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Disclaimer: The following information is intended only as general introductory information to address some common questions. It is not intended to be and must not be relied on as legal advice. Please refer to the specific provisions of Alberta securities laws. We encourage you to seek legal advice from legal counsel familiar with Alberta securities laws.
Alberta securities law starts from the premise that every distribution of securities requires a prospectus. However, filing a prospectus and fulfilling the ongoing disclosure and governance obligations of being a reporting issuer can be significant. Recognizing that, in some cases, these costs may be disproportionate to the amount of money being raised and that there are investors who may not require the protections of a prospectus, securities law provides various exemptions from the prospectus requirement.
There are a variety of different prospectus exemptions to cover various different types of transactions. The prospectus exemptions that are most commonly used to raise capital generally fall into one of three categories:
There is not necessarily a prospectus exemption for every situation that you might assume or hope there would be.
The exemptions are technical and you must strictly comply with them.
If there is not a prospectus exemption available, it is possible to make an application for a discretionary exemption.
Most of the prospectus exemptions available in Alberta can be found in National Instrument 45-106 Prospectus Exemptions (NI 45-106). This rule has been adopted by each of the jurisdictions of Canada, providing a set of harmonized exemptions available across Canada.
Each of the jurisdictions has also published for comment proposed National Instrument 45-110 Start-Up Crowdfunding Registration and Prospectus Exemptions, which if adopted, will provide another harmonized regime for start-up crowdfunding offerings.
In addition to NI 45-106, there are a number of other prospectus exemptions that have been adopted either only in Alberta or in Alberta and one or more other jurisdictions of Canada.
Alberta-only prospectus exemptions include:
Alberta prospectus exemptions that were not adopted on a national basis but were adopted in cooperation with one or more securities regulators in other jurisdictions of Canada, with the goal of having substantially similar corresponding exemptions, include:
Securities sold under capital-raising prospectus exemptions are typically subject to restrictions on their resale. This is because National Instrument 45-102 Resale Restrictions deems the resale of securities acquired under certain specified prospectus exemptions to be a “distribution”. Until the resale restrictions expire an investor can only resell the securities under a prospectus or a prospectus exemption.
Unless an investor has special rights obligating the issuer to file a prospectus, selling under a prospectus is usually not a realistic option. That means that generally the investor can only resell their securities under another prospectus exemption. There are very few prospectus exemptions that are available to investors to resell their securities. Often investors are limited to reselling to accredited investors or to directors or executive officers of the issuer.
In the case of securities of a reporting issuer, the resale restrictions typically expire after four months. However, for an issuer that is not a reporting issuer, the four month period does not start running until the issuer becomes a reporting issuer. Consequently, if the issuer does not become a reporting issuer, the resale restrictions can continue indefinitely.
Although you are not required to retain a registered dealer when selling securities under prospectus exemptions, you may wish to do so to assist in identifying prospective investors.
A registered dealer may provide other useful services such as assisting with:
In order to comply with their obligation to know their product and to avoid liability with respect to the offering, a registered dealer will typically ask questions, review key documents and take other steps to ensure it understands an issuer’s business and the associated risks and the terms of the securities being offered.
Although a registered dealer may provide comments to an issuer on any offering document or other marketing materials, this does not relieve the issuer from its responsibility of ensuring that the information provided to investors complies with securities laws.
Both exempt market dealers and investment dealers can be engaged with respect to selling securities under prospectus exemptions.
An issuer that relies on a prospectus exemption to distribute securities in Alberta will typically be required to file a report with the ASC reporting on the use of that exemption. The issuer will typically also be required to file a report in each jurisdiction of Canada in which the distribution occurred, reporting on sales in that jurisdiction.
The required form of report is Form 45-106F1 Report of Exempt Distribution, including the two accompanying schedules. (A different report is required under the start-up crowdfunding regimes in some other jurisdictions.) That report must typically be filed within 10 days of the distribution (e.g. the closing at which the issuer accepts the subscriptions and issues the securities).
If there are multiple distributions that occur more than 10 days apart, it may be necessary to file multiple reports and pay multiple fees.
There are two principal exceptions to the generally applicable 10 day filing requirement:
CSA Staff Notice 45-308 Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus Exemptions addresses many of the common questions issuers have when preparing these reports.
The fees required to be paid in Alberta in conjunction with the filing are specified by ASC Rule 13-501 Fees. The ASC fee calculator may be a useful tool for calculating the fee.
