whether the exemption was appropriately relied on as it would be unlikely that a third party would be required to identify an investor who qualified to invest.
An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.
Securities acquired under this exemption are subject to restrictions on resale. In the case of a reporting issuer these will usually continue for a period of four months. In the case of a business that is not a reporting issuer, these resale restrictions continue indefinitely.
FAMILY, FRIENDS and BUSINESS ASSOCIATES EXEMPTION presentation
According to reports of exempt distribution filed with the ASC, the most commonly used prospectus exemption is the accredited investor exemption set out at section 2.3 of National Instrument 45-106 Prospectus Exemptions (NI 45-106).
The principal requirement of this exemption is that the investor be an “accredited investor”.
The definition of “accredited investor” is set out in section 1.1 of NI 45-106. In general terms, it includes various institutions such as banks, trust companies, pension funds, municipalities, certain investment funds, as well as entities (other than investment funds) that have net assets of at least $5 million (as shown on their most recent financial statements). It also includes persons or companies (including individuals) registered, or previously registered, under applicable securities laws in Canada as a dealer or adviser.
The definition also includes individuals where the individual meet certain income or asset tests:
The definition also contemplates certain companies and trusts (e.g. wholly-owned or directed by accredited investors).
There is no required disclosure document when using this exemption. However, if an investor is an individual then, unless the individual has net financial assets exceeding $5,000,000, the issuer must obtain a specified form of risk acknowledgement from the investor. The required form of risk acknowledgement is Form 45-106F9 Form for Individual Accredited Investors.
An investor investing as an accredited investor must be investing as principal; however, a trust company or registered portfolio manager operating on behalf of a fully managed account of a client is generally deemed to be acting as principal.
The accredited investor exemption is not available for a distribution to a person or company if the person or company was created, or is used, solely to take advantage of the exemption.
An issuer that relies on this exemption must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.
Securities acquired under this exemption are subject to restrictions on resale. In the case of a non-reporting issuer, they will continue indefinitely.
Alberta businesses attract significant foreign investment. ASC Rule 72-501 Distributions to Purchasers Outside Alberta (ASC Rule 72-501) 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 the securities laws in the jurisdiction of the purchaser.
When a non-reporting issuer sells securities privately to foreign investors (e.g. not under a prospectus), securities acquired by those investors will generally be subject to restrictions on resale that limit their resale back into Canada. However, resales can generally be made in a market outside of Canada.
In most cases, there will be a requirement to file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days. However, ASC Rule 72-501 provides certain reporting exemptions (e.g. relating to purchaser information).
The exemption in section 2.10 of National Instrument 45-106 Prospectus Exemptions allows a business to sell securities to persons or companies - other than individuals - provided that the acquisition cost is at least $150,000.
The securities must be those of a single issuer and each purchaser must purchase as principal (i.e. on their own account) and the purchaser cannot have been created, or used, solely to take advantage of the exemption.
An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 10 days.
The offering memorandum (OM) exemption in section 2.9 of National Instrument 45-106 Prospectus Exemptions (NI 45-106) allows a business to sell its securities to the general public without filing a prospectus and becoming a reporting issuer. Although a prospectus is not required, investors must be provided with a disclosure document called an “offering memorandum”.
Form of offering memorandum
Assuming that the issuer is not a reporting issuer, the offering memorandum must be prepared in accordance with the requirements of Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers.
The offering memorandum is required to describes the business, its management, the offering and the risks and, significantly, requires that audited annual financial statements of the business be included.
Looking for an example of a form of offering memorandum to use under the offering memorandum exemption? The ASC doesn’t recommend or endorse any particular issuer’s offering memorandum however, you can find examples that have been filed by others by searching the SEDAR website.
Click on “Search Database” then click on either:
Under Document Type, search for the type of offering document and specify the time period.
We encourage issuers to seek advice from qualified legal counsel to assist them in preparing an offering memorandum.
An issuer relying on the OM exemption must also obtain a specified risk acknowledgement form from each investor. The required form of risk acknowledgement is Form 45-106F4. There are two schedules to Form 45-106F4 that must be completed by investors that are individuals. One schedule asks the investor to indicate whether they are an “eligible investor”, an “accredited investor” (see Accredited Investor exemption), an investor that would qualify under the family, friends or business associates exemption (see Family, Friends and Business Associates exemption) or an investor that is none of those. The other schedule requires the investor to acknowledge that in certain circumstances there are limits on how much they can invest and confirm that limit has not been exceeded.
