Finding and Using Financial Investors: Prospectus Exemptions 101

By: Conflicts Analytics Lab – Securities Team

Abstract:

When securities are offered to the public in Ontario, they must be offered under a prospectus, which is a document that provides detailed information about the security and the company offering it
There are some exemptions available to this requirement, which would allow a company to bypass the complex prospectus requirement
Some of these exemptions include: family, friends, business associates, employees, and accredited investors

What are Securities? What are the Requirements When Using Investors?

Securities are tradable financial assets, primarily either equity or debt. When securities are offered to the public in Ontario, they must be offered under a prospectus, which is a document that provides detailed information about the security and the company offering it.[1] As per the OSC, “a prospectus includes specific, detailed disclosure about a company, its business and the securities being offered. It must provide “full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed” as required by subsection 56(1) of the Securities Act (Ontario)”.[2]

The offering of securities in Ontario are regulated by the Ontario Secutrities Commission (“OSC”). The OSC has a broad regulatory mandate. Their regulation must fit in line with the three main purposes of the Securities Act (Ontario), which are: to protect investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.[3]

Investors who buy securities through prospectus exemptions generally do not have the benefit of ongoing information about the security that they are buying or the company selling it. For example, they do not typically know information about the company’s revenues or on-going operations. As well, they often do not have the ability to easily resell the security. Therefore, it is important that they are privy to information about the company from which they are intending to buy securities, which is where the requirement for a prospectus comes in.

However, there are some exceptions to this rule that allow securities to be offered without a prospectus, called ‘prospectus exemptions’. These prospectus exemptions can help a company raise money without the time and expense of preparing a prospectus.

Steps for Companies Finding and Using Investors

Step 1: Understanding the Requirements

Registration Requirements: If a company is in the business of trading securities, they must register as a “securities dealer”. If a company is in the business of trading only securities distributed pursuant to a prospectus exemption, they need to register as an “exempt market dealer”.

Prospectus Requirements: If securities are being distributed on the primary market by the company in question, they MUST file a prospectus. However, securities laws provide exemptions from the registration and the prospectus requirements in certain cases, as detailed below.

Step 2: Finding an Investor

When a business/company/corporation is looking to raise capital for their business, they often will look for an investor who is interested in investing their own money into the company in return for a stake in the business/profits. Once they find an investor, they need to determine whether that investor can fit under a prospectus exemption, or whether they will have to meet the onerous requirement.

Step 3: Picking an Exemption

There are three categories of exemptions:

(1) exemptions based on the type of transaction,

(2) exemptions based on the attributes of the investor, and

(3) exemptions based on the attributes of the investment.

A company will need to consider whether their prospective investor fits under any of the available prospectus exemptions by considering what is required by each exemption. The benefit of using an exemption is that the company will not need to go through the expensive and length process of creating and filing a prospectus with the Ontario Securities Commission. This is a very important cost-saving option.

The prospectus exemptions available to companies are primarily set out in National Instrument 45-106 Prospectus Exemptions. Generally speaking, each exemption is premised on a specific policy rationale that supports not requiring a prospectus in the circumstances.

Some of the most popular exemptions include: family, friends, business associates, employees, private issuer exemption, and the accredited investor exemption. These will be covered in greater detail in subsequent blog posts.

Step 4: Notifying the OSC

Once one of the prospectus exemptions is relied on, the company will still need to notify the OSC of the investment. They will need to file a report of the exempt distribution (explaining how much raised using the exemption and from who) and file it in the jurisdiction where the distribution takes place no later than 10 days after distribution under Form 45-106F1.

How MyOpenCourt Can Help

MyOpenCourt has launched a tool that can help business owners understand whether they can raise money from investors.

To explore our other free legal aid tools, click here.

Disclaimer: The information provided in this response is for general informational purposes only and is not intended to be legal advice. The content provided does not create a legal client relationship, and nothing in this response should be considered as a substitute for professional legal advice. The information is based on general principles of law and may not reflect the most current legal developments or interpretations in your jurisdiction. Laws and regulations vary by jurisdiction, and the application and impact of laws can vary widely based on the specific facts and circumstances involved. You should consult with a qualified legal professional for advice regarding your specific situation.

[1] Ontario Securities Commission. “Offering Securities to the Public”, (15 May 2018), online: Ontario Securities Commission<https://www.osc.gov.on.ca/en/offering-securities.htm>
[2] Ibid.
[3] Ibid.