The Form 45-106F1 Report of Exempt Distribution is required to be filed electronically through SEDAR, the System for Electronic Document Retrieval and Analysis (or any successor to SEDAR).
CSA Notice 13-323 Frequently Asked Questions About Making Exempt Market Offering and Disclosure Filings on SEDAR provides useful guidance on how to file exempt market documents through SEDAR, and outlines the options of hiring a service provider to file for you or downloading the free software and subscribing directly. The Notice also outlines the separate electronic filing systems in British Columbia and Ontario.
In addition to the Form 45-106F1 Report of Exempt Distribution there may be a requirement under certain prospectus exemptions to file other exempt market documents with the ASC, including for example:
Refer to the terms of the particular exemptions for the applicable filing requirements and timing. A filing fee is not typically required to be paid to the ASC with exempt market filings other than the Form 45-106F1.
If distributing securities into other jurisdictions, review the requirements in those jurisdictions as there may be additional filing requirements (e.g. voluntarily provided offering documents and, in New Brunswick, Nova Scotia and Ontario, for issuers using the offering memorandum exemption, Form 45-106F17 NB, NS & ON Notice of Specified Key Events).
If you are unable to comply with any of the codified prospectus exemptions set out in existing regulatory instruments, you may be able to apply to the ASC for an order granting a discretionary prospectus exemption. Applications for relief are reviewed on a case-by-case basis and whether relief will be granted will depend on the facts and circumstances of your case. The application takes the form of a letter that identifies the party making the application, explains the circumstances, and includes compelling reasons for why an exemption is appropriate and how there are alternative measures to protect investors or an explanation for why certain protections are not necessary in the particular circumstance. The application is required to be accompanied by certain supporting material, including a draft copy of the order sought.
ASC Policy 12-601 Applications to the ASC sets out the process for making such an application, and its Appendix sets out the associated fee.
If relief is required not just in Alberta but in other jurisdictions of Canada because the distribution will be made in other jurisdictions, refer to National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions which describes the process for making such applications, the types of applications that can be made and how you can determine your principal regulator.
Examples of prior orders that have granted discretionary prospectus exemptions can be found on the ASC website by searching for orders made under s.144 of the Securities Act (Alberta). Orders granted by the ASC or other securities regulators in Canada can also be found through online systems such as that provided by the Canadian Legal Information Institute available at www.canlii.org.
There are a variety of possible consequences for non-compliance that may apply in the circumstances, having regard to the seriousness of the contravention. Some examples of possible consequences are as follows:
Crowdfunding refers to raising money online, typically through a website or social media. There are different types of crowdfunding, such as raising money by donation, pre-selling of products or by the sale of securities. Securities laws applies to crowdfunding that involves the sale of securities (e.g. shares, loans or digital tokens).
Crowdfunding typically engages both the prospectus and the dealer registration requirements.
The issuers or businesses raising money through securities crowdfunding will typically be subject to the prospectus requirement but rely on prospectus exemptions. There are a variety of different prospectus exemptions that are relied on for crowdfunding such as:
The crowdfunding portal or website that facilitates a securities crowdfunding offering will typically be considered to be a party "in the business" of trading securities (i.e. a dealer). As such, it will be subject to the registration requirement. In most cases, this means that the funding portal will need to be a registered dealer (e.g. an exempt market dealer), and comply with all of the normal requirements of a registered dealer such as knowing the product to be sold, collecting information on clients to understand the client’s financial circumstances and investment objectives, and assessing the suitability of investments that the client makes. Registration of dealers provides investors with many important investor protections.
You can search the CSA’s Check Registration page to see whether a funding portal is registered as a dealer.
Under Start-up Crowdfunding, where issuers are conducting very modest financings, and the amounts that can be invested are very limited, a funding portal may rely on the registration exemption in Blanket Order 45-521.
You may use multiple prospectus exemptions at the same time provided that the terms of the exemptions do not conflict.
You may use any of the prospectus exemption as long as you meet the conditions of the exemption. Which exemption(s) is/are best will depend on the circumstances. Some factors to consider when reviewing the different prospectus exemptions include:
See the Cheat Sheet: Private Company Capital-Raising Prospectus Exemptions at a Glance for a comparison of the prospectus exemptions most frequently used by small businesses that are not reporting issuers.