Raising Capital in the Exempt Market

Transcription

1 Raising Capital in the Exempt Market Calgary Chamber Member Expert Series May 16 th, 2013 Presented by: A. Neil Hutton, Partner, Corporate & Commercial Ryan Franzen, Partner, Corporate & Commercial What is the Exempt Market? The market place for securities that are issued without a prospectus It is called exempt because the securities are exempt from prospectus requirements Reliance on National Instrument Prospectus and Registration Exemptions 1

2 The exempt market is considered to have a higher degree of risk. Why? No prospectus, less due diligence and no regulatory vetting Potential for less disclosure or no continuous disclosure No secondary market for securities thus illiquid Securities can be sold without an investment dealer or other registrants and therefore may not get suitability advice on the investment Less regulatory oversight Players in the Exempt Market Reporting Issuers Listed Issuers Exempt Market Issuers 2

3 What is an Exempt Market Financing? Raising capital through the issuance of exempt market securities Includes equity and debt from both corporations and partnerships Access to the capital markets through reliance on the prospectus exemptions and compliance with the criteria and conditions of the exemptions and resale restrictions What is an Exempt Market Financing? (cont d) Provides easier and less expensive access to the capital markets without having to become a reporting issuer and a listed issuer. Provides investors with alternative investments to the stock market Represents billions of investment dollars, primarily to small to medium sized business who can t or don t want to be involved in the stock markets. 3

4 The Securities Act Section 75(1) - Unless registered in accordance with securities laws, a person shall not act as: (a) a dealer, (b) and adviser, or (c) an investment fund manager. Section 110(1) - No person shall trade in a security if the trade would be a distribution of the security unless a prospectus has been filed. Free Trading Exemptions (backdoor) Restricted Trading Front Door (Prospectus) Free Trading 4

5 Exemptions from the Registration Requirement Section 75(1) - Unless registered in accordance with securities laws, a person shall not act as: (a) a dealer, (b) and adviser, or (c) an investment fund manager. Is an exemption even needed? If no one is acting as a dealer, adviser or an investment fund manager, then an exemption would not be required. Exemptions from the Registration Requirement Definitions: a. dealer engaging in or holding itself out as engaging in the business of trading in securities b. adviser engaging in or holding itself out as engaging in the business of advising in securities 5

6 The Business Trigger Test - NI CP We [the ASC] look at the type of activity and whether it is carried out for a business purpose to determine if an individual or firm must register. We [the ASC] consider the factors set out below, among others, to determine if the activity is for a business purpose The Business Trigger Test - NI CP(cont d) Factors: a. Engaging in Activities Similar to a Registrant b. Intermediating Trades or Acting as a Market Maker c. Directly or Indirectly Carrying on the Activity with Repetition, Regularity or Continuity d. Being, or Expecting to be, Remunerated or Compensated e. Directly or Indirectly Soliciting 6

7 The Business Trigger Test - NI CP (cont d) A securities issuer is an entity that issues or trades in its own securities. In general, securities issuers with an active non-securities business do not have to register as a dealer if they The Business Trigger Test - NI CP (cont d) Do not hold themselves out as being in the business Trade infrequently are not, or do not expect to be, compensated do not act as intermediaries do not produce, or intend to produce, a profit Summary: An exemption from the registration requirement may not be necessary if the issuer is not in the business of trading / advising. 7

8 Exemptions from the Registration Requirement Part 8 of NI a laundry list of exemptions Various Blanket Orders Exemptions from the Registration Requirement (cont d) Example of exemption under Part 8 of NI Trades Through or to a Registered Dealer The dealer registration requirement does not apply to a person or company in respect of a trade by the person or company if one of the following applies: The trade is made solely through an agent who is a registered dealer, if the dealer is registered in a category that permits the trade; The trade is made to a registered dealer who is purchasing as principal, if the dealer is registered in a category that permits the trade. 8

