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Legal Guide


A corporation seeking to raise capital may choose equity financing as an alternative to debt financing. Corporations seeking equity financing often cannot look to banks and other financial institutions to make equity investments, in part due to the greater risk associated with equity investments. Instead, equity investments in “private corporations” are generally made by persons connected with the business and operations of the corporation, or by certain investment corporations which are less “risk averse”, and which have been established to provide merchant banking, mezzanine financing or venture capital investments for start-up and early stage corporate ventures. In the case of “public corporations”, equity financings are either made by way of an offering to the public using a prospectus, or pursuant to a private placement exemption under applicable securities legislation in Canada. In either case, corporations which issue securities are required to comply with the registration and prospectus requirements (or the exemptions therefrom) of applicable securities legislation in Canada.

Securities legislation in Canada

  1. A     Federal laws

Generally speaking, there are no federal laws of general application governing securities transactions in Canada. Although corporations incorporated under the Canada Business Corporations Act (“CBCA”) are subject to certain of its “securities” provisions relating to insider trading, the CBCA does not set forth a comprehensive regulatory scheme for the distribution of securities by federal corporations. The federal Bank Act also has requirements relating to insider trading, as well as the distribution of securities of chartered banks, as does the federal Trust and Loan Companies Act in relation to federally chartered trust and loan companies. Accordingly, in any transaction involving such federally regulated institutions, the special requirements of the governing legislation must be considered.

  1. B     Provincial laws

Each province of Canada has enacted its own securities legislation. Although such laws are not yet uniform, the basic regulatory concepts are common. Accordingly, a discussion of the Securities Act (British Columbia) (“BC Act”), the Securities Act (Alberta) (“Alberta Act”), the Securities Act (Ontario) (“Ontario Act”) and the Securities Act (Quebec) (“Quebec Act”), assists in understanding the securities legislation of the other provinces of Canada. Compliance with securities legislation is enforced by a securities commission or equivalent regulatory body in each province. The provincial bodies coordinate regulatory initiatives through the Canadian Securities Administrators (“CSA”). In fact, the CSA, a voluntary umbrella organization, has made progress in pursing a national system of harmonized securities laws. The CSA has implemented a national passport system in every province other than Ontario, which allows issuers and registrants to deal with only the regulator in their principal jurisdiction, and exempts such issuers and registrants from certain legal requirements in other provinces and territories.

Securities regulation in most provinces has the same broad objectives of protecting the investing public, the integrity of the capital markets and the confidence of investors. This is accomplished through comprehensive sets of rules to ensure equal access to information, to provide for a level playing field for market participants, and to set qualifications and standards of conduct for persons in certain fiduciary and other positions.

Principal mechanisms

The principal mechanisms employed in each of the BC Act, the Alberta Act, the Ontario Act and the Quebec Act to achieve their respective objectives are the following:

  1. i.     Registration: The requirement that participants in the capital markets who trade in securities, underwrite securities or advise with respect to investing in securities, be appropriately registered in order to do so. The definition of trading extends not only to original issues of securities, but also to secondary market activity. There is a limited list of exemptions from the registration requirements that are applicable to certain types of trades and to trades in certain types of securities.
  1. ii.     Disclosure requirements: Detailed rules governing information which must be made available to investors in order to ensure that they have adequate information available to them upon which to base their investment decisions. These disclosure requirements can be broken down into two categories: (i) prospectus disclosure requirements; and (ii) continuous disclosure requirements, each of which is discussed briefly under the corresponding subheading below.
  1. iii.     Take-over bid/issuer bid requirements: A set of rules that governs the acquisition of significant interests in a public corporation and acquisitions by a corporation of its own securities.
  1. iv.     Enforcement powers and remedies: Penal sanctions in respect of contraventions of the relevant securities laws, as well as certain enforcement powers which are granted to the relevant Securities Commissions, and civil remedies to investors who have suffered a loss because of a breach of the relevant Act.

