To facilitate small, local financings by Alberta-based start-up businesses, the Alberta Securities Commission (the “ASC”) has implemented ASC Rule 45-517 – Prospectus Exemption for Start-up Businesses (the “Start-up Business Exemption” or “ASC Rule 45-517”).
The Start-up Business Exemption is available for distributions of certain securities by Alberta issuers seeking to raise funds from Alberta investors. The Start-up Business Exemption is a prospectus exemption designed to respond to concerns that small and start-up issuers encounter when trying to address very modest financing needs. The funding limit permitted under ASC Rule 45-517 is $250,000.
An issuer wishing to raise funds can use the prospectus exemption in ASC Rule 45-517 in three ways:
- to raise money through an online funding portal (provided that the portal is in compliance with the registration requirement e.g., registered as an exempt market dealer);
- to raise money through a dealer (provided the dealer is in compliance with the registration requirement e.g., registered as an exempt market dealer or investment dealer) that will solicit investment and distribute securities through traditional distribution channels; or
- to raise money through the issuer’s principal’s own network of contacts (provided that they are not in the business of trading securities such that the dealer registration requirement is triggered).
Included among the key conditions of the Start-up Business Exemption are the following:
- The head office of the issuer must be located in Alberta (or, in certain circumstances, a corresponding jurisdiction).
- The issuer must prepare an offering document in the required form, which includes certain information about its business, its management and the offering, including how it intends to use the funds raised, and the minimum offering amount.
- The issuer, including other members of its “issuer group”, cannot raise in aggregate more than $250,000 per distribution. The issuer group is also limited to two start-up business distributions in a calendar year.
- The aggregate lifetime amount that an issuer group can raise under all start-up business distributions is $1,000,000.
- Generally, the maximum amount that an issuer can accept as a subscription from an investor in a start-up business distribution is $1,500. However, if a registered dealer provides the investor advice that the investment is suitable to the investor, the maximum subscription from that investor is $5,000.
- If the distribution is made through a funding portal the portal must be a registered dealer.
- The issuer must provide purchasers with a 48 hour period in which to cancel their agreement to purchase securities.
- The issuer must provide each investor with a specified form clearly explaining certain risks of investing and must obtain an acknowledgment from each investor that they have read and understood the contents of that form.
Importantly, ASC Rule 45-517 does not include a registration exemption. If a person or company is in the business of dealing in securities in Alberta, including as a funding portal, they will be required to comply with the registration requirement.
For issuers, the Start-up Business Exemption is designed to be a simpler and less costly capital raising alternative. For investors, the exemption is designed to clearly convey and limit the risks that can be associated with an investment in an early-stage business.
Is the Start-Up Business Exemption Right for Your Company?
Before commencing a distribution under ASC Rule 45-517 issuers should consider whether it is appropriate for their purposes. In particular, issuers should assess whether they have the resources to comply with the requirements under the Rule and estimate if they have the financial and other resources necessary to manage a greater number of security holders.
If the distribution is successful, the founders of the issuer may have to give up part of the ownership of the issuer to investors. The issuer will be accountable to its investors. Investors will likely expect to be informed about successes and failures of the issuer’s business. The issuer may have to spend time and money to maintain contact with investors.
Within 30 days after the closing of a distribution, the issuer must file a report of exempt distribution, in the required form, with the ASC. There is a fee associated with the filing of this report.
An issuer that relies on ASC Rule 45-517 will likely no longer be considered a “private issuer” under National Instrument 45-106 – Prospectus Exemptions and, as such, will likely not be able to rely on the “private issuer” prospectus exemption for future distributions of securities. As a consequence, other prospectus exemptions will need to be considered and if relied upon, a report of exempt distribution with the associated fee will likely be required in respect of each future distribution.
ASC Rule 45-517 is not available to reporting issuers. Reporting issuers are companies that are required to make continuous disclosure to the public of their business activities including by filing financial statements and other documents as required by securities legislation.
Relying on ASC Rule 45-517 will not make an issuer a “reporting issuer” under securities laws; however, by increasing the number of its shareholders, the issuer may become subject to certain reporting requirements under applicable corporate law. For example, under the Business Corporations Act (Alberta) an issuer is typically required to hold an annual meeting of its shareholders and is required to distribute an information circular, containing certain specified information, where it solicits proxies from more than a specified number of shareholders. Also, under Business Corporations Act (Alberta), an issuer will often be required to deliver audited annual financial statements to shareholders, unless the shareholders unanimously resolve to dispense with the appointment of an auditor. With a large number of public shareholders obtaining such a resolution may not be realistic.
The Start-up Business Exemption is nuanced and issuers would be well served to discuss the application and implications of the legislation with a legal advisor prior to relying on it.
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Keith Inman is an Alberta and B.C. qualified securities and M&A lawyer with broad experience in the capital markets. Keith regularly advises individuals and companies with respect to capital raises, securities reporting and compliance matters, purchases and sales of businesses and other corporate/commercial matters. You can reach Keith at 250-869-1195 or by email at [email protected].
