Intro to Raising Capital Using Prospectus Exemptions

Alberta securities law starts from the premise that every distribution of securities requires a prospectus. However, filing a prospectus and fulfilling the ongoing disclosure and governance obligations of being a reporting issuer can be significant. Recognizing that, in some cases, these costs may be disproportionate to the amount of money being raised and that there are investors who may not require the protections of a prospectus, securities law provides various exemptions from the prospectus requirement.

There are a variety of different prospectus exemptions to cover various different types of transactions. The prospectus exemptions that are most commonly used to raise capital generally fall into one of three categories:

• The investors are wealthy and/or sophisticated enough to look after themselves and withstand the loss of an investment.
• The investors have a relationship of trust with the principals of the business and are likely investing on the basis of that relationship.
• The investors are provided some alternative specified disclosure, which may be less comprehensive than a prospectus and not provide the protections of a prospectus. To off-set the increased risk, there may be caps on the amount that can be invested and potentially lost.

If there is not a prospectus exemption available, it is possible to make an application for a discretionary exemption.

Most of the prospectus exemptions available in Alberta can be found in National Instrument 45-106 Prospectus Exemptions (NI 45-106). This rule has been adopted by each of the jurisdictions of Canada, providing a set of harmonized exemptions available across Canada.

Each of the jurisdictions of Canada has also adopted National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions (NI 45-110), which as of September 21, 2021, provides a harmonized regime for start-up crowdfunding offerings.

In addition, a number of prospectus exemptions although not adopted in all jurisdictions of Canada, have been adopted in cooperation with one or more securities regulators in other jurisdictions of Canada, with the goal of having substantially similar corresponding exemptions. These include:

• ASC Blanket Order 45-538 Self-Certified Investor Prospectus Exemption Varied      
  • See Multilateral CSA Notice of Amendments to Alberta and Saskatchewan Orders 45-538 Self-Certified Investor Prospectus Exemption
• ASC Blanket Order 45-539 Small Business Financing
  • See Multilateral CSA Notice of Implementation Alberta and Saskatchewan Orders 45-539 Small Business Financing
• ASC Rule 45-516 Prospectus Exemptions for Retail Investors and Existing Security Holders
  • See Multilateral CSA Notice 45-313 Prospectus Exemption for Distributions to Existing Security Holders
  • See also OSC Rule 45-501 Ontario Prospectus and Registration Exemptions in respect of the existing securityholder exemption (note that link is to the most recent unofficial consolidation)
  • See Multilateral CSA Notice 45-318 Prospectus Exemption for Certain Distributions through an Investment Dealer
    
     

• ASC Rule 45-502 Trade with RESP
• ASC Rule 45-511 Local Prospectus Exemptions and Related Requirements
• ASC Rule 72-501 Distributions to Purchasers Outside Alberta

Securities sold under capital-raising prospectus exemptions are typically subject to restrictions on their resale. This is because National Instrument 45-102 Resale Restrictions deems the resale of securities acquired under certain specified prospectus exemptions to be a “distribution”. Until the resale restrictions expire an investor can only resell the securities under a prospectus or a prospectus exemption.

Unless an investor has special rights obligating the issuer to file a prospectus, selling under a prospectus is usually not a realistic option. That means that generally the investor can only resell their securities under another prospectus exemption. There are very few prospectus exemptions that are available to investors to resell their securities. Often investors are limited to reselling to accredited investors or to directors or executive officers of the issuer.

In the case of securities of a reporting issuer, the resale restrictions typically expire after four months. However, for an issuer that is not a reporting issuer, the four month period does not start running until the issuer becomes a reporting issuer. Consequently, if the issuer does not become a reporting issuer, the resale restrictions can continue indefinitely.

Although you are not required to retain a registered dealer when selling securities under prospectus exemptions, you may wish to do so to assist in identifying prospective investors.

A registered dealer may provide other useful services such as assisting with:

• the marketing and promotion efforts, including the development of marketing materials
• structuring the financing and determining appropriate pricing
• assessing market interest
• coordinating distribution and collection of offering materials and subscription agreements
• improving the quality of disclosure documents

In order to comply with their obligation to know their product and to avoid liability with respect to the offering, a registered dealer will typically ask questions, review key documents and take other steps to ensure it understands an issuer’s business and the associated risks and the terms of the securities being offered.

Although a registered dealer may provide comments to an issuer on any offering document or other marketing materials, this does not relieve the issuer from its responsibility of ensuring that the information provided to investors complies with securities laws.

Both exempt market dealers and investment dealers can be engaged with respect to selling securities under prospectus exemptions.

An issuer that relies on a prospectus exemption to distribute securities in Alberta will typically be required to file a report with the ASC reporting on sales made in Alberta under that prospectus exemption. The issuer will usually also be required to file that report in each other jurisdiction of Canada in which the distribution occurred, reporting on sales made in that jurisdiction.