Prospectus requirements and exemptions

An essential feature of Canadian securities laws is the requirement to prepare and have approved by the relevant Securities Commissions, a preliminary prospectus and a final prospectus in respect of a “distribution” of securities. Generally speaking, a distribution includes a trade in securities that have not been previously issued, a trade in previously issued securities from a “control block”, and trades in previously issued securities that were originally issued in reliance upon an exemption from the prospectus requirements, and remain subject to certain resale restrictions. A prospectus is a comprehensive disclosure document relating to the affairs of the entity issuing the securities and to the particulars of the securities being distributed. It must be prepared in accordance with, and contain the information required by, the relevant securities laws and the rules and regulations promulgated thereunder. In Quebec, the prospectus must be prepared in French only, or in French and English.

Each of the BC Act, the Alberta Act, the Ontario Act and the Quebec Act, and the rules and regulations promulgated thereunder, contain certain specific exemptions from this prospectus requirement. National Instrument 45-106 - Prospectus and Registration Exemptions (“NI 45-106”), creates a national set of exemptions with only a few provincial differences. In the case of private placements of securities, some of the most commonly relied upon exemptions are as follows:

  • •     The accredited investor exemption: Permits an unlimited number of purchasers to buy securities as principal if they fall within the definition of “accredited investor”, which includes, among other categories of investors: (i) an individual who owns, or together with a spouse owns, financial assets having an aggregate realizable value, that before taxes but net of any related liabilities, exceeding CA$1 million; (ii) an individual whose net income before taxes exceeded CA$200,000, or whose net income before taxes combined with that of a spouse exceeded CA$300,000 in each of the last two years, and who in either case reasonably expects to exceed such net income level in the current year; (iii) a corporation, partnership, trust, fund and an association, syndicate, organization or other organized group of persons, whether incorporated or not (other than an investment fund) that has net assets of at least CA$5 million as shown on its most recently prepared financial statements; and (iv) certain banks and trust institutions, certain types of insurers, the Crown and Canadian municipal corporations, public boards and commissions;
  • •     The minimum amount investment exemption: Permits a purchaser buying as principal, to acquire securities for an aggregate acquisition cost to such purchaser of not less than CA$150,000 paid in cash at the time of the trade;
  • •     The employee, executive officer, director and consultant exemption: permits an issuer to distribute its securities to its directors, executive officers, employees and consultants without a prospectus;
  • •     The private issuer exemption: Permits a private issuer, that meets certain requirements, to make sales to purchasers in circumstances where each purchaser purchases as principal, and is not a member of “the public” in relation to such private issuer (e.g. directors, officers or employees of the company and certain of their relatives, close personal friends and close business associates, as well as any person who currently holds securities of the issuer) or to accredited investors; and
  • •     The offering memorandum exemption: Permits an issuer to sell its securities to purchasers who are purchasing as principal, available in each of the provinces, except Ontario, if certain requirements are met, which vary depending upon the province, including at the same time or prior to entering into an agreement to purchase such securities, purchasers are delivered an offering memorandum and sign a risk acknowledgement form; an offering memorandum is a disclosure document similar to a prospectus, which must be prepared in accordance with a prescribed form; in British Columbia, there are no limits on who can purchase securities under this exemption; in Alberta and Quebec, unless the purchaser qualifies as an “eligible investor”, the issuer may rely on this exemption only if the purchaser’s acquisition cost does not exceed CA$10,000.

It is also necessary to consider resale restrictions applicable under provincial securities legislation to securities issued in reliance upon an exemption. Under the “closed system” of securities regulation in Canada, the first trade in securities issued in reliance upon a prospectus exemption must generally either be made under a prospectus, pursuant to a further prospectus exemption or in compliance with the relevant resale restrictions (including hold period requirements) of provincial securities legislation. In contrast, when securities are distributed by way of a prospectus, they are thereafter freely tradeable, unless they form part of a “control block”.

If a corporation intends to seek the listing of its securities on a Canadian stock exchange, it is also necessary to comply with the additional requirements of such exchange, including initial and continuous listing requirements.

