Issuing Securities in Ontario – Prospectus and Registration Requirements
This issue comes up often in my business law practice. Many clients – whether individuals or private companies – believe that securities law does not apply to them unless they are public companies listed on a stock exchange.
This is false.
Securities laws apply to any “issuer” of a “security”: if you or your company issues any form of security, then Ontario’s securities laws applies.
What is an “Issuer” and What is a “Security”?
An “issuer” means a person or company who has outstanding, issues or proposes to issue, a security. Note that even ‘proposing’ to issue a security (defined below) may qualify you as an issuer.
The term “security” is not as easily defined. The legal definition is intentionally over-broad, designed with a “capture and exempt” methodology: it captures a very wide range of agreements, investment and debt instruments, but then contains exemptions based on specific policy rationales to allow for the efficient raising of capital.
Under the Securities Act, the following are examples of securities (this is a non-exhaustive list. Please consult the Act for full details):
- any investment contract;
- any document constituting evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company; or,
- any profit-sharing agreement or certificate.
The breadth of the first definition – “any investment contract” – should immediately catch your attention.
It is common that a private Ontario company will be a “private issuer” (generally, a company which has less than 50 beneficial owners of its stock), and its issuance falls under the ‘private issuer’ exemption under the Act; however, this is not always the case. Private companies seeking to raise capital can take advantage of other exemptions which do not require compliance with prospectus and reporting requirements under securities law. In future posts, I will discuss each prospectus exemption in more detail.
There are two principal requirements which apply to the issuance of securities in Ontario: the prospectus requirement; and, the registration requirement.
The Prospectus Requirement
Every person or company which issues a security to investors must file a prospectus with the Ontario Security Commission (“OSC”).
The prospectus is a disclosure document which provides investors which the information necessary to make an informed investment decision. This requirement is designed to protect investors.
At the same, the OSC encourages companies to raise money in a flexible manner. So, there are certain exemptions to the prospective requirement through which Ontario companies can issue securities without a prospectus, including:
- Private issuer;
- Employee, executive officer, director and consultant;
- Accredited investor;
- Minimum amount of $150,000;
- Family, friends and business associates;
- Offering memorandum; and
- Crowdfunding
Other than the private issuer exemption and the employee, executive officer, director and consultant exemption, a company seeking to avail itself of an exemption must prepare and file an report of the exempt distribution with the OSC, and pay the associated fees.
It is beyond the scope of this discussion to dive into the specific requirements of each exemption category; however, it is important to understand that there is specific disclosure, know-your-client (“KYC”) and risk-acknowledgement requirements for each category. And, importantly, the person or company issuing securities must satisfy itself of these requirements. Thus, the onus is on the issuer – not the investor – to ensure that all requirements of an exemption category are met.
The Registration Requirement
Second, each person or company which issues securities must be registered (or licensed) under the requirements of Ontario securities legislation.
A general exception to the registration requirement is the “business trigger” rule: where issuers sell their own securities on an infrequent basis, and the solicitation of investors is only incidental to their primarily business (i.e., they are not “in the business” of selling securities), that issuer need not be registered.
The net effect of the “business trigger” rule is that a person or company may issue securities where they do so incidentally to their day-to-day activities.
However, whether or not a person or company is “in the business” of selling securities is a determination which can only be made by the OSC or the Courts. It is very important to remember this.
There are many instances in which individuals or companies engage in the issuance or distribution of securities without being lawfully able to do so. In my practice advising small businesses, start-ups and joint-venture partners, this issue comes up often. Contact me if you wish to discuss anything in this article or business law in general.
