Selling Shares To Investors: Exemptions From The Prospectus Requirement

In the article entitled “Does the Securities Act Apply to My Corporation?  The Answer Might Surprise You”, we noted that when a corporation issues shares it has to provide an investor with a “prospectus” unless the corporation can rely on an exemption from this requirement.

The exemptions from the prospectus requirement essentially assume that certain investors know the corporation and its management well enough, or are sophisticated enough, that they don’t require the protection provided by the disclosure found in a prospectus.  There are several such exemptions, the most common of which are:

1. the “accredited investor” exemption, which permits certain wealthy investors to purchase securities;
2. the “private issuer” exemption, which allows accredited investors, employees and close family, friends and business associates of directors, executive officers, founders and control persons of a private issuer corporation to purchase shares.  In order to issue shares under this exemption, the corporation must have a limited number of shareholders and must have restrictions on the transfer of their shares; and
3. the “minimum amount” exemption, which provides an exemption where the investors pays at least $150,000 for its shares.

Most private corporations start out as “private issuers”.  The “Prohibitions” section of standard form corporate articles specifically relates to the definition of “private issuer” under the securities rules.  Corporations that rely on the private issuer exemption are not required to report the issuance of its securities to the securities regulators.  Once an issuer relies on another capital raising exemption, such as the “minimum amount” exemption, or ceases to meet the criteria to be a private issuer, it must generally begin to report all of its subsequent securities issuances to each applicable securities regulator by filing a Report of Exempt Distribution (in B.C., Form 45-106F6).

There are also restrictions on the transfer of previously issued securities from one holder to another.  Generally speaking, each such “secondary trade” must also be done pursuant to an available prospectus exemption.

It is important that all of the specific requirements for an exemption be met and that the corporation understand the consequences of issuing shares pursuant to each exemption.  Therefore, we strongly recommend contacting your lawyer prior to issuing any shares or other securities to investors.

How Pushor Mitchell Can Help

Andrew Brunton is a business and securities lawyer at Pushor Mitchell LLP.  You can reach Andrew at 250-869-1135.  Our office offers a wide range of legal services to start-up and growth companies.  For more information, please visit www.pushormitchell.com.