Registration requirements and exemptions

Canadian securities law requires that any market participant that conducts trading activity as a business, or holds itself out as being in the business of trading, comply with the dealer registration requirements in National Instrument 31-103 - Registration Requirements and Exemptions (“NI 31-103”). The regulation requirements are intended to protect investors and ensure that market dealers have the necessary proficiency, insurance requirements, internal controls and meet the continuing compliance requirements for registrants.

To determine whether registration is required, a market participant must assess whether its activities amount to trading and then consider whether it is carrying out the trading as a business. NI 31-103 outlines a number of factors to be considered in determining whether this “business trigger” has been established.

There are a limited number of exemptions from the registration requirements available to certain types of market participants. The most commonly relied upon exemptions are as follows:

  • •     Trades through a registered dealer: An exemption exists for a trade being conducted through a registered dealer. This exemption is only available where a trade is made solely through a dealer or if a registered dealer is purchasing a principal.
  • •     Mobility exemption: This exemption is available to allow a registered participant to continue to deal with clients who move to a different jurisdiction without the requirement to register in that other jurisdiction. A registered firm may use this exemption for a maximum of 10 clients and an individual may use this exemption for up to five clients.
  • •     Northwestern jurisdiction exemption: The CSA has advised that British Columbia, Alberta, Manitoba, the Northwest Territories, Nunavut and the Yukon (“Northwest Jurisdictions”) will establish a registration exemption for trades in securities that have been distributed under the following exemptions in NI 45-106:
  1. •     The accredited investor exemption;
  1. •     The minimum amount investment exemption;
  1. •     The family, friends and business associates exemption; or
  1. •     The offering memorandum exemption.

A market participant wishing to rely on this exemption must:

  1. •     Not be registered in any jurisdiction (Canadian or otherwise);
  1. •     Not be in the business of providing trading suitability advice to the purchaser;
  1. •     Not provide financial services to the purchaser, except for in British Columbia;
  1. •     Have access to or hold the purchaser’s assets;
  1. •     Provide risk disclosure to the purchaser; and
  1. •     File an information report with the appropriate securities regulatory authority.

This exemption is not yet available in all of the Northwest Jurisdictions.

Continuous disclosure requirements

Securities legislation applicable in each of British Columbia, Alberta, Ontario and Quebec, contains provisions requiring public entities which are “reporting issuers” under such legislation, to promptly report any material changes in their affairs, and to prepare quarterly interim and comparative annual financial statements, with accompanying notes and management discussion, and analysis of financial condition and results of operations. In addition, such legislation requires any person or company that solicits proxies from voting shareholders of reporting issuers to supply an information circular to such shareholders. Further, most reporting issuers are required to file an annual information form which provides supplemental analysis and background material relating to the issuer. As well, such legislation imposes obligations on “insiders” of reporting issuers to report their shareholdings and to refrain from trading when having knowledge of material undisclosed information concerning an issuer’s affairs. Certain foreign reporting issuers who have a de minimis number of shares held by Canadian residents and are subject to foreign disclosure requirements of certain designated jurisdictions, as well as certain foreign reporting issuers who are registrants under US securities legislation, are afforded relief from Canadian continuous disclosure requirements, provided that they comply with applicable foreign disclosure requirements. Reporting issuers are able to file “short form” or “simplified” prospectuses that incorporate their continuous disclosure documents by reference.

Multijurisdictional Disclosure System

The CSA has implemented a multijurisdictional disclosure system which permits US issuers that meet certain eligibility criteria (which include market value, public float and US reporting history tests, depending on the nature of the offering) to distribute securities in Canada using disclosure documents prepared according to the requirements of US regulatory authorities. In turn, the US Securities and Exchange Commission has implemented reciprocal measures which allow Canadian issuers meeting similar criteria to register securities in the US using disclosure documents prepared according to the requirements of Canadian regulatory authorities. The multijurisdictional disclosure system also facilitates compliance with proxy, insider reporting, third party, issuer, exchange and cash take-over bid/tender offer requirements, by generally recognizing the documentation of the “home” jurisdiction.

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