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.
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
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
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 email@example.com or Ralph Shay at firstname.lastname@example.org.
Summary of key elements of the Proposed Start-up Business Exemption17:
|Element of exemption||Details|
In Alberta, an investment share that is a non-convertible preference share issued by a cooperative organized under the Cooperatives Act.
|Investor protection measures|
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||
|Contractual and statutory rights||
|Reporting of distribution||
|Books and records||
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.
6 Ibid at 3.
13 Ibid at 4.
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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