UNIT 5 Flashcards
Security
Very broad definition – includes share, note, profit sharing agreement, bond, debenture
- Securities legislation will vary by province – each can implement whatever they want
- Not to the province’s advantage to think “outside” the norm, because lots of time issuers will hit more than one province at a time, thus the legislation is similar
Two big issues to watch for when purchasing securities (when buying a company):
[1] Do we have a take-over bid?
[2] If purchasing securities from private company, need to find an exemption
Securities Legislation is a _____ system
Closed
Securities Legislation
Issuers are not allowed to issue share/trade unless they:
[1] issue a prospectus
[2] fall within an exemption
Securities Legislation - Issuing a prospectus
[1] Prospectus = a large document that offers full and clear disclosure of sufficient detail regarding the company such that you can make an informed decision about whether to invest
- Means that ANYONE can go and buy those shares because all company information was released
- If there are any factually incorrect statements, misrepresentations, misleading statements, or omissions in a prospectus, then investor is deemed to rely on them; therefore issuer may be liable for damages (or right to rescission) to investors
[2] This is a codified statutory right – no contractual or tort related reason needed
- Why? To keep people from giving inaccurate information & providing relevant information
[3] Negatives: hard to fulfil the requirements (must keep up w/disclosure) & expensive (difficult for smaller corporations)
Securities Legislation - Exemptions (list)
[1] Capital Raising/Private Placement Exemptions:
(i) Accredited Investor Exemption
(ii) Private Issuer Exemption
(iii) Friends, Family, and Business Associates
(iv) Offering Memorandum
(v) Minimum Investments
(vi) Crowdfunding
[2] Transaction Exemptions
(i) Business Combination and Reorganization
(ii) Asset Acquisition
(iii) Other Transaction Related Exemptions [s. 2.13 – Petroleum, Natural Gas and Mining Properties; s. 2.14 – Securities for Debt; s. 2.15 – Issuer Acquisition or Redemption; s. 2.16 – Take-over Bid and Issuer Bid; S. 2.17 – Offer to Acquire to Security holder Outside Local Jurisdiction]
[3] Trades issued to and among Employees Directors, etc
(i) Employee, executive officer, director and consultant – s. 2.24
(ii) Trades among employees of a non-reporting issuer – s. 2.26
Accredited Investor Exemption
Rationale: these individuals have sufficient resources to obtain advice from professionals and the ability to withstand significant losses with regard to their investment (i.e. not losing rent money)
- This exemption has filing requirements
Note: If you’re counsel for the issuer of securities being issued via accredited investor exemption, you must exercise due diligence to ensure that the purchasing investor is actually an accredited investor
Accredited Investor Exemption Requirements
Need to satisfy at least one category:
(i) an individual (alone or with spouse) has net “financial assets” (cash and securities, exclude tax) of at least $1,000,000;
* *Note** that net “assets” differs from net “financial assets” Financial assets are only cash and securities and do not include real estate; Net assets could include your house
(ii) an individual with net income before tax (in the last two years) of at least $200,000 (or $300,000 combined w/spouse) & reasonably expects to exceed that income level in current calendar year;
(iii) an individual (alone) has net “financial assets” (cash and securities) of at least $5,000,000;
(iv) an individual (alone or with spouse) has “net assets” of at least $5,000,000;
(v) a “person” (other than an individual) has “net assets” of at least $5,000,000;
- I.e. a corporation, partnership, individual – allows indirect ownership
(vi) a person in respect of which all owners of interests (except those required to be owned by directors) are persons that are accredited investors.
- If ALL owners of a corporation are accredited investors, can look through that corporation to them, allowing that corporation to buy shares
- Facilitates a HoldCo structure: HoldCo itself doesn’t meet any of the categories for an accredited investor, but if all the owners of HoldCo are accredited investors, then HoldCo itself is an accredited investor –> allows flow-through of accreditor investor exemption
Private Issuer Exemption
[1] Most common exemption in dealing with companies – most applicable to private companies
[2] This exemption has NO filing/reporting requirements
- This means that the securities commission doesn’t know the company exists and cannot audit you!
