Raising Capital in the Exempt Market

06/03/2013 Raising Capital in the Exempt Market Calgary Chamber – Member Expert Series May 16th, 2013 Presented by: A. Neil Hutton, Partner, Corpora...
Author: Rachel Bond
1 downloads 2 Views 61KB Size
06/03/2013

Raising Capital in the Exempt Market Calgary Chamber – Member Expert Series May 16th, 2013

Presented by: A. Neil Hutton, Partner, Corporate & Commercial Ryan Franzen, Partner, Corporate & Commercial

Raising Capital in the Exempt Market What is the Exempt Market? • The market place for securities that are issued without a prospectus • It is called “exempt” because the securities are exempt from prospectus requirements • Reliance on National Instrument 45-106 Prospectus and Registration Exemptions

1

06/03/2013

Raising Capital in the Exempt Market The exempt market is considered to have a higher degree of risk. Why? • No prospectus, less due diligence and no regulatory vetting • Potential for less disclosure or no continuous disclosure • No secondary market for securities thus illiquid • Securities can be sold without an investment dealer or other registrants and therefore may not get suitability advice on the investment • Less regulatory oversight

Raising Capital in the Exempt Market Players in the Exempt Market • Reporting Issuers • Listed Issuers • Exempt Market Issuers

2

06/03/2013

Raising Capital in the Exempt Market What is an Exempt Market Financing? • Raising capital through the issuance of exempt market securities • Includes equity and debt from both corporations and partnerships • Access to the capital markets through reliance on the prospectus exemptions and compliance with the criteria and conditions of the exemptions and resale restrictions

Raising Capital in the Exempt Market What is an Exempt Market Financing? (cont’d) • Provides easier and less expensive access to the capital markets without having to become a reporting issuer and a listed issuer. • Provides investors with alternative investments to the stock market • Represents billions of investment dollars, primarily to small to medium sized business who can’t or don’t’ want to be involved in the stock markets.

3

06/03/2013

Raising Capital in the Exempt Market The Securities Act Section 75(1) - Unless registered in accordance with securities laws, a person shall not act as: (a) a dealer, (b) and adviser, or (c) an investment fund manager. Section 110(1) - No person shall trade in a security if the trade would be a distribution of the security unless a prospectus has been filed.

Raising Capital in the Exempt Market Free Trading Exemptions (backdoor)

Restricted Trading

Front Door (Prospectus)

Free Trading

4

06/03/2013

Raising Capital in the Exempt Market Exemptions from the Registration Requirement Section 75(1) - Unless registered in accordance with securities laws, a person shall not act as: (a) a dealer, (b) and adviser, or (c) an investment fund manager. Is an exemption even needed? If no one is acting as a dealer, adviser or an investment fund manager, then an exemption would not be required.

Raising Capital in the Exempt Market Exemptions from the Registration Requirement Definitions: a. “dealer” …engaging in or holding itself out as engaging in the business of trading in securities… b. “adviser” …engaging in or holding itself out as engaging in the business of advising in securities…

5

06/03/2013

Raising Capital in the Exempt Market The Business Trigger Test - NI 31-103CP “We [the ASC] look at the type of activity and whether it is carried out for a business purpose to determine if an individual or firm must register. We [the ASC] consider the factors set out below, among others, to determine if the activity is for a business purpose…”

Raising Capital in the Exempt Market The Business Trigger Test - NI 31-103CP(cont’d) Factors: a. Engaging in Activities Similar to a Registrant b. Intermediating Trades or Acting as a Market Maker c. Directly or Indirectly Carrying on the Activity with Repetition, Regularity or Continuity d. Being, or Expecting to be, Remunerated or Compensated e. Directly or Indirectly Soliciting

6

06/03/2013

Raising Capital in the Exempt Market The Business Trigger Test - NI 31-103CP (cont’d) A securities issuer is an entity that issues or trades in its own securities. In general, securities issuers with an active non-securities business do not have to register as a dealer if they…

Raising Capital in the Exempt Market The Business Trigger Test - NI 31-103CP (cont’d) • • • • •

Do not hold themselves out as being in the business Trade infrequently are not, or do not expect to be, compensated do not act as intermediaries do not produce, or intend to produce, a profit

Summary: An exemption from the registration requirement may not be necessary if the issuer is not “in the business” of trading / advising.

7

06/03/2013

Raising Capital in the Exempt Market Exemptions from the Registration Requirement • Part 8 of NI 31-103  a laundry list of exemptions • Various Blanket Orders

Raising Capital in the Exempt Market Exemptions from the Registration Requirement (cont’d) Example of exemption under Part 8 of NI 31-103 •

Trades Through or to a Registered Dealer – The dealer registration requirement does not apply to a person or company in respect of a trade by the person or company if one of the following applies: • The trade is made solely through an agent who is a registered dealer, if the dealer is registered in a category that permits the trade; • The trade is made to a registered dealer who is purchasing as principal, if the dealer is registered in a category that permits the trade.

