Canada: Are Securities Laws Applicable To Me?

Last Updated: December 16 2015
Article by Stewart L. Muglich

Securities laws in British Columbia apply to any issuer, including those not listed on a stock exchange. Securities laws apply from the moment of incorporation or formation. Forming an organization usually involves issuing securities to the owner(s) or founder(s). It is a common misconception that securities laws only apply to public companies; this misconception results in many start-up and early stage issuers unintentionally breaking the law. This memorandum will provide a general understanding of securities regulation. It will also provide some simple guidance on how an organization can comply with securities laws in British Columbia. The trading of securities is also governed by separate legislation in each of the provinces and territories. As a result, when considering a securities offering, an issuer may have to comply with the laws of more than one jurisdiction. For example, an issuer wishing to sell securities to investors in Ontario, Quebec and British Columbia will have to comply with the securities legislation of each of the three provinces.

This blog post should not be considered legal advice. If you have a concern about securities laws, you should consult one of our lawyers in our Corporate Finance + Securities Group.

Overview of Securities Laws in British Columbia

Securities laws in British Columbia are designed to ensure a fair and efficient securities market and to safeguard the public interest. Securities laws are based on two basic requirements:

  1. Registration – Every person who is in the business of trading in securities or acting as an advisor, investment fund manager or underwriter must be registered (licensed) with the British Columbia Securities Commission (the "Commission").
  2. Prospectus – Every person who "distributes" securities must file and obtain a receipt for a prospectus with the Commission. A prospectus is a comprehensive document that provides full, true and plain disclosure of all material facts relating to the issuer and the securities being sold.

In British Columbia, the term "person" has a broad legal meaning that includes an individual, corporation, partnership, party, trust, fund, association, or any other organization. An "issuer" means a person who has a security outstanding, is issuing a security or proposes to issue a security.

The term "trading" includes a disposition of a security for valuable consideration and any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of such activity.

The term "security" includes, but is not limited to:

  • common and preferred shares
  • options, warrants and other convertible instruments
  • bonds, debentures, notes and other instruments of indebtedness
  • limited partnership units
  • memberships in co-operative associations
  • units in a resort property (sharing in the rental profits for the whole building or property)

The term "distribution" includes a trade in a security of an issuer that has not been previously issued, or a trade in a previously issued security of an issuer from the holdings of a control person.

Securities legislation in British Columbia contains many provisions that apply only to reporting issuers. A reporting issuer includes any issuer that has:

  • filed a prospectus and obtained a receipt for it from the Commission
  • merged with a reporting issuer by a business combination or takeover bid
  • has, or previously had, its securities listed on a stock exchange in British Columbia
  • received an order from the Commission designating it a reporting issuer

A reporting issuer must provide information about its affairs on a regular basis to the Commission, its security holders and the investing public. If your organization is not a reporting issuer, you do not have to comply with the public disclosure requirements. Every issuer must, however, comply with the registration and prospectus requirements or be able to rely on an exemption from those requirements. If you do not comply with those requirements and you are not able to rely on an exemption from them, you are violating securities laws. This may result in penalties such as severe fines or sanctions or the shutdown of your operations.

The process for completing a prospectus is time-consuming and expensive.  In the context of an early stage company, the amount of capital being raised rarely justifies the expenditure of such time and money.  The Commission recognizes that there are circumstances in which registration as a dealer and the filing of prospectus are not necessary and has created exemptions from these requirements. For example, people who are related to the principals of an issuer may not need the information provided in a prospectus before they buy securities. For these reasons, the Commission provides exemptions – exceptions by which individuals and companies are freed from the prospectus obligation. You can use these exemptions to form your organization, reward your employees, raise money to finance the development of your business, and reorganize or sell your business.

A number of exemptions from the prospectus requirement exist. Some of the more common ones include:

  • private issuer exemption
  • family, friends and business associates exemption
  • employee, director, officer and consultant exemption
  • accredited investor exemption
  • $150,000 exemption
  • start-up crowdfunding exemption
  • offering memorandum exemption

You do not have to apply to the Commission to use any of the foregoing exemptions. You do have to ensure that you meet all of the conditions of the exemption. It is the issuer's responsibility, when conducting private placements, to determine whether the conditions of an exemption relied upon have been met. If the issuer has reservations about whether a purchaser qualifies under an exemption, the issuer should not sell securities to the purchaser in reliance on that exemption until the issuer has had an opportunity to speak with legal counsel.

Certain steps are laid out in the securities laws for issuers to follow to reasonably confirm the availability of a prospectus exemption including: (1) understanding the terms and conditions of the exemption; (2) establishing appropriate policies and procedures; (3) verifying the purchaser meets the exemption; and (4) keeping relevant and detailed documents to evidence steps taken to establish exemption availability. The issuer is responsible for confirming all parties, including an officer, director, employee acting on the issuer's behalf, understand the conditions to rely on the exemption.

The issuer must (i) be able to explain to an investor the meaning of the conditions of the applicable exemption, including, in respect of the accredited investor exemption, the differences among the ways in which a person can qualify as an accredited investor; (ii) be able to apply the specific facts of the investor to the conditions of the applicable exemption, specifically in respect of the meaning of "close personal friend" and "close business associate" used in the family, friends and business associates exemption; and (iii) know what information and documentation should be obtained from an investor to confirm that the conditions of the exemption have been satisfied.

These qualification and verification procedures undertaken by issuers are expected to be completed prior to discussing details of an investment with purchasers.

In most cases, if you rely upon an exemption, you must file a report of exempt distribution with the Commission, usually within 10 days of selling the securities.

If you issue securities using these exemptions, the securities are subject to resale restrictions. This means that the securities may not be resold (transferred) unless certain conditions are met. In almost all cases, the securities are subject to a "seasoning period" or a "hold period" – a specified period of time during which the purchaser cannot sell the securities unless a purchaser can rely on an exemption from the prospectus and registration requirements.

In addition, if you are a private issuer, the securities that you issue or sell are subject to restrictions on transfer outlined in the private issuer's articles, memorandum, bylaws or its shareholders' agreement. Generally, this means that the purchasers must obtain approval from the private issuer's board of directors before selling their securities.

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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Stewart L. Muglich
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