Alberta Securities Commission implements prospectus exemption for startups

The Alberta Securities Commission (the “ASC”) implemented new rules designed to facilitate start-up businesses in Alberta to raise capital through the issuance of certain securities. The new ASC Rule 45-517 Prospectus Exemption for Start-Up Businesses (the “Start-up Business Exemption”) provides a prospectus exemption for Alberta-based start-ups for capital raising up to $250,000 per distribution and up to a lifetime aggregate of $1,000,000.

Key Conditions of the Start-up Business Exemption

Who can use the exemption?

The Start-up Business Exemption is available for distributions of securities by Alberta issuers that wish to raise funds from Alberta investors. The head office of the issuer must be located in Alberta or another jurisdiction that has adopted a corresponding exemption (of which there currently are none). Furthermore, the issuer cannot be an investment fund or a reporting issuer in any Canadian jurisdiction.

What type of distribution can an issuer make?

Under the Start-up Business Exemption, the issuer may only distribute common shares, non-convertible preferred shares, securities convertible into common shares or non-convertible preferred shares, non-convertible debt securities linked to a fixed or floating interest rate, limited partnership units, or investment shares that are non-convertible preferred shares issued by a cooperative under the Cooperatives Act (Alberta).

What are the capital raising limitations?

The issuer cannot raise more than $250,000 under each distribution. In addition, the issuer may only complete two distributions in each calendar year and there is an aggregate lifetime total of $1,000,000 under all distributions under the Start-up Business Exemption.

The capital raising limitations are applicable to an issuer and other members of its “issuer group”, which includes each affiliate of the issuer, and any other issuer that is engaged in a common enterprise with the issuer or with an affiliate of the issuer or who has a founder that is a founder of the issuer. The founder is a person who is actively involved in the business of the issuer at the time of the distribution. As such, a person who started the company and subsequently left prior to the distribution is not considered a founder for the purposes of the Start-up Business Exemption.

No commission, fee, or other amounts may be paid to the issuer group or any of their respective principals, employees, or agents in connection to the distribution.

What fund-raising vehicles can be used?

Under the Start-up Business Exemption, an issuer in Alberta can raise capital via three routes:

• through crowd-funding by way of an online portal, provided the portal is in compliance with the registration requirements;
• through a registered dealer who will solicit investment and distribute securities through traditional distribution channels, provided the dealer is in compliance with the registration requirements; or
• through the issuer’s network of contracts, provided they are not in the business of trading securities.

Generally, the maximum amount that an issuer can accept from a purchaser by way of a subscription is $1,500 per distribution. However, if a registered dealer provides the purchaser advice that the investment is suitable for their investment needs, then the maximum subscription from that purchaser increases to $5,000.

What are the disclosure requirements?

To rely on the Start-up Business Exemption an issuer must prepare an offering document in the required form. This form includes information about the issuer’s business, its management, the minimum offering amount and how it intends to use the funds raised. The information contained in the offering document must be kept up to date throughout the distribution.

The purchaser has 48 hours from the time of subscription or any amendment to the offering document to rescind their agreement to purchase securities.

In addition to the offering document, the issuer must provide each purchaser with a specified form detailing the risks of investing and must receive a risk acknowledgement from the purchaser. This risk acknowledgement form indicates that the purchaser has read and understood the content of the form.

An offering made under the Start-up Business Exemption must close within 90 days of the offering document being first delivered to the purchaser, failing which the issuer must return all funds to purchasers. The issuer must file the offering document (including any amendments), pay a fee and file a report of exempt distribution in the required form with the ASC within 30 days after the closing of the distribution.

The foregoing should be viewed as an overview of the Start-up Business Exemption. Other details not discussed here, may be applicable to your company. Should you have any questions, please contact us, and we would be pleased to assist with your company’s legal needs.

By Leigh-Anne Norris and Brigitte LeBlanc-Lapointe.

The information in this post is accurate as of the posting date.