Raising Money in BC: New Private Placement Exemption for Issuers Proposed in BC
The securities regulatory authorities in British Columbia are proposing a new prospectus exemption that would, subject to certain conditions, allow issuers listed on a Canadian exchange to raise money by distributing securities to investors who have obtained advice about the suitability of the investment from an investment dealer.
Prospectus distributions and prospectus exempt distributions
One of the main requirements of securities legislation is that an issuer distributing a security must file and obtain a receipt for a prospectus. The prospectus must contain full, true and plain disclosure of all material facts relating to the securities being offered. Investors who purchase securities under a prospectus are provided certain statutory rights.
Securities legislation provides exemptions from the prospectus requirement in circumstances where a prospectus is not necessary (because of the investor’s knowledge, sophistication or relationship with principals of the issuer) or where alternative protections exist. The most commonly used prospectus exemption is the accredited investor exemption. The accredited investor exemption is available for the sale of securities to both new investors and existing security holders if they meet the definition of “accredited investor”. There is also the existing security holder exemption which allows an issuer to distribute securities to an existing security holder if certain key conditions are met. One of the key conditions is that the existing security holder is limited to acquiring $15,000 under the exemption in a 12-month period unless the security holder has obtained advice about the suitability of the investment from an investment dealer.
Retail investors that are not existing security holders
If an issuer wants to raise capital from retail investors that are not existing security holders, without a prospectus, the principal prospectus exemptions available require an offering document. Canadian issuers do not generally use these exemptions to raise capital from retail investors because of the time and cost involved in preparing the required offering document. Because issuers rarely use the prospectus exemptions intended for sales to retail investors, retail investors have limited opportunity to invest directly in issuers.
The key condition
The regulators’ proposed prospectus exemption dovetails the conditions (see below) of the existing security holder exemption (removing the requirements of being an existing security holder) with the additional key condition that the investor must obtain advice regarding the suitability of the investment from a “full service” investment dealer
This condition is intended to provide protection to the investor as the suitability determination involves the investment dealer meeting their know-your-client and know-your product obligations. Specifically,
- the know-your-client obligations require the investment dealer to accurately determine the investor’s current financial situation, investment knowledge, investment objectives and time horizon, risk tolerance, and current investment portfolio composition and risk level,
- the know-your-product obligations require the investment dealer to understand the structure, features and risks of the relevant product, and
- a suitability determination entails the investment dealer ensuring that the product is suitable for the investor using the results of the know-your-client and know-your-product
The exemption is proposed to expire three years after implementation, subject to extension after assessing the use of the exemption (will dealers embrace the exemption or not), and whether it provides sufficient protections for investors. The deadline for comments on this proposal is June 15, 2015.
Existing Security Holder Exemption – Conditions (those in square brackets not applicable to above proposed exemption)
- the issuer is a reporting issuer in at least one jurisdiction of Canada;
- the issuer’s equity securities are listed for trading on the TSX Venture Exchange, the Toronto Stock Exchange, or the Canadian Securities Exchange;
- the issuer has filed in each jurisdiction of Canada in which it is a reporting issuer all periodic and timely disclosure documents that it is required to have filed in that jurisdiction as required by each of the following
- applicable securities legislation,
- an order issued by the regulator or securities regulatory authority,
- an undertaking to the regulator or securities regulatory authority;
- the issuer has issued and filed the offering news release;
- the distribution is of a listed security or a unit consisting of a listed security and a warrant;
- [the issuer makes the offer available to all persons who, as of the record date, held a listed security of the issuer of the same class and series as the listed security to be distributed under this exemption;]
- the purchaser purchases the security as principal;
- the purchaser represents in writing to the issuer that, on or before the record date, the purchaser acquired and continues to hold, a listed security of the issuer of the same class and series as the listed security to be distributed under this exemption;
- [one of the following applies:
- the purchaser is a person that has obtained advice regarding the suitability of the investment and, if the person is resident in a jurisdiction of Canada, that advice has been obtained from a person that is registered as an investment dealer in the jurisdiction,
- the aggregate acquisition cost to the purchaser for the securities purchased under this Instrument, when combined with the acquisition cost to the purchaser for the purchase of any other security from the issuer under this Instrument in the last 12 months, does not exceed $15,000.]