All corporations are governed by securities legislation that generally requires \u201cprospectus level disclosure\u201d for the issuance of shares.\u00a0 This level of disclosure is expensive for any corporation and often prohibitively expensive for private corporations.\u00a0 As a result, many corporations issue shares under National Instrument 45-106 \u2013 Prospectus and Registration Exemptions (\u201cNI 45-106\u201d), which sets out a variety of exemptions from the prospectus level disclosure otherwise required under securities legislation.\u00a0 One of the primary exemptions used in this regard, particularly for start-up corporations seeking initial financing, is the \u201cprivate issuer\u201d exemption.\u00a0 New corporations should attempt to fit into, and stay within, the requirements of this exemption as long as possible.<\/p>\n
To fit into the private issuer exemption, a corporation must:<\/p>\n
1.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 not be a reporting issuer or an investment fund;<\/p>\n
2.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 be a corporation whose securities, other than non-convertible debt securities, are subject to restrictions on transfer that are contained in the corporation\u2019s constating documents or shareholders agreements;<\/p>\n
3.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 have securities, other than non-convertible debt securities, that are beneficially owned, directly or indirectly, by not more not more than fifty (50) persons, not including employees and former employees of the corporation; and<\/p>\n
4.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 have distributed securities only to persons who fit within prescribed categories.<\/p>\n
\n
Most law firms ensure that the required share transfer restrictions are included in the corporation\u2019s Articles of Incorporation.\u00a0 However, the required restrictions can also be added later through Articles of Amendment.\u00a0 The 50-shareholder restriction is self-explanatory.\u00a0 However, it is important to note that securities can only be distributed to persons included in prescribed categories.\u00a0 If the corporation\u2019s security holders don\u2019t fit into a prescribed category, the exemption is lost.\u00a0 The prescribed categories include:<\/p>\n
\n
1. a director, officer, employee, founder or control person of the corporation;<\/p>\n
2. a spouse, parent, grandparent, brother, sister or child of a director, executive officer, founder or control person of the corporation;<\/p>\n
3. a parent, grandparent, brother, sister or child of the spouse of a director, executive officer, founder or control person of the issuer;<\/p>\n
4. a close personal friend or close business associate of a director, executive officer, founder or control person of the issuer;<\/p>\n
5. a spouse, parent, grandparent, brother, sister or child of the selling security holder or the selling security holder\u2019s spouse;<\/p>\n
6. a security holder of the corporation;<\/p>\n
7. an accredited investor (as defined elsewhere in NI 45-106).<\/p>\n
\n
This is not a complete list, but it\u2019s close.\u00a0 As a rule of thumb, eligible shareholders under this exemption are people whose investing experience, or whose relationship to a director, executive officer, founder or control person of a corporation, enables them to assess and rely on the corporation\u2019s collective capabilities, trustworthiness and business acumen when investing in the corporation.<\/p>\n
The private issuer exemption is one of the key ways by which start-up companies can raise capital in the early stages of the business plan.\u00a0 Sooner or later, many corporations outgrow the restrictions described above and lose the exemption, but it\u2019s better to do it later rather than sooner.\u00a0 Your lawyer can help you with that.<\/p>\n
This article was originally published in an October 2009\u00a0edition of the Ottawa Business Journal. <\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":" All corporations are governed by securities legislation that generally requires \u201cprospectus level disclosure\u201d for the issuance of shares.\u00a0 This level of disclosure is expensive for any corporation and often prohibitively expensive for private corporations.\u00a0 As a result, many corporations issue shares under National Instrument 45-106 \u2013 Prospectus and Registration Exemptions (\u201cNI 45-106\u201d), which sets out […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"wds_primary_category":0,"wds_primary_expertise_area":0,"footnotes":""},"categories":[82],"tags":[],"class_list":["post-1675","post","type-post","status-publish","format-standard","hentry","category-publication"],"acf":[],"_links":{"self":[{"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/posts\/1675","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/comments?post=1675"}],"version-history":[{"count":1,"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/posts\/1675\/revisions"}],"predecessor-version":[{"id":3169,"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/posts\/1675\/revisions\/3169"}],"wp:attachment":[{"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/media?parent=1675"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/categories?post=1675"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/perlaw.ca\/fr\/wp-json\/wp\/v2\/tags?post=1675"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}