Note: The rules and law may have changed since this article was first published. It is provided for archival purposes but you should consult with your lawyer for the current state of the law
You have a great idea. You’ve incorporated a company. Now you need the cash to put your idea into motion. That’s the problem…you’re tapped out from financing your last great idea and the bank won’t give you money because you have no assets. Where will the capital come from?
Selling shares in your company is a common way to raise capital; however, many offerings require a prospectus, a costly and complex process. A less-complicated alternative is to offer securities privately pursuant to certain statutory exemptions from registration and prospectus requirements.
This article will not explore the types of securities that can be offered, nor will it explain the importance of a solid business plan or issues such as restrictions on resale or payment of commissions. Rather, the focus will be on private placements in a general sense and will provide an overview on the processes and timelines involved. It is vital that you work with professional advisors who are well-versed in the rules applying in Saskatchewan and other jurisdictions that may be involved.
For a company (the “Issuer”) to sell shares without filing a prospectus, potential shareholders (the “Subscribers”) must fall within a statutory exemption, many of which are found in National Instrument 45-106 (“NI 45-106”). NI 45-106 has been adopted across Canada, but there are slight variances among provinces. As such, it is important to check the specific rules and regulations of each province in which you are raising capital.
Other exemptions are available, but the most common exempt purchasers are:
1. A founder of the Issuer;
2. A director, executive officer or control person of the Issuer or affiliate of the Issuer;
3. A spouse, parent, grandparent, brother, sister or child of any person referred to in #1 or #2;
4. A close personal friend of any person referred to in #1 or #2;
5. A close Business Associate of any person referred to in #1 or #2;
6. A person (other than an individual) of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in #1 through #5 above; or
7. An Accredited Investor (refer to NI 45-106 for the complete list of criteria -many are based on the net worth of the Subscriber).
Steps and Timelines
If potential investors fall within one or more of the exemptions listed above, the Issuer can begin the paperwork involved in a private placement. The first and most important document is the subscription agreement. This contains the representations and warranties of the Issuer and the Subscriber, the exemption of the Subscriber, terms of closing, instructions for registration and delivery of the shares, as well as necessary statutory provisions.
Once the subscription agreement is completed, Subscribers complete and return it with payment for the shares. The Issuer will accept the subscriptions on a closing date disclosed in the subscription agreement, at which time the funds received can be put to use in whatever manner the company needs.
The Subscription Agreement is not the only document an Issuer needs in this process. Other closing documents include Directors’ Resolutions, a Certificate of Incumbency, Officer’s Certificate, Reports of Trade, and a Treasury Order.
The Report of Trade is a prescribed form that must be completed and submitted to the appropriate securities commissions. It includes information about the Issuer, sets forth the subscriber information (including exemptions) and provides the total number of securities and funds raised. The Report of Trade must be submitted to securities commission in the home jurisdiction of the Issuer and any other province in which a Subscriber resides, and must be submitted within 10 clear days of the offering’s closing date. Every province administers reporting in different ways, so it is essential to refer to the Regulations of each province.
The Treasury Order directs the proper registration and delivery of the shares you have sold. This will either be submitted to a trust company or your lawyer to create the share certificates or book entries as necessary.
A Word of Caution
While Subscribers fill out their own subscription agreement and exemption, the Issuer is held responsible for the accuracy of the information provided. Some Securities Commissions will randomly monitor the use of certain exemptions, and the Issuer may at any time be requested to provide proof that a certain Subscriber does indeed satisfy the requirements of that exemption.
Therefore, the importance of creating a well-drafted and comprehensive subscription agreement, accepting only subscriptions that are accurate and complete, and ensuring consistency in all ancillary documents and filings, cannot be stressed enough.