MCkercher. Frequently asked questions

The Securities Act, 1988 – a form of consumer protection legislation directed to protecting the investing public – is administered by the Financial and Consumer Affairs Authority of Saskatchewan (the “FCAA”).  This Act, together with a body of national instruments, multilateral instruments, national policies, stock exchange rules (if applicable) and local Saskatchewan rules, comprise the regulatory framework governing securities in Saskatchewan.

It is not permissible for a company to sell its securities unless both a preliminary and final prospectus – a comprehensive disclosure document about your company – have been filed with the FCAA and a receipt has been issued.  However, preparing a prospectus is a complex, expensive and time-consuming endeavor that will trigger continuous reporting obligations (which can be quite onerous) of the company ensuring the investing public has ongoing information about the company.  Exemptions to prospectus requirements are available to companies who desire to raise capital without the costs or additional regulations that follow an initial public offering.

The private issuer exemption is the most common exemption relied upon by companies to issue securities without a prospectus. To rely upon the private issuer exemption, a company must be a “private issuer” as defined in National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”).  A private issuer is a company that has not more than 50 shareholders, with such shareholders being generally limited to: (i) directors, officers, employees or founders if the company, (ii) family of directors, officers, or founders, (ii) close personal friends or business associates of directors, officers or founders, or (iv) accredited investors (discussed in greater detail below).  Additionally, a private issuer must not be a reporting issuer or an investment fund, each as defined in NI45-106, and is required to restrict the transfer of securities within its constating documents.

The accredited investor exemption is one the most common exemptions relied upon by companies to issue securities without a prospectus. There are several subcategories of what entities and individuals are “accredited investors”, however, most accredited investors generally identify with the following:

• an individual whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year; or
• a corporation, partnership, trust (or other permitted legal entity) in respect of which all of the owners of interests, direct, indirect or beneficial, except the voting securities required by law to be owned by directors, are persons that are accredited investors.

In addition to these common exceptions, companies rely often rely upon the offering memorandum exemption or the exemption available for family, friends and business associates.