On March 25, 2021, the Alberta Securities Commission (ASC) proposed two new prospectus exemptions to promote investment opportunities for small businesses in Alberta, and is seeking written submissions with respect to the proposed exemptions by May 7, 2021.
Small Business Financing Exemption
This proposed exemption (which has been proposed by each of the ASC and the Saskatchewan securities regulator), if instituted, will provide an additional prospectus exemption to streamline financing for small businesses seeking up to $5 million from potential investors. The proposed exemption will only be available to small businesses raising money from investors in Alberta and Saskatchewan.
The proposed exemption contemplates two tiers of investments in an issuer group (which includes the issuer and any affiliates as well as certain persons or entities in connection or common enterprise with the issuer):
- For an investment of $1.5 million or less in a 12-month period in an issuer group, financial statements are not required to be provided with the offering document to investors, nor will the proposed exemption create any additional ongoing financial statement requirements, except for any financial disclosure requirements required under corporate law or other requirements.
- For an investment of more than $1.5 million in a 12-month period in an issuer group, specified financial statements based on a modified generally accepted accounting principles standard must be provided with the offering document to investors. Unaudited annual financial statements may be provided if they have been subject to a review engagement by a certified public accountant. An issuer will be required to deliver an undertaking and deliver annual financial statements to each holder of securities distributed under the proposed exemption.
Issuers will be required to provide investors with an offering document containing various details of the issuer and the offering, including:
- capital structure and organization of the issuer;
- proposed use of funds by the issuer following the offering;
- directors and management of the issuer;
- details regarding the business and transactions of the issuer;
- details regarding the offered securities;
- tax considerations;
- risk factors of investing in the issuer's business;
- financial statements (if needed); and
- ·other additional details as required by the proposed exemption.
Offering and Investment Limits
The proposed exemption has tiered offering and investment limits based on whether: (i) specified financial statements are provided, and (ii) an investor is considered a "minimum income investor", being individuals who have for the last two years had annual net income in excess of $75,000, or $125,000 when combined with the income of their spouse, and in the case of non-individuals, generally to persons or companies controlled by such a person.
If specified financial statements are not provided:
- the maximum that an issuer group can raise from investors in a 12-month period under the proposed exemption is $1.5 million, subject to a lifetime limit of $5,000,000; and
- the maximum that an investor can invest in the issuer group in a 12-month period is $2,500 or if the investor is a minimum income investor, $10,000.
If specified financial statements are provided:
- the issuer group can raise up to an aggregate lifetime maximum of $5,000,000; and
- the maximum that an investor can invest in the issuer group in a 12-month period is $5,000 or if the investor is a minimum income investor, $20,000.
Investments from persons qualified to invest under the accredited investor exemption, the close family, friend and business associate exemption, the foreign investor exemption and the self-certified investor exemption are not included in the calculation of the above $1.5-million or $5-million offering limits.
Additional conditions include:
- investors must complete an enhanced risk acknowledgement form;
- the issuer's head office must be in Alberta or Saskatchewan;
- the issuer must not be a reporting issuer or an investment fund;
- continuous distributions are not permitted; and
- securities to be distributed are limited to common shares, preferred shares, debt securities (other than securitized products or structured finance products), limited partnership units, membership shares or investment shares issued by a cooperative or convertible securities.
Any securities issued under the proposed exemption would be subject to standard resale restrictions, preventing their resale until the issuer becomes a reporting issuer or the securities are resold under a prospectus or prospectus exemption.
Small Business Finder's Exemption
The ASC is also proposing to revoke the current Blanket Order 31-505 (the Northwestern Exemption) in favour of a newly proposed prospectus exemption (the Finder's Exemption). The Northwestern Exemption provides limited blanket relief from the requirement to register as an exempt market dealer in connection with distributions of exempt market securities. The proposed replacement, the Finder's Exemption, would institute targeted dealer registration exemptions, which would apply to exempt natural persons, or finders, who assist Alberta small businesses in raising capital from the exempt market dealer registration requirements.
Who Can a Finder Act For?
In order to use the Finder's Exemption:
- the issuer must have a head office in Alberta; and
- the finder can only work for an issuer that has not raised, in aggregate, more than $5 million under exemptions from prospectus requirements.
When Can a Finder Participate in a Financing?
- A finder can participate in a financing conducted in connection with the self-certified investor prospectus exemption, the proposed small business financing prospectus exemption (described above) or a distribution by a private issuer to an accredited investor or a person or company that is not the public. A finder cannot participate in a financing conducted in connection with distributions to family, friends and business associates.
Who Can Be a Finder?
- Finders must be an individual and cannot be a bad actor.
What is a Finder Prohibited from Doing?
- Finders cannot directly or indirectly advertise the distribution or solicit prospective investors other than to parties with whom they have a substantial pre-existing relationship.
- Finders cannot have previously provided financial services to potential investors as a registrant, financial planner, insurance agent, mortgage broker or similar financial services relationship, except for specific exceptions.
The ASC has made it clear that the Finder's Exemption is not an invitation to solicit the general public to invest.
As noted above, the ASC is seeking written submissions on the two aforementioned exemptions on or before May 7, 2021.