The required form of report is Form 45-106F1 Report of Exempt Distribution, including the two accompanying schedules. That report must typically be filed within 10 days of the distribution (e.g. the closing at which the issuer accepts the subscriptions and issues the securities).

If there are multiple distributions that occur more than 10 days apart, it may be necessary to file multiple reports and pay multiple fees.

There are three principal exceptions to the 10 day filing requirement:

• The report is permitted to be filed within 30 days of the distribution for sales under
  • National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions, and
  • ASC Blanket Order 45-539 Small Business Financing.
• Investment funds are generally permitted to report 30 days after the calendar year.

CSA Staff Notice 45-308 Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions addresses many of the common questions issuers have when preparing these reports.

The fees required to be paid in Alberta in conjunction with the filing are specified by ASC Rule 13-501 Fees. The ASC fee calculator may be a useful tool for calculating the fee. 

The Form 45-106F1 Report of Exempt Distribution is required to be filed electronically through SEDAR+, the System for Electronic Document Retrieval and Analysis (or any successor to SEDAR+).  

In addition to the Form 45-106F1 Report of Exempt Distribution there may be a requirement under certain prospectus exemptions to file other exempt market documents with the ASC, including:

Refer to the terms of the particular exemptions for the applicable filing requirements and timing. A filing fee is not typically required to be paid to the ASC with exempt market filings other than the Form 45-106F1.

If distributing securities into other jurisdictions, review the requirements in those other jurisdictions as there may be additional filing or delivery requirements (e.g. voluntarily provided offering documents are required to be delivered in some jurisdictions and, in New Brunswick, Nova Scotia and Ontario, for issuers using the offering memorandum exemption, Form 45-106F17 NB, NS & ON Notice of Specified Key Events may be required).

If you are unable to comply with any of the codified prospectus exemptions set out in existing regulatory instruments, you may be able to apply to the ASC for an order granting a discretionary prospectus exemption. Applications for relief are reviewed on a case-by-case basis and whether relief will be granted will depend on the facts and circumstances of your case. The application takes the form of a letter that identifies the party making the application, explains the circumstances, and includes compelling reasons for why an exemption is appropriate and how there are alternative measures to protect investors or an explanation for why certain protections are not necessary in the particular circumstance. The application is required to be accompanied by certain supporting material, including a draft copy of the order sought.

ASC Policy 12-601 Applications to the ASC sets out the process for making such an application, and its Appendix sets out the associated fee.

If relief is required not just in Alberta but in other jurisdictions of Canada (because the distribution will be made in other jurisdictions), refer to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions which describes the process for making such applications, the types of applications that can be made and how you can determine your principal regulator.

Examples of prior orders that have granted discretionary prospectus exemptions can be found on the ASC website by searching for orders made under s.144 of the Securities Act (Alberta). Orders granted by the ASC or other securities regulators in Canada can also be found through online systems such as that provided by the Canadian Legal Information Institute available at www.canlii.org.

There are a variety of possible consequences for non-compliance that may apply in the circumstances, having regard to the seriousness of the contravention. Some examples of possible consequences are as follows:

• There is a fee for filing a Form 45-106F1 Report of Exempt Distribution late.  This fee can continue to accumulate for each day that the form is late, subject to a maximum amount. See section 11(5) of ASC Rule 13-501 Fees.
• If a document that is filed is not compliant, staff may require the issuer to file a revised document. In the case of a non-compliant offering document, staff may require that the issuer offer investors an opportunity to cancel their investment after receiving the revised document.
• Investors who should have been delivered an offering memorandum or other offering document will typically have a two day right to cancel their investment for any reason. This two day right runs from the date the offering document is delivered. Investors may choose to exercise their right to cancel their investment.
• Investors and others may question your integrity or consider you to be untrustworthy.
• Investors may sue for damages or rescission in the event of a misrepresentation. Where the misrepresentation is contained in an offering memorandum or other specified offering document or marketing materials, investors may have a special statutory right to sue that makes it easier for them to establish liability. This statutory right is in addition to any common law or equitable remedies the investor may have.
• If an offering document or other document that is required to be filed is not filed or is not completed in accordance with Alberta securities law, the Commission or Executive Director may, without providing a right to be heard, make a cease trade order, ordering that trading in some or all of the issuer’s securities cease.
• The ASC may make various orders if considered to be in the public interest (e.g. a cease trade order, a reprimand, require a director or officer to resign, prohibit a person from becoming or acting as a director or officer, or require that certain material be disseminated to the public).
• The ASC may, if there has been a contravention and it concludes it is in the public interest to do so, order an administrative penalty of up to $1,000,000 for each contravention or failure to comply.
• ASC Staff may pursue an order from the Provincial Court for a fine of up to $5,000,000 or imprisonment of up to five years less a day, or both.

