Start-up companies looking to raise capital have options in the form of market exemptions. Private placement markets or “exempt” markets are exactly that, a way for businesses to be exempt from certain securities laws that govern the capital raising process and still allow small companies to raise funds.
A private placement investment may be offered to investors by either a public or private company, limited partnership, or other form of legal entity that wants to raise money for its operations by issuing securities without a prospectus. The key thing to remember is these securities do not trade on a public stock exchange so an investor may not be able to resell them. The exempt market may not be for everyone, but if you’re a start-up business looking to raise capital, it just might be for you. Five of the many exemptions available in Canada are:
1. Accredited Investor Exemption: A company can sell securities to “Accredited Investors” withouta prospectus.
An Accredited Investor is someone who has:
At least $1 million in financial assets (cash and marketable securities) before taxes, net of any debts. Neither your home nor any other real estate you own are considered financial assets.
Net income before taxes of more than $200,000 consistently over the past two years ($300,000 when combined with a spouse’s net income).
Net assets of at least $5 million.
2. Private Issuer Exemption: A company is considered a private issuer if its securities are owned by fewer than 50 qualified security holders. Qualified security holders must not be a member of the general public. They can include a close personal friend or close business associate of a person with a direct relationship to the company, such as a director of the company.
3. Offering Memorandum Exemption(not available in Ontario): A company can sell its securities to anyone using the Offering Memorandum (OM) exemption. An OM is a prescribed shorter version of a prospectus. The company is required to include a description of its business, disclose annual financial statements, list the relevant risks, and tell how the money raised will be used. Lastly, it must be filed with the provincial regulator where the securities are being sold.
4. Family, Friends and Business Associates Exemption: A company can sell securities to individuals that share a close relationship with a director, executive officer or control person of the company. These individuals include:
Family, being a spouse, parent, grandparent, brother, sister, child or grandchild.
Close personal friends.
Close business associates.
5. Minimum Amount Investment Exemption: This exemption is available for a company that has an investor who can invest the whole amount of $150,000 in cash for the purchase of securities from the company.
In using one of the above exemptions, a company cannot advertise or publicly seek funds. Under some exemptions the sales of securities must still be reported to the applicable securities regulators. Certain jurisdictions in Canada allow companies to provide certain financial information when using the offering memorandum exemption with the condition that the maximum amount of capital raised is $500,000. Companies looking to use the exempt market should review National Instrument 45-106 Prospectus and Registration Exemptions and consult with a lawyer familiar with securities laws.
To help facilitate the capital raising process in the exempt market place, firms may want to seek assistance from exempt market dealers. There is an exempt market dealer association in Canada for firms to research the market as well find a dealer to assist in the capital raising process.
The words investing and markets are not meant to be intimidating as one might like to think. There are numerous resources available to you to gain a better understanding of capital markets. If you are considering entering the exempt market, please feel free to contact the securities regulator in your province.