In Canada, businesses and governments (which we will refer to as issuers in this
brochure) may raise capital by selling securities – such as common shares, units
or shares of investment funds, or bonds – in one of the following two ways:
the issuer can prepare a disclosure document, called a prospectus, containing
detailed information about the securities offered as well as the issuer’s activities,
its management and its financial condition. Once the prospectus has been filed
with, and approved by, a securities regulatory authority, the issuer can sell its
securities to the public (see our brochure entitled Prospectuses made clear);the issuer may be exempted from the obligation to prepare a prospectus in
order to sell securities, but only under certain conditions. We will refer to this
as a prospectus exemption.
WHY USE AN EXEMPTION?
The prospectus is an important component of the investor protection system
in Canada, but the task of preparing and having a prospectus approved by
the regulatory bodies involves significant costs and time for issuers in search
of capital. Consequently, securities regulations reduce the obligations relating
to prospectuses under specific conditions.
Exemption for a private issuer
An issuer is referred to as a “private” issuer when it meets the following criteria:
It is not an issuer subject to continuous disclosure obligations;
It is not an investment fund;
It does not have more than 50 investors, excluding employees and formeremployees of the issuer;
Most of its securities are subject to resale restrictions. Consequently, you may
be unable to sell them for a certain period. Even if you were able to resell your
securities, there might be no market for those securities, such that you would
not be able to find any purchasers.
In general, it can offer its securities only to the following classes of investors:
A director, officer, employee, founder or control person of the issuer;
a spouse or other family member (grandparent, brother, sister or child)
of a director, executive officer or control person;
a close personal friend or close business associate of the persons mentioned
in the preceding item;
an accredited investor;
a spouse or a family member of the selling shareholder or the selling
shareholder’s spouse.
Other prospectus exemptions are available, but they usually apply to specialized
business transactions that do not relate to the majority of investors.