Prospectus Exempt Securities: The Private Issuer in Ontario

Prospectus Exempt Securities – In most closely-held private companies, the private issuer exemption is almost universally applied when shares are initially issued to business partners.

However, the private issuer exemption is often a source of confusion – it is widely believed that securities laws do not apply to private companies because the private issuer exemption applies almost automatically so long as certain provisions are included in the company’s articles of incorporation.

This is not the case.

Securities laws do potentially apply to all Ontario businesses and ventures (see our blog post on securities issuance in Ontario). This highlights that it’s important to structure your business in the right manner from the start.

Under Ontario securities laws, the private issuer exemption is found in National Instrument 45-106, and has the following requirements:

The company cannot be a reporting issuer
This means that the company has not filed a prospectus in Ontario or made a special application to the Ontario Securities Commission. It is impossible to become a reporting issuer by accident.
The articles, by- laws or unanimous shareholder agreement must restrict the transfer of securities
Typically, this restriction is structured such that no transfer is permitted without the approval of the board of directors.
No more than 50 people, excluding employees and former employees, can hold designated securities
The company has not distributed shares to the public.
Shares can only be issued to directors, officers, employees, founder and control persons or close family members, close personal friends and close business associated. Accredited investors are also permitted
No commission may be paid to a third party for any sale of shares, except to an accredited investor

Now…a couple of definitions.

It is important to note that “close personal friends” and “close business associates” are defined exemption categories – we will tackle these in our next post in this series.

The “control person” means any person who owns a sufficient number of voting shares of a company to affect material control over it. There is a rebuttable presumption that any person owning or controlling more than 20% of a company’s voting shares is a control persons. Furthermore, combinations of persons acting in concern can collectively become control persons.

If you wish to discuss your business law needs, give us a call or book a free consultation with our lawyers.