Private Issuer Exemption Requirements
Need to satisfy ALL criteria:
(i) is not a reporting issuer or an investment fund;
(ii) securities are subject to transfer restrictions contained in the issuers constating documents or shareholders agreement (USA);
- Ex: shares cannot be transferred without consent of directors – this is enough of a restriction
- PUT THIS IN YOUR ARTICLES OF INCORPORATION
(iii) securities are held by not more that 50 people, exclusive of employees and former employees
(iv) has only distributed securities to the permitted list of investors:
(a) director, officer, employee, founder or control person;
(b) spouse, parent, grandparent, brother, sister, child or grandchild of either a director, executive officer, founder, or control person, or of a spouse of such
(c) close personal friend or close business associate of a director, executive officer, founder or control person;
- Close personal friend: hard to meet this requirement. Must have a very close connection, a genuine relationship, with this person.
- Rule of thumb: would this person be a pallbearer at my funeral?
- Being a relative does not make you a close personal friend or business associate.
- LOOKING FOR PEOPLE WHO KNOW YOU WELL ENOUGH THAT THEY CAN EVALUATE YOUR TRUSTWORTHINESS to make informed investment decisions
(d) grandchild of the selling shareholder or the selling shareholder’s spouse;
(e) a current shareholder;
(f) an accredited investor;
(g) a person of which a majority of voting SHs or directors are persons described above;
(h) a person that is “not the public”
- What is public? Caselaw is old and not clear on this
Friends, Family and Business Associates (“FF&BA”) Exemption – s. 2.5
Applies when you can’t meet all the Private Issuer criteria, and contains many of the same relationships as the private issuer exemption, but:
(i) Not limited to 50 shareholders like the Private Issuer Exemption
(ii) No accredited investor category as with the private issuer exemption
(iii) Must file a report with securities commission
Friends, Family and Business Associates (“FF&BA”) Exemption Categories
(i) a director, executive officer or control person of the issuer or an affiliate of the issuer;
(ii) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer or control person;
(iii) a parent, grandparent, brother, sister, child/grandchild of a spouse of a director, executive officer or control person;
(iv) a close personal friend or a close business associate of a director, executive officer or control person;
(v) a founder of the issuer or a spouse, parent, grandparent, brother, sister, child, close personal friend or close business associate of a founder;
(vi) a parent, grandparent, brother, sister or child of the spouse of a founder;
(vii) a person of which the majority of the voting securities are owned by, or a majority of the directors are, persons described above; and Facilitates HoldCo structure
(viii) a trust or estate of which all of the beneficiaries are or a majority of the trustees are persons described above
Offering Memorandum
[1] Requires some disclosure (in between a prospectus & private issuer (no information reported) about company
[2] “Eligible investors” can buy/sell securities
- Eligible investor: individual made at least $75,000 in net income (or $125,000 with a spouse) in at least the past two years; $400,000 net asset threshold, etc
Thresholds are dropped relative to an accredited investor
- Accredited investors are automatically considered eligible investors
- “Ineligible” investors can still invest a maximum of $10,000 within a 12-month period.
- Eligible investors can invest max of $30,000 within a 12-month period, or up to a higher limit if they seek professional advice
[3] Marketing material is incorporated into the OM: therefore, misrepresentations in the marketing material give rise to the same remedies as misrepresentations in the actual OM damages or rescission
[4] History: used to be a great way to bring in many investors due to the very low threshold – was very popular in Alberta for real estate, until the 2008 recession
[5] NOW must provide financial statements that are audited, and must continue with them forever (every year) = people reconsidered its use = not popular
- Audits cost a lot of money, especially for newer start-up companies.
- Audits will be required indefinitely into the future if an issuer uses the OM exemption, so there is a corresponding indefinite increase in costs for an issuer who uses the OM exemption.
[6] There are filing requirements and fees
Minimum Investments
[1] Applicable if an investor purchases at least $150,000 (paid in cash at time of trade) in the securities of a single issuer.
[2] Rationale: if making such a large investment, you would have (i) leverage and incentive to obtain relevant information from the issuer, (ii) the ability to protect yourself, and (iii) the ability to negotiate. No need to block these transactions/protect these people.
Crowdfunding - MI 45-108
[1] Recall that securities law does not apply to buying assets. Crowdfunding can be more easily used to pool funds for assets. This is specific to raising share capital –> must make arrangements with a “funding portal”
[2] Not a common way to raise capital – not streamlined, and unreliable because you’re relying on the public
[3] Max you can raise as an issuer is $1.5 million within a 12-month period.
[4] If you’re not an accredited investor, the most you can subscribe for is $2,500 per distribution, with a cap of $10,000 per calendar year
- So you would have a minimum of 150 shareholders if you raised $1,500,000.
- Having 150 shareholders complicates the entire process with respect to dealing with shareholders (e.g. can’t pass resolutions but then would need to hold actual shareholders’ meetings)
