On October 19, 2015, the Alberta Securities Commission and the Nunavut Securities Office (the Regulators) published for comment Multilateral Instrument 45-109 – Prospectus Exemption for Start-up Businesses (MI 45-109 or the Proposed Start-up Business Exemption), which could impact offerings by emerging issuers in Alberta and Nunavut. The following summarizes the terms of the Proposed Start-up Business Exemption.

Background

Generally, according to securities laws, an issuer distributing securities is required to file a prospectus. However, there are prospectus exemptions that issuers can use when selling securities. In providing background to the Proposed Start-up Business Exemption, this alert references certain existing prospectus exemptions, including the accredited investor exemption and the offering memorandum (OM) exemption. The accredited investor exemption allows issuers to sell securities to investors that meet bright-line thresholds, such as income or assets, and these are intended to serve as proxies for financial sophistication. The OM exemption allows issuers to sell securities to a broader investor pool, subject to providing investors with a document known as an offering memorandum, which contains certain prescribed disclosure.

Several other jurisdictions in Canada have recently adopted exemptions that allow for equity- or securities-based crowdfunding (raising capital through an internet portal). The Proposed Start-up Business Exemption is Alberta and Nunavut's approach to facilitating such activity.

Start-ups raising capital

Equity- or securities-based crowdfunding is emerging as a way for small businesses to raise capital.1 In crowdfunding financings, issuers often use the accredited investor exemption or the OM exemption to distribute securities. Some early-stage businesses, however, are unable to obtain investment from accredited investors and the costs of using the OM exemption can be too high for some issuers. The primary objective of the Proposed Start-up Business Exemption is to allow small businesses in such circumstances to raise capital in a cost-effective manner, while still providing investor protection.2

Proposed Start-up Business Exemption

The Proposed Start-up Business Exemption provides a prospectus exemption, but requires registration of dealers.3 An individual or company "in the business of (or holding themselves out as being in the business of) trading in securities is considered a "dealer" and must be registered".4 The Regulators would most likely consider a person or company operating a crowdfunding portal to be a dealer and would expect them to be registered as an investment dealer or an exempt market dealer.5 The Proposed Start-up Business Exemption is aimed at facilitating financings through a portal that complies with the registration requirement, but may also be used for more traditional financings, with or without the assistance of a dealer.

Disclosure and risk acknowledgment

General disclosure for issuers is required under the Proposed Start-up Business Exemption. For example, investors must be presented with an offering document containing prescribed information.6 The offering document is more streamlined than that required under the OM exemption, as it does not require financial statements as part of its disclosure. Further, the issuer must obtain from every investor a risk acknowledgment form which sets out that the investor understands the risks involved in the offering.7

Investment limits

Under the Proposed Start-up Business Exemption, the Regulators propose to set a maximum amount of money that purchasers can invest.8 The limits are aimed at off-setting the risks associated with the minimal disclosure requirements and the resale restrictions placed on the securities.9

If a registered dealer is not involved, an investor is limited to a maximum of CA$1,500 in a single investment and not more than CA$3,000 in the issuer group (which includes subsidiaries and other affiliates), over a 12-month period.10 Where a registered dealer is involved and the dealer provides suitability advice, a purchaser can invest up to CA$5,000 in a single investment and up to CA$10,000 per issuer group in a 12-month period.11

Lifetime limit

One of the aims of the Proposed Start-up Business Exemption is to address a possible financing gap that small businesses encounter.12 Accordingly, it is proposed that issuers be subject to a CA$1 million lifetime limit on the amount that they can raise under either the Proposed Start-up Business Exemption or any corresponding exemptions in other Canadian jurisdictions.13 The Regulators have taken the position that once an issuer has raised CA$1 million through these exemptions, it is likely in a position to comply with the disclosure requirements under the OM exemption.14

It is important to note that the Regulators are not proposing any restrictions on how many distributions can occur per calendar year or on the amount of each distribution.15 The Regulators offer some flexibility by permitting an issuer to raise the lifetime limit in a single offering, or conduct multiple offerings in a single year.16

Request for comments

Regulators are accepting written submissions on the Proposed Start-up Business Exemption until December 18, 2015. For more information or to comment on the Proposed Start-up Business Exemption, please contact Keith Inman at keith.inman@dentons.com or Ralph Shay at ralph.shay@dentons.com.

