Businesses are often looking for funding to expand. If conventional lending sources are not available to you, one avenue you may want to consider is private equity funding.
When thinking in terms of raising private equity funding for your business, you must be aware that the provisions of the OSA and its related Regulations, Rules, Policies and Notices will apply.
The application of the OSA means that if you want to raise money from the public in Ontario by issuing securities, such as common equity shares or preference shares, you must prepare and file a prospectus with the Ontario Securities Commission ("Commission"). In the prospectus, you are required to describe your business and the proposed offering of securities and provide audited financial statements and other information about your business. Preparing a prospectus can be both very expensive and very time consuming. Additionally, the securities may only be sold through dealers registered with the Commission.
You can avoid the considerable expense of preparing a prospectus if you can find an exemption from doing so under the OSA.
Past exemptions were not all that helpful in practical terms. As an example, one exemption required an investor to make a minimum investment of $150,000, not an inconsiderable amount of money. Another exemption limited the number of potential investors you could approach, the time within which you could offer your securities and the number of times you could use the exemption.
Fortunately for small and medium sized businesses, the rules for raising private equity have recently changed, making it somewhat easier for these businesses to raise equity funding.
The old exemptions have been replaced by two new ones which are referred to as the "closely-held issuer" exemption and the "accredited investor" exemption:
This exemption permits your business to raise up to a total of $3 million through any number of offerings from up to 35 investors without the need to prepare and file a prospectus with the Commission and without the need to sell your securities through registered dealers. Additionally, you do not have to concern yourself with a potential investor's financial status, sophistication or ability to withstand the loss. There is no limit as to the number of investors that can be approached under this exemption, as there were with certain past exemptions. Certain investors, such as directors, officers, employees and others are excluded from the "35 investor" limit.
Certain additional rules apply before you can make use of the "closely-held issuer" exemption. In particular, the issuer must provide a purchaser with a prescribed "don't buy" statement (Form 45-501F3) at least four days prior to the trade.
The "accredited investor" exemption permits you to raise any amount at any time from any person or company that is considered to be an "accredited investor" without complying with the OSA's dealer registration and prospectus requirements. "Accredited investors" are considered to have the capacity and sophistication to obtain and analyze the information needed to assess an investment opportunity without needing the assistance of the information contained in a prospectus and they are considered to have the financial ability to withstand the loss of the investment.
The Rule contains a list of those considered to be an "accredited investor". In particular, an accredited investor can be an individual who has certain net worth and/or has a certain level of income. Accredited investors also include financial institutions, registered advisors and dealers (other than limited market dealers), pension funds and a spouse, parent, grandparent or child of an officer, director or promoter of the issuer.
Certain other rules, such as filing requirements, apply before you can make use of the "accredited investor" exemption.
The foregoing exemptions do not require an issuer to provide an Offering Memorandum to purchasers. However, if a document which "constitutes" an Offering Memorandum is provided, a copy of it must be filed with the Commission within 10 days of the sale and a statutory right of action, as set out in the OSA, must be provided to purchasers and must be described in the Offering Memorandum.
The new rules have definitely made it easier for a small or mid-size company to raise private equity. However, you should note that there are other considerations and exceptions which are beyond the scope of this article and are best addressed by your lawyer.
