Canada: New Developments In Prospectus Exemptions To Enhance Opportunities For Raising Capital

Last Updated: March 2 2015
Article by Andre Garber and Jason A. Saltzman

On February 19, 2015, the Ontario Securities Commission (OSC) introduced a family, friends and business associates prospectus exemption and the Canadian Securities Administrators proposed amendments to the accredited investor, the short-term debt and the minimum amount investment prospectus exemptions. These developments are designed to make it easier for small- and medium-sized enterprises to raise investment capital. 

The family, friends and business associates exemption

On February 19, 2015, the OSC introduced a new prospectus exemption applicable to the distribution of securities to directors, executive officers, control persons or founders of an issuer, as well as certain family members, close personal friends and close business associates of such persons (the FFBA Exemption).1 The introduction of the FFBA Exemption follows up on the March 20, 2014 proposed amendments to NI 45-106 Prospectus and Registration Exemptions, among other instruments and rules, and their associated Companion Policies, which were published for comment by the OSC. The FFBA Exemption is substantially harmonized with similar exemptions available in other Canadian jurisdictions and has the potential to become an efficient and low-cost method for issuers to raise capital from investors in Ontario.

The FFBA Exemption permits issuers to distribute securities to the issuer's directors, executive officers, control persons and founders, as well as certain family members, close personal friends and close business associates of such persons without a prospectus, subject to a number of conditions. Subject to Ministerial approval2, with the introduction of the FFBA Exemption, the currently in force, "founder, control person and family exemption" in section 2.7 of NI 45-106 will be repealed.

General

The FFBA Exemption is available to both reporting and non-reporting issuers but, in Ontario, is not available to investment funds3. Subject to meeting the conditions of the FFBA Exemption, any type of security may be distributed under this exemption and there are no limits as to the size of the offering.  However, short-term securitized products (as defined in NP 45-106) may not be distributed under the FFBA Exemption. Furthermore, the use of registrants, finders or advertising, as well as payment of fees or commissions to any person to find purchasers may not be used with respect to the FFBA Exemption.4

Potential benefits of the FFBA Exemption to issuers include: (1) no investment limits for distributions; (2) no requirement for the issuer or the selling security holder to provide the investor with any disclosure at time of the distribution; (3) no right of withdrawal for investors; (4) no requirement for non-reporting issuers to provide any ongoing disclosure; and (5) no requirement to provide an offering memorandum.6 However, securities provided under the FFBA Exemption are subject to resale restrictions. Depending on conditions, securities of a reporting issuer are subject to a four month hold period and securities of a non-reporting issuer are subject to an indefinite hold period and can only be resold under a prospectus or another prospectus exemption. Issuers distributing securities under the FFBA Exemption must file Form 45-106F1 Report of Exempt Distribution within 10 days of the distribution together with the requisite filing fees.

Qualifications

As set out in subsection 2.5(1) of NI 45-106, the FFBA Exemption is available for distributions to directors, executive officers, control persons and founders of the issuer, as well as family members, close personal friends and close business associates of directors, executive officers, control persons or founders of the issuer. The issuer relying on the exemption is responsible for determining whether the terms and conditions of the exemption are met. As such, the following guidance is provided in the Companion Policy to NI 45-106 with respect to the qualification criteria for close personal friends and close business associates.

Close business friend

A "close personal friend" of a director, executive officer, founder or control person of an issuer is an individual who knows the director, executive officer, founder or control person well enough and has known them for a sufficient period of time to be in a position to assess their capabilities and trustworthiness and to obtain information from them with respect to the investment. An individual is not a close personal friend simply because the individual is: (1) a relative, (2) a member of the same club, organization, association or religious group, (3) a co-worker, colleague or associate at the same workplace, (4) a client, customer, former client or former customer, (5) a mere acquaintance, or (6) connected through some form of social media, such as Facebook, Twitter or LinkedIn. The relationship between the individual and the director, executive officer, founder or control person must be direct; it is insufficient, for example, for the individual to be a close personal friend of a close personal friend of a director of the issuer.