Summary of key elements of the Proposed Start-up Business Exemption17:

Element of exemption Details
Issuer restrictions
Qualification criteria
  • Issuer's head office must be located in a jurisdiction that has adopted MI 45-109 or in a corresponding jurisdiction with a corresponding exemption.
  • Available to non-reporting issuers only.
  • Not available to investment funds.
  • Limited types of securities can be offered:

    • Common shares;
    • Non-convertible preference shares;
    • Securities convertible into common shares or non-convertible preference shares;
    • Non-convertible debt securities linked to a fixed or floating interest rate;
    • Units of a limited partnership; or
 

In Alberta, an investment share that is a non-convertible preference share issued by a cooperative organized under the Cooperatives Act.
Offering parameters
  • Issuer group cannot raise aggregate funds of more than CA$1 million.
  • Minimum offering must be raised within 90 days.
  • Offering document must disclose minimum offering amount and whether there is a maximum offering amount.
Investor protection measures
Investment limits
  • Where there is  no registered dealer involved
    • An investor cannot invest more than CA$1,500 in a single investment, and not more than CA$3,000 per issuer group in the previous 12 months.

Where there is a registered dealer involved, and the dealer performs a suitability assessment, an investor cannot invest more than CA$5,000 in a single investment, and not more than CA$10,000 per issuer group in the previous 12 months.
Risk acknowledgement The issuer must obtain a completed Start-up Business Risk Acknowledgment form from each investor, evidencing that the investor has read the matters set out in that form.
Provision of disclosure at point-of-sale
  • The issuer must complete, and deliver to purchasers, a Start-up Business Offering Document, which includes basic information about the offering and the issuer.
Offering materials
  • Offering materials must be balanced and fair, and cannot contain any information that is misleading or untrue in a material respect. Financial statements are not required.
Contractual and statutory rights          
  • Investors will have the following statutory rights:

    • Two-day right of withdrawal;
    • A right of action for rescission against the issuer or for damages against the issuer, every director of the issuer at the date of the offering document, and every person or company who may have signed the offering document.
  • Investors will also have the following contractual rights:

    • 48-hour right of withdrawal after the purchaser's subscription;
    • 48-hour right of withdrawal after the purchaser is notified of a material amendment to the offering document.
Registered dealers
  • A registered dealer is not allowed to participate in a distribution if the issuer is a "connected issuer" or a "related issuer", as defined in NI 33-105.
Resale restrictions
  • Securities obtained by investors are subject to indefinite resale restrictions, and until and unless the issuer becomes a reporting issuer, can only be resold under another prospectus exemption or under a prospectus.
Reporting
Reporting of distribution
  • Start-up Business Report of Exempt Distribution Form must be filed within 30 days of the closing of the distribution in each jurisdiction.
  • The report of exempt distribution is required to be filed in electronic format through SEDAR.
  • If a multi-jurisdictional distribution takes place under a corresponding exemption, the issuer is permitted to instead complete, the forms prescribed by the corresponding exemption.
Books and records
  • Issuers and registered dealers that participate in a start-up business distribution must maintain books and records for eight years from the distribution.

Footnotes

1  Canadian Securities Administrators, "Multilateral CSA Notice of Publication and Request for Comment Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses", October 19, 2015 at 2.

2  Ibid.

3  Ibid.

4  Ibid.

5  Ibid.

6  Ibid at 3.

7  Ibid.

8  Ibid.

9  Ibid.

10  Ibid.

11  Ibid.

12  Ibid.

13  Ibid at 4.

14  Ibid.

15  Ibid.

16  Ibid.

17  The table is condensed and extracted from the Canadian Securities Administrators, "Multilateral CSA Notice of Publication and Request for Comment Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses", October 19, 2015. For further details, see http://www.albertasecurities.com/Regulatory%20Instruments/5205021-v1-CSA_Notice_MI_45-109_with_all_Annexes_attached.pdf

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