8

06/03/2013

Raising Capital in the Exempt Market The Northwestern Exemption (Blanket Order 31505) Order – The dealer registration requirement does not apply to a trade in a security by a person or company in connection with a “Prospectus Exempt Distribution”, provided that…:

Raising Capital in the Exempt Market The Northwestern Exemption (Blanket Order 31505) (cont’d) a. Cannot be registered or required to be registered in any jurisdiction b. Cannot offer suitability advice to the purchaser c. Must obtain a signed Risk Acknowledgement Form from the purchaser d. Cannot provide financial services (other than in connection with the Prospectus Exempt Distribution) to the purchaser e. Cannot hold or have access to the purchaser’s assets f. post-closing filing with ASC

9

06/03/2013

Raising Capital in the Exempt Market The Northwestern Exemption (Blanket Order 31 505) Is the Northwestern Exemption of limited use? • It was never intended to be relied upon by issuers? It’s for “Market Makers”? • It could be revoked at any time

Raising Capital in the Exempt Market Prospectus Exemptions - The exemptions from s.110 of the Securities Act (Alberta) • Overview on Canadian Securities Administrators and National Instruments and Policies

10

06/03/2013

Raising Capital in the Exempt Market National Instrument 45-106 Prospectus and Registration Exemptions • One of the fundamental and most used Securities policies. It cover a variety of prospectus exemptions and had previous covered registration exemptions until the introduction of NI 31-103 • This instrument covers a variety of prospectus exemptions outside of capital raising (i.e. transaction exemptions, employee exemptions, investment funds) • Cross references to National Instrument 45-102 Resale of Securities

Raising Capital in the Exempt Market • The primary application of NI 45-106 for the exempt market are covered off under Division 1 of the Instrument called Capital Raising Exemptions. The most commonly used are: 1. Accredited Investor • Criteria for individuals • Financial test

11

06/03/2013

Raising Capital in the Exempt Market (cont’d) 2. Private Issuer • Private companies and other entities • 50 shareholders or less • No solicitation to the public • Limited to those connected to the directors, officers, founders and control persons • Useful exemption for smaller offerings • No ASC filings

Raising Capital in the Exempt Market (cont’d) 3. Family, Friends and Business Associates • Connection to directors, officers, control persons • What is a close friend/business associates? • Special Saskatchewan requirement • No commissions to directors, officers, and control persons. 4. Minimum Investment Amount • $150,000 • Supporting materials

12

06/03/2013

Raising Capital in the Exempt Market (cont’d) 5. Offering Memorandum • Prescribed disclosure For Offering Memorandums NI45-106F2 • >$10,000 Eligible Investor Test (AB) • CSA Notice 45-309 and CSA Notice 45-311 • No OMs in Ontario • No commissions to non-registrants in NWT, SK, NT, YK. • Regulatory oversight and review

Raising Capital in the Exempt Market Resale Restrictions – National Instrument 45102 Resale of Securities • Resale Restrictions: First trades are subject to a Restricted Period or a Seasoning Period • Certificates representing securities must bear a legend

13

06/03/2013

Raising Capital in the Exempt Market Resale Restrictions • Practical Applications of Resale Restrictions • Indefinite hold period • Can still be transferred with another prospectus exemption • Transfer Agreements

Raising Capital in the Exempt Market Structure of the Offering • How much are you raising? • How does this related to the value of your business? • What type of security are you issuing? • Exempt Market Dealer input • RRSP and TFSA eligibility

14

06/03/2013

Raising Capital in the Exempt Market Required documents • Subscription Agreements • Offering Memorandum • Other information or pro-forma financial forecasts • Future orientated financial statements

Raising Capital in the Exempt Market Issuer Disclosure • Business Plan • Engineering Reports • Financial Statement • Audit • Material Contracts

15

06/03/2013

Raising Capital in the Exempt Market Selling the Securities Consider who will sell the securities: An Issuer v. an EMD Consider: • Registration requirements and exemptions • Ability to find investors versus those in the sales industry (i.e., EMDs) • Cost

Raising Capital in the Exempt Market Closing an Offering: 1. Formalities • Review subscriptions agreements and attachments • Note residency of subscribers • Ensure subscription prices have been paid • Ensure requirements of any RSP Trustee have been satisfied • I.e., Legal opinions, RSP opinion, proof of funds etc.

16

06/03/2013

Raising Capital in the Exempt Market Closing an Offering (Cont’d): 1. Formalities (con’t) • Acceptance of subscription agreements • Create certificates representing securities (with legend), and deliver as applicable. • Resolutions • Registration of any security (i.e., mortgage) • Corporate Registries – update shareholders / limited partners

Raising Capital in the Exempt Market Closing an Offering (Cont’d): 2. Filings (within 10 days) • Form 45-106F1 • Form 45-106F6 (BC) • Information Report under Blanket Order 31505 (if Northwestern Exemption is relied on) • Form of offering memorandum, if applicable.

17

06/03/2013

Raising Capital in the Exempt Market Post-Closing and Ongoing Obligations a. What type of legal entity is the issuer? • Financials (audited) • Annual General Meetings b. Is the offering ongoing? • If relying on an Offering Memorandum and the offering is ongoing – update financials • Has there been a Material change.

Questions? For more information please contact:

Neil Hutton Partner, Corporate & Commercial [email protected] 403.225.6416

Ryan Franzen Partner, Corporate & Commercial [email protected] 403.873.3707

18