Canadian companies currently are required to provide prospectus-level disclosure (very technical and very expensive in terms of legal fees from the perspective of a budding company). For Canadian companies who wish to offer shares to investors, there is a requirement of a minimum level of investor protection information disclosure. Certain disclosure exemptions apply (among others):
(a) company founders;
(b) company employees;
(c) family members of founders;
(d) “sophisticated” or accredited (high net worth investors who presumably have the contacts and resources to evaluate investment opportunities);
(e) close business associates; and
(f) if a minimum threshold of information is provided in an offering memorandum document (this exemption is not available in all provinces).
A complete list of exemptions can be found here: http://bit.ly/N1V1pQ (scroll down within the document to part 2).
Where an exemption does not exist, a high level of investor disclosure, both initially and ongoing (including audited financial reports, an explanation of risk factors, and information on the business) is required in the form of a prospectus in order to raise financing from complete strangers.
In the preceding list, the further the offer is from “(a)” i.e. an established relationship with the founder and the closer the offer is to “(f)”, i.e. a complete stranger, the more information is required.
However, a complete stranger who is an accredited (or sophisticated) investor in the eyes of the securities regulators (item (“d”), above) will not require comprehensive investor disclosure if he/she or such investor passes the required threshold for investing. This label applies to (among others) banks, pension funds and, relevantly, individuals with (1) an annual income of at least $200,000 each year for the past two years ($300,000 with his or her spouse, if married) and have the expectation to make the same amount this year; or (2) have financial assets exceeding $1 million (excluding primary residence); or (3) have net assets of at least $5 million (including net value of primary residence).
This blog is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at your own risk. The law may have changed since the publication of this article. The writer is licensed to practise law in Ontario and not in any other jurisdiction.
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