Crowdfunding refers to raising money online, typically through a website or social media. There are three main types of crowdfunding, (1) raising money by donation, (2) pre-selling of products and (3) the sale of shares or other securities. Securities laws applies to crowdfunding that involves the sale of securities (e.g. shares, loans or digital tokens).

Crowdfunding typically engages both the prospectus and the dealer registration requirements (see “Start-up crowdfunding regime”).

The issuers or businesses raising money through securities crowdfunding will typically be subject to the prospectus requirement but rely on prospectus exemptions. 
Although the ASC and the other securities regulators have adopted National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions (NI 45-110) for start-up crowdfunding, that is not the only way to conduct securities crowdfunding. There are a variety of different prospectus exemptions that can be relied on for crowdfunding such as:

• the accredited investor prospectus exemption
• self-certified investor prospectus exemption (only in Alberta & Saskatchewan)
• the offering memorandum prospectus exemption
• the small business financing prospectus exemption (only in Alberta & Saskatchewan)
• exemptions granted by an order from the securities regulatory authority providing discretionary relief (see “None of the exemptions work for me: Applying for a discretionary exemption” under this section)

The crowdfunding portal or website that facilitates a securities crowdfunding offering will typically be considered to be a party "in the business" of trading securities (i.e. a dealer). As such, it will be subject to the registration requirement. In most cases, this means that the funding portal offering the securities through the internet will need to be registered as a dealer (e.g., an exempt market dealer), and comply with all of the normal requirements of a registered dealer such as knowing the product to be sold, collecting information on clients to understand the client’s financial circumstances and investment objectives, and assessing the suitability of investments that the client makes. Registration of dealers provides investors with many important investor protections.

You can search the CSA’s Check Registration page to see whether a funding portal is registered as a dealer.

If the online offering is a start-up crowdfunding offering being conducted only under NI 45-110 where issuers are conducting very modest financings, and the amounts that can be invested are very limited, it may be possible for the funding portal to rely on the registration exemption in NI 45-110. That registration exemption is not available for funding portals selling securities under other prospectus exemptions. 

You may use multiple prospectus exemptions at the same time provided that the terms of the exemptions do not conflict.

You are free to choose which prospectus exemption you use provided you meet the conditions of the exemption. Which exemption(s) is/are best will depend on your particular circumstances. Some factors to consider when reviewing the different prospectus exemptions include:

• Are there any restrictions on the types of business that can use the exemption?
  • For example, some exemptions are limited to reporting issuers and some are limited to non-reporting issuers. Some exemptions are available to investment funds and others are not available to investment funds.
• Are there any restrictions on the types of securities that can be sold under the exemption?
  • For example, the start-up crowdfunding regime and the small business financing exemption can only be used to sell certain simple securities.
• Who can buy the securities under the exemption?
  • For example, under the accredited investor exemption, only investors who meet the definition of "accredited investor" in section 1.1 of NI 45-106 Prospectus Exemptions may purchase securities.
• Is there a limit on how much money can be raised under the exemption or how much money a particular investor can invest under the exemption?
  • For example, in the start-up crowdfunding regime under NI 45-110 investors are limited to $2,500 in any one issuer or $10,000 with positive suitability advice from a registrant. 
• Does the exemption specify that a particular form of offering document be provided to investors?
  • For example, under the small business financing exemption, the start-up crowdfunding regime or the offering memorandum exemption an issuer must provide a offering document that contains the information specified in the applicable form.
• Does the exemption require that financial statements be required to be provided to investors?
  • For example, the offering memorandum exemption requires that the issuer provide audited annual financial statements to investors.
• Does the exemption require that a particular risk warning be provided to investors?
  • Many of the prospectus exemptions require a particular form of risk warning be provided to investors. For example, under the accredited investor exemption, the issuer must obtain a risk acknowledgement from most individuals in the format of Form 45-106F9.
• Does use of the exemption trigger a requirement to report it to securities regulators and pay a fee?
  • Most prospectus exemptions require the issuer to file a Form 45-106F1 Report of Exempt Distribution reporting the sales made under the prospectus exemption and to pay the associated fee. (The private issuer exemption is an exception to the reporting requirement). 
• Does the exemption provide investors with any special rights, for example, a right to cancel their investment?
  • For example, the offering memorandum, start-up crowdfunding and small business financing exemptions each require that the issuer provide the investor with a 2 day right to cancel their subscription.
• Does using the exemption trigger any ongoing disclosure requirements?
  • For example, the offering memorandum exemption requires an issuer that has used it to provide to investors on an ongoing annual basis annual audited financial statements and notices of the use of proceeds.

  For more information on the various exemptions mentioned above, see Common Capital Raising Prospectus Exemptions.