Securities Laws – They Do Apply to Your Business!
As a small business owner you may be under the impression that securities laws are not applicable to you. This impression likely stems from a common perception that “securities” are publicly traded, and consequently the laws that regulate them must only be of concern to publicly-listed entities. Right? Unfortunately not. Securities laws are relevant to all businesses, especially those operating under corporations, and business owners would do well to keep them in mind when considering growth opportunities.
To start with, the definition of a “security” under the Securities Act (Ontario) is extensive, and it includes shares of all corporations, whether they are publicly traded or not. Keeping that in mind, you should be aware that every issuance of a “security” (i.e. issuing shares in your corporation to an investor) will require that you: (i) provide your investor with a prospectus – an exhaustive document setting out, among other things, all material information with respect to the nature of your business, including its historic and current performance – and, (ii) register as a person who is in the business of trading securities. You may now be starting to panic, thinking back to the initial stages of investment in your business and remembering that you did not comply with either of these requirements. Thankfully though there are categories of exemptions from these requirements (set out in NI 45-106 of the Canadian Securities Administrators, entitled “Prospectus and Registration Exemptions.”), and more likely than not your initial investors fit into these categories.
For instance, the exemption category most applicable to small businesses is the “private issuer exemption”. This exemption is available to those businesses that have distributed securities to: (i) fewer than 50 persons (excluding employees/former employees) and, (ii) that have only distributed securities to certain investor types such as directors, officers and employees of the issuer (being the corporation running the business), accredited investors (essentially investors who are strong enough financially to take on risks and absorb losses – as determined based on monetary thresholds set out in NI 45-106), immediate family members of directors and officers of the issuer, close personal friends/ business associates of directors and officers of the issuer, and existing security holders of the issuer (refer to NI 45-106 for a complete list of exemptions).
Looking at this exemption category you may now be starting to relax. In most cases the initial investors in a business will fit into the investor types listed and this will need to be documented through the use of a subscription agreement. That said, it is important to remember that prospectus and registration requirements apply to every single issuance of securities, and that it could become more difficult to comply with the private issuer exemption criteria as your business grows. If you intend to distribute securities to more than 50 persons, or to persons that are outside the designated categories of investors mentioned, you will either have to satisfy the prospectus and registration requirements, or qualify for another exemption under NI 45-106 (most of which involve making certain filings with your provincial securities commission, and come with other requirements that are not addressed in this article).
At the end of the day Securities laws are complex, and they are more applicable to your business than you think. Consequently, if you are anticipating issuing securities, you should first speak to a lawyer who can provide you with appropriate advice.
Please contact me for specific advice relating to the distribution of securities by your business.