9 The Northwestern Exemption (Blanket Order ) Order The dealer registration requirement does not apply to a trade in a security by a person or company in connection with a Prospectus Exempt Distribution, provided that : The Northwestern Exemption (Blanket Order ) (cont d) a. Cannot be registered or required to be registered in any jurisdiction b. Cannot offer suitability advice to the purchaser c. Must obtain a signed Risk Acknowledgement Form from the purchaser d. Cannot provide financial services (other than in connection with the Prospectus Exempt Distribution) to the purchaser e. Cannot hold or have access to the purchaser s assets f. post-closing filing with ASC 9

10 The Northwestern Exemption (Blanket Order ) Is the Northwestern Exemption of limited use? It was never intended to be relied upon by issuers? It s for Market Makers? It could be revoked at any time Prospectus Exemptions - The exemptions from s.110 of the Securities Act (Alberta) Overview on Canadian Securities Administrators and National Instruments and Policies 10

11 National Instrument Prospectus and Registration Exemptions One of the fundamental and most used Securities policies. It cover a variety of prospectus exemptions and had previous covered registration exemptions until the introduction of NI This instrument covers a variety of prospectus exemptions outside of capital raising (i.e. transaction exemptions, employee exemptions, investment funds) Cross references to National Instrument Resale of Securities The primary application of NI for the exempt market are covered off under Division 1 of the Instrument called Capital Raising Exemptions. The most commonly used are: 1. Accredited Investor Criteria for individuals Financial test 11

12 (cont d) 2. Private Issuer Private companies and other entities 50 shareholders or less No solicitation to the public Limited to those connected to the directors, officers, founders and control persons Useful exemption for smaller offerings No ASC filings (cont d) 3. Family, Friends and Business Associates Connection to directors, officers, control persons What is a close friend/business associates? Special Saskatchewan requirement No commissions to directors, officers, and control persons. 4. Minimum Investment Amount $150,000 Supporting materials 12

13 (cont d) 5. Offering Memorandum Prescribed disclosure For Offering Memorandums NI45-106F2 >$10,000 Eligible Investor Test (AB) CSA Notice and CSA Notice No OMs in Ontario No commissions to non-registrants in NWT, SK, NT, YK. Regulatory oversight and review Resale Restrictions National Instrument Resale of Securities Resale Restrictions: First trades are subject to a Restricted Period or a Seasoning Period Certificates representing securities must bear a legend 13

14 Resale Restrictions Practical Applications of Resale Restrictions Indefinite hold period Can still be transferred with another prospectus exemption Transfer Agreements Structure of the Offering How much are you raising? How does this related to the value of your business? What type of security are you issuing? Exempt Market Dealer input RRSP and TFSA eligibility 14

15 Required documents Subscription Agreements Offering Memorandum Other information or pro-forma financial forecasts Future orientated financial statements Issuer Disclosure Business Plan Engineering Reports Financial Statement Audit Material Contracts 15

16 Selling the Securities Consider who will sell the securities: An Issuer v. an EMD Consider: Registration requirements and exemptions Ability to find investors versus those in the sales industry (i.e., EMDs) Cost Closing an Offering: 1. Formalities Review subscriptions agreements and attachments Note residency of subscribers Ensure subscription prices have been paid Ensure requirements of any RSP Trustee have been satisfied I.e., Legal opinions, RSP opinion, proof of funds etc. 16

17 Closing an Offering (Cont d): 1. Formalities (con t) Acceptance of subscription agreements Create certificates representing securities (with legend), and deliver as applicable. Resolutions Registration of any security (i.e., mortgage) Corporate Registries update shareholders / limited partners Closing an Offering (Cont d): 2. Filings (within 10 days) Form F1 Form F6 (BC) Information Report under Blanket Order (if Northwestern Exemption is relied on) Form of offering memorandum, if applicable. 17

18 Post-Closing and Ongoing Obligations a. What type of legal entity is the issuer? Financials (audited) Annual General Meetings b. Is the offering ongoing? If relying on an Offering Memorandum and the offering is ongoing update financials Has there been a Material change. Questions? For more information please contact: Neil Hutton Partner, Corporate & Commercial anhutton@mcleod-law.com Ryan Franzen Partner, Corporate & Commercial rfranzen@mcleod-law.com