Limits on who can use the exemption
In Alberta, the offering memorandum exemption is not available for use by a mutual fund, other than a mutual fund that is a reporting issuer. In some jurisdictions (e.g. Ontario), the exemption is not available to any investment funds. The exemption is not available for the sale of a short-term securitized product, a specified derivative or a structured finance product.
Similar to a prospectus, an investor investing under the offering memorandum exemption can sue the issuer and its directors, CEO and CFO if the offering memorandum or any marketing materials used in association with the offering memorandum contains a misrepresentation. Investors also have a two day "cooling off period" in which they can cancel their investment.
The OM exemption is designed to facilitate capital-raising by allowing businesses to solicit investments from a wider range of investors than under other prospectus exemptions. However, because the offering disclosure may be less extensive than a prospectus and the issuer will not become a reporting issuer, there are limits that apply on how much can be invested by individuals. The limits vary depending on the financial circumstances of the investor, their relationship to the issuer, and whether or not they have received advice from a registered dealer regarding the suitability of the investment.
There are no investment limits under the prospectus exemption for investors that are not individuals or that are accredited investors (see Accredited Investor exemption) or who would qualify to invest under the Family, Friends and Business Associates exemption.
Unless one of those exceptions apply, the investment limits under Alberta securities law for individuals are as follows:
The term “eligible investor” is defined in National Instrument 45-106 Prospectus Exemptions and may vary slightly between jurisdictions. Under Alberta securities law, the term “eligible investor” generally refers to an individual whose:
Not all jurisdictions of Canada impose these same investment limits under the offering memorandum prospectus exemption. In order to reduce regulatory burden for Alberta issuers, section 7 of ASC Rule 72-501 Distributions to Purchasers Outside Alberta allows an Alberta issuer to sell securities to a Canadian investor who is not a resident of Alberta by complying with the terms of the offering memorandum exemption as it exists in the jurisdiction in which the investor is resident.
Ongoing filing requirements
Although the OM exemption allows sales of securities to the general public, using the OM exemption will not result in the issuer becoming a reporting issuer. However, after using the exemption, the business will be required to annually file audited financial statements and a notice of its use of proceeds prepared in accordance with Form 45-106F16 Notice of Use of Proceeds.
If the exemption is used in New Brunswick, Nova Scotia or Ontario, the business will also be required to provide notice of certain "significant events" by filing a Form 45-106F17 NB, NS & ON Notice of Specified Key Events.
Reporting use of exemption
Securities acquired under this exemption are subject to restrictions on resale (see "Restrictions on reselling securities acquired under prospectus exemptions"). In the case of a reporting issuer these will usually continue for a period of four months. In the case of a business that is not a reporting issuer, these resale restrictions continue indefinitely.
Another option for businesses that want to raise money from the general public but one that might be less expensive than using a prospectus or the offering memorandum exemption, is the start-up crowdfunding regime. The offering document required under the start-up crowdfunding regime is less extensive than the requirements of an offering memorandum under the offering memorandum exemption and, significantly, is not required to contain any financial statements. Further, use of the start-up crowdfunding regime does not trigger a requirement under securities law to continue to file annual audited financial statements. (However, note that a requirement may exist under applicable corporate law.)
Note that the exemption is not available to reporting issuers or investment funds.
Currently, the securities regulators in Alberta, British Columbia, Manitoba, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan (the participating jurisdictions) have each adopted a corresponding local blanket order or instrument that provides both a prospectus exemption and a registration exemption to facilitate crowdfunding for start-ups and small businesses. In Alberta, these exemptions are provided by ASC Blanket Order 45-521 Start-up Crowdfunding Registration and Prospectus Exemptions.
This is not the only exemption that can be relied on for crowdfunding but it is one that was especially designed with early stage businesses that have crowdfunding in mind.
The key conditions of the start-up crowdfunding prospectus exemption are as follows:
The ASC has published a number of guides to assist those contemplating start-up crowdfunding. They include the following:
The securities regulators in all of the jurisdictions of Canada have published for comment proposed National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions. If adopted, that instrument will expand the start-up crowdfunding regime across Canada and may liberalize the investment and offering limits.
