Two recent British Columbia Securities Commission
("BCSC") cases demonstrate the standard required of an
issuer that wishes to rely on an exemption from the prospectus
requirement when undertaking a private placement financing.
In Cinnabar Explorations Inc. (2013 BCSECCOM 361) and Photo Violation
Technologies Corp. (2012 BCSECCOM 284; 2013 BCSECCOM 276), the BCSC found that the
issuers did not properly rely on exemptions from the prospectus
requirements under National Instrument 45-106.
A person distributing or trading securities is responsible for
determining when an exemption is available. In determining whether
an exemption is available, a person may rely on factual
representations by a purchaser, provided that the person has no
reasonable grounds to believe that those representations are false.
However, the person distributing or trading securities is
responsible for determining whether, given the facts available, the
exemption is available. Generally, a person distributing or trading
securities under an exemption should retain all necessary documents
that show the person properly relied upon the exemption.
For example, an issuer distributing securities to a close
personal friend of a director could require that the purchaser
provide a signed statement describing the purchaser's
relationship with the director. On the basis of that factual
information, the issuer could determine whether the purchaser is a
close personal friend of the director for the purposes of a family,
friends and business associates exemption. The issuer
should not rely merely on a representation: "I am a close
personal friend of a director". Likewise, under the
accredited investor exemptions, the seller must have a reasonable
belief that the purchaser understands the meaning of the definition
of "accredited investor". Prior to discussing the
particulars of the investment with the purchaser, the seller should
discuss with the purchaser the various criteria for qualifying as
an accredited investor and whether the purchaser meets any of the
It is not appropriate for a person to assume an exemption is
available. For instance a seller should not accept a form of
subscription agreement that only states that the purchaser is an
accredited investor. Rather the seller should request that the
purchaser provide the details on how they fit within the accredited
In Photo Violation Technologies Corp., the BCSC
stated that "the definition of accredited investor for the
purposes of the exemption is technical and excludes assets that
would, in other contexts, be included in an individual's net
worth – for example, the individual's personal residence.
Investors who indicated on their subscription forms that they were
accredited were not provided with the definition of accredited
investor nor with the appropriate interpretation of the exemption.
In these circumstances, it has not been established that any of
them were, in fact, accredited investors."
To summarize, a mere representation (or a "tick of the
box" on an accredited investor questionnaire) on a private
placement subscription agreement is not sufficient to make a
determination whether an exemption is available. The issuer must
take additional steps to establish and document facts that
demonstrate the exemption.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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