Canada: Alberta And Nunavut Propose Start-Up Business Exemption

Last Updated: November 19 2015
Article by Keith C. Inman

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

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
Events from this Firm
23 Oct 2018, Other, Toronto, Canada

Dentons and SheEO are coming together for an evening of #radicalgenerosity on October 23, 2017. Meet Vicki Saunders, Founder of SheEO, and learn about how SheEO is changing the landscape for female entrepreneurs.

23 Oct 2018, Seminar, Montreal, Canada

Dentons is pleased to invite you to join us for a breakfast seminar as part of the Les Matinées Dentons series on issues relevant to you and your business.

24 Oct 2018, Other, Toronto, Canada

If you build it, claims may come. Join the Dentons Construction group for breakfast and an informative discussion on current topics in construction law.

Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
Bennett Jones LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
Bennett Jones LLP
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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