The factors that are relevant in determining the eligibility of a "close personal friend" include:

  1. the length of time the individual has known the director, executive officer, founder or control person;
  2. the nature of the relationship between the individual and the director, executive officer, founder or control person including such matters as the frequency of contacts between them and the level of trust and reliance in those previous circumstances; and
  3. the number of "close personal friends" of the director, executive officer, founder or control person to whom securities have been distributed in reliance on the private issuer exemption or the family, friends and business associates exemption.

Close Business Associate

A "close business associate" is an individual who has had sufficient prior business dealings with a director, executive officer, founder or control person of the issuer to be in a position to assess their capabilities and trustworthiness and to obtain information from them with respect to the investment. An individual is not a close business associate simply because the individual is: (a) a member of the same club, organization, association or religious group, (b) a co-worker, colleague or associate at the same workplace, (c) a client, customer, former client or former customer, (d) a mere acquaintance, or (e) connected through some form of social media, such as Facebook, Twitter or LinkedIn.

The factors that are relevant in determining the eligibility of a close business associate include:

  1. the length of time the individual has known the director, executive officer, founder or control person;
  2. the nature of any specific business relationships between the individual and the director, executive officer, founder or control person, including, for each relationship, when it began, the frequency of contact between them and when it terminated if it is not ongoing, and the level of trust and reliance in the other circumstances,
  3. the nature and number of any business dealings between the individual and the director, executive officer, founder or control person, the length of the period during which they occurred, and the nature and date of the most recent business dealing; and
  4. the number of "close business associates" of the director, executive officer, founder or control person to whom securities have been distributed in reliance on the private issuer exemption or the family, friends and business associates exemption.

The relationship between the individual and the director, executive officer, founder or control person must be direct. For example, the exemptions are not available for a close business associate of a close business associate of, for example, a director of the issuer.

Risk Acknowledgement Form Required

Form 45-106F12 Risk Acknowledgement Form for Family, Friend and Business Associate Investors must be signed by:

  1. the investor;
  2. the director, executive officer, control person or founder of the issuer with whom the investor has asserted the relationship (either directly or through the spouse of the director, executive officer, founder or control person), if applicable; and
  3. the issuer.

A potential investor must acknowledge, through the form, certain risks6 associated with the investment. Additionally the investor must disclose the identity of the director, executive officer, control person or founder of the issuer with whom they assert a relationship, that person's position at or relationship with the issuer, the category of the relationship asserted by the investor, and how long the investor has known that person. The risk acknowledgement form must be retained by the person making the distribution for a period of eight years after the distribution.

Utilizing the FFBA Exemption

Issuers should be aware of the complexity and responsibility of utilizing the FFBA Exemption and seek counsel where necessary. Issuers may look to counsel for:

  1. Developing procedures to reasonably confirm purchasers meet FFBA Exemption criteria;
  2. Advising issuers when the issuer should and should not sell securities to the purchaser in reliance on the FFBA Exemption;
  3. Informing issuers with respect to the terms and conditions of the exemption enabling the issuer to adequately explain the conditions and terms of the FFBA Exemption to purchasers;
  4. Establishing proper internal policies and procedures facilitating understanding of the terms and conditions of the FFBA Exemption7;
  5. Evaluating relationships with regard to FFBA Exemption qualification;
  6. Preparation of subscription agreements; and
  7. Facilitating proper record-keeping in connection with the FFBA Exemption8.

Amendments to certain exemptions set out in NI 45-106 of the Canadian Securities Administrators (CSA)

Concurrently with the introduction of the FFBA Exemption, the Canadian Securities Administrators (CSA) announced the adoption of two sets of amendments to NI 45-106 Prospectus and Registration Exemptions and its associated Companion Policy.

Amendments to Accredited Investor and the Minimum Amount Investment Prospectus Exemption

The first amendment to NI 45-106 is with respect to the accredited investor and the minimum amount investment prospectus exemptions. Among other changes, the amendments:

  1. introduce a new risk acknowledgement form for individual accredited investors9;
  2. provide expanded guidance10 in the Companion Policy on the steps a seller should take to verify the status of purchasers acquiring securities under prospectus exemptions, including the accredited investor exemption; and
  3. restrict the minimum amount investment exemption to distributions to non-individual investors.

An important change in Ontario is the change to the definition of accredited investor. The change now allows fully managed accounts to purchase investment fund securities using the managed account category of the accredited investor exemption. This particular amendment is designed to nationally harmonize this category of the accredited investor exemption. 

