When you go about raising money to help fund a business venture, you will almost always engage in the sale of securities. While the definition of a “security” is very broad under applicable legislation, a simplified description is that it is any document or right that, in exchange for money from an investor, entitles the investor to a return on such monies derived from the business. The most common security is of course common shares issued by the business but includes promissory notes and any other such promises to return monies received and presumably interest or other return on such monies.
The starting point of securities laws is that in order to sell securities to anybody, you must complete a prospectus and sell through a registered broker, unless you have an exemption or exemptions available to you from the prospectus and registration requirements. There are a number of so called private placement exemptions. An initial set of exemptions is based on your business being a “private issuer” which is a company having less than 50 shareholders, excluding employees, and containing restrictions on the transfer of securities. As a private issuer, you can raise money from:
- Directors, officers, employees and major shareholders of the business;
- “Close” family members of directors, senior officers and major shareholders (generally, immediate family members are deemed to be “close”);
- “Close” business associates of directors, senior officers and major shareholders (generally, such persons must truly and sufficiently know the director, senior officer or major shareholder such that the person knows they are capable and trustworthy);
- “Accredited” investors who meet certain defined asset or income tests.
If you are no longer a private issuer or which to access additional exemptions (and therefore lose your private issuer status), other exemptions are:
- Persons who purchase $150,000 or more in the business;
- Persons who purchase after you have delivered to them an “offering memorandum” in a prescribed form which would include attaching audited financial statements of the business.
Please note that so called “crowdfunding”, while potentially available under any of the above exemptions would realistically be supported by the offering memorandum exemption which does not have any minimum investment or require any connection between the investor and the business or its management.
The British Columbia Securities Commission has published a document entitled Capital Raising for Small Business which can be found at http://www.bcsc.bc.ca/newspub.asp?id=57#Companies and explains the above concepts in greater detail.