An issuer that relies on the start-up crowdfunding regime, must file a Form 45-106F1 Report of Exempt Distribution (see “What are the required Forms and Filings?") with the ASC within 30 days. In some other jurisdictions, the required form is a Form 5.
Securities acquired under this exemption are subject to restrictions on resale. These resale restrictions will continue indefinitely unless the issuer becomes a reporting issuer.
Looking for an example of a form of offering document to use under the start-up crowdfunding regime?
The ASC doesn’t recommend or endorse any particular issuer’s offering document, however, you can find examples that have been filed by others by searching the SEDAR website.
Click on “Search Database” then click on either:
Under Document Type, search for “offering document” and specify the time period.
We encourage issuers to seek advice from qualified legal counsel to assist them in preparing an offering document.
Another prospectus exemption that is available, but only in Alberta, is the exemption provided by ASC Rule 45-517 Prospectus Exemption for Start-up Businesses.
This exemption is not available to investment funds or reporting issuers.
The key conditions of the start-up business exemption are as follows:
This exemption has many similarities to the start-up crowdfunding regime e.g., a streamlined offering document without a requirement for financial statements. However, there are a few key distinctions:
An issuer that relies on this exemption, must file a Form 45-106F1 Report of Exempt Distribution with the ASC within 30 days.
Securities acquired under this exemption are subject to restrictions on resale. These restrictions will continue indefinitely unless the issuer becomes a reporting issuer.
Looking for an example of a form of offering document to use under the start-up prospectus exemption?
Cooperatives can use any of the common capital raising exemptions described above; however, cooperatives incorporated under the Cooperatives Act (Alberta) can also use exemptions intended solely for cooperatives.
Section 2.1 of ASC Rule 45-511 Local Prospectus Exemptions and Related Requirements contains special prospectus exemptions that permit these cooperatives to sell member shares and investment shares in certain circumstances.
There is no prescribed disclosure document required. Further, there is no requirement to file a Form 406-F1 Report of Exempt Distribution with the ASC and pay the associated fee when these exemptions are used.
Section 2.1 of NI 45-106 Prospectus Exemptions provides an exemption that allows an issuer - provided it is a reporting issuer - to distribute rights to acquire additional securities to its securityholders. Generally, those rights are distributed pro rata to existing security holders.
One of the key conditions to the exemption is that the business has to be current in its continuous disclosure obligations. Investors are provided with similar statutory rights to those they would have if they acquired the securities in the secondary market.
In lieu of a prospectus, the issuer is required to:
The rights offering exemption has a few key distinctions from other capital raising exemptions:
Because the securities are offered to all existing security holders, in proportion to their existing holdings, if the issuer’s securities are listed on a stock exchange, the exchange may have more liberal rules with respect to pricing of the securities than would apply to other financings.
ASC Rule 45-516 Prospectus Exemptions for Retail Investors and Existing Security Holders (ASC Rule 45-516) provides two prospectus exemptions that allow a reporting issuer listed on one of the identified stock exchanges in Canada to conduct a broad offering.
The listed, reporting issuer has to be current in its continuous disclosure obligations and trading in its securities must not be suspended for failure to comply.
The issuer must issue a news release providing information about the financing and confirming that there is no misrepresentation in its continuous disclosure. The business can only sell the same type of securities as are listed on the exchange or a combination of those securities and warrants.
An issuer can rely on these exemptions to sell:
Any offering material (other than a subscription agreement) provided to an investor must be filed with the ASC when the material is first provided to an investor.
These exemptions allow a public distribution of securities without requiring the issuer to provide a specified disclosure document. The exemptions contemplate that investors will rely on the continuous disclosure available about the issuer. Investors are provided rights of action similar to those they would have if they acquired securities in the secondary market and the issuer is required to represent to investors that certain of the issuer’s core continuous disclosure documents do not contain a misrepresentation and that the issuer has not failed to disclose any material information.
Similar prospectus exemptions exist in the other jurisdictions of Canada to facilitate the sale of securities to existing security holders. See:
CSA Notice 45-321 Frequently Asked Questions about the Investment Dealer Prospectus Exemption addresses many of the common questions raised by issuers looking to use the investment dealer exemption.
Securities acquired under these exemptions are subject to restrictions on resale that will typically expire after four months.