Amendments to the short-term debt prospectus exemption

The second set of amendments to NI 45-106 is to the short-term debt prospectus exemption. These amendments are intended to address investor protection and systemic risk concerns. Among other changes, the amendments:

  1. modify the credit ratings required to distribute short-term debt, primarily corporate commercial paper under the short-term debt exemption; and
  2. make the short-term debt exemption unavailable for short-term securitized products, which are primarily asset-backed commercial paper, and create a new prospectus exemption for the distribution of short-term securitized products.

Provided Ministerial approvals are obtained, the CSA's amendments will come into force on May 5, 2015. In Ontario, the amendments to the accredited investor and minimum amount exemptions will come into force on the later of May 5, 2015 and the date on which subsection 12(2) of Schedule 26 of the Budget Measures Act, 2009 is proclaimed in force.

This article was co-authored by Danijel Augustinovic, an articling student in Dentons Toronto office.

Footnotes

1 Subject to Ministerial approval, the exemption comes into effect on May 5, 2015.

2 The Rule Amendments and the Policy Changes (collectively, the Final Amendments) were delivered to the Minister of Finance on February 17, 2015. The Minister of Finance may approve or reject the Rule Amendments or return them for further consideration. If the Minister approves the Rule Amendments or does not take any further action by April 20, 2015, the Final Amendments will come into force on May 5, 2015.

3 Proposed section 2.6.1 (1) states that one of the conditions to qualify for the FFBA Exemption is that the issuer "is not an investment fund"

4 Guidance in 45-106CP.

5 If an issuer or selling security holder voluntarily provides a potential investor with an offering memorandum in connection with a distribution, the investor has certain rights of action for damages or rescission in the event of a misrepresentation.

6 Form 45-106F12 can be found on page 8 of the February 19, 2015, Supplement to the OSC Bulletin "Amendments To National Instrument 45-106 Prospectus And Registration Exemptions"

7 The issuer is responsible for confirming that all parties acting on behalf of the seller in a distribution (including any employee, officer, director, agent, finder or other intermediary involved in the transaction) understand the conditions that must be satisfied to rely on the exemption. The OSC expects an issuer to have policies and procedures in place to confirm that these other parties understand the exemption being relied on, are able to describe the terms of the exemption to purchasers and know what information and documentation must be obtained from purchasers to confirm the conditions of the exemption have been satisfied.

8 Issuers must consider what documentation should be collected and retained from purchasers to evidence the steps followed to establish that the purchaser met the conditions of the exemption. The issuer should consider whether it is necessary to have the purchaser sign that documentation before distributing securities and consider whether a director should sign a statement confirming the relationship.

9 The form includes acknowledgments regarding the risk of investment loss, liquidity risk, lack of information, lack of advice and status as an accredited investor.

10 The NI 45-106 Companion Policy provides guidance with respect  to verification of the status under the prospectus exemptions including information regarding: purchaser characteristics, understanding the terms and conditions of the exemption, and establishing appropriate internal policies and procedures to facilitate understanding of the exemptions. Moreover, the CSA states that it would not be sufficient for a seller to rely solely on a form of subscription or other agreement that only states "I am an accredited investor." Instead, the seller must obtain information to confirm the purchaser meets the criteria set out in the exemption.

About Dentons

Dentons is a global firm driven to provide you with the competitive edge in an increasingly complex and interconnected marketplace. We were formed by the March 2013 combination of international law firm Salans LLP, Canadian law firm Fraser Milner Casgrain LLP (FMC) and international law firm SNR Denton.

Dentons is built on the solid foundations of three highly regarded law firms. Each built its outstanding reputation and valued clientele by responding to the local, regional and national needs of a broad spectrum of clients of all sizes – individuals; entrepreneurs; small businesses and start-ups; local, regional and national governments and government agencies; and mid-sized and larger private and public corporations, including international and global entities.

Now clients benefit from more than 2,500 lawyers and professionals in 79 locations in 52 countries across Africa, Asia Pacific, Canada, Central Asia, Europe, the Middle East, Russia and the CIS, the UK and the US who are committed to challenging the status quo to offer creative, actionable business and legal solutions.

Learn more at www.dentons.com

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. Specific Questions relating to this article should be addressed directly to the author.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions