Prospectus exemptions What you need to know
Some companies seek to obtain capital from investors in exchange for securities like shares or bonds. In Québec, companies wishing to do this usually have to file a prospectus with the AMF first.
A prospectus is a document containing detailed information about:
- The securities offered;
- How the money raised will be used;
- The company’s activities;
- The company’s management;
- The company’s financial condition.
A prospectus can help you make a more informed investment decision.
A prospectus is not required to distribute certain types of securities, such as government bonds or deposit certificates guaranteed by deposit insurance.
It can take a lot of money and time to prepare a prospectus. However, companies can obtain permission not to prepare a prospectus. Such permission is called an “exemption.”
Main prospectus exemptions
Prospectus exemptions can help companies by enabling them to raise capital more quickly and at lower cost than if they were required to prepare a prospectus.
Private issuer exemption
When soliciting investors for the first time, some companies use the “private issuer” exemption. A private issuer is an issuer with no more that 50 investors (excluding employees) whose securities are subject to restrictions on their resale (the investor cannot resell them to just anyone).
Generally, a company that is a private issuer can only solicit the following people as investors:
- Employees of the company.
- Officers, directors, founders or control persons of the company.
- The immediate family of anyone in point 2 and the immediate family of a spouse of anyone in point 2.
- Close personal friends of anyone in point 2.
- Close business associates of anyone in point 2.
- Accredited investors. To be accredited, an investor must have a far-higher-than-average income or substantial assets. The investor must meet one of the following criteria:
- Alone or with a spouse, has more that $1,000,000 in financial assets (cash and investments) net of liabilities and taxes, not including the home and other real estate.
- Alone, has net assets of at least $5 million net of liabilities (may include the home and other real estate).
- Alone, has net income before taxes of more than $200,000 ($300,000 if combined with a spouse’s net income) in each of the two most recent calendar years and reasonably expects to exceed that net income level in the current calendar year.
Investors holding the securities of a private issuer can only sell them to other investors in the above list, with the approval of the issuer’s officers.
This requirement can make reselling the securities difficult.
Crowdfunding exemption
Crowdfunding is a process through which a business, often a start-up, raises money from investors. The objective is to raise sufficient funds to carry out a specific project. For more information, see our page on Crowdfunding.
Offering memorandum exemption
Companies may benefit from a prospectus exemption if they prepare an offering memorandum. An offering memorandum is a shorter, less detailed legal document than a prospectus.
An offering memorandum contains information about the company, including:
- Its business;
- Its officers;
- Risks that could affect it;
- The securities offered;
- How the funds raised will be used.
In Québec, the maximum subscription limit under the offering memorandum exemption is $10,000, unless you’re an accredited investor or an eligible investor.
To be eligible, an investor must meet at least one of the conditions set by regulation, which include:
- Has net assets, alone or with a spouse, exceeding $400,000;
- Has net income before taxes that exceeded $75,000 in each of the two most recent calendar years and reasonably expects to exceed that incomlevel in the current year;
- Has, alone or with a spouse, income exceeding $125,000 in each of the two most recent calendar years and reasonably expects to exceed that income level in the current year.
An eligible investor, depending on the amount they wish to invest, may also have to get advice from a registered representative regarding the suitability of their investment.
Before investing in exempt securities
Prospectus exemptions help companies raise capital and provide greater choice to investors. However, before you invest in exempt securities, take time to gather information and assess the risks.
- Some scammers are promoting fraudulent distributions, presenting then as “exempt” securities. To learn more, visit our fraud prevention section.
- Do you have the financial means to take risks? If the answer is no, investing in exempt securities from may not be a good idea.
- A company that issues exempt securities may be a start-up. Securities of start-ups are considered high-risk investments. If you lose any or all of your money, will you be able to absorb the hit? If the answer is no, maybe investing in exempt securities is not such a good idea.
- Can you afford to be patient? If you think you’ll need to resell your securities quickly, this may not be the best type of investment for you. It could be a very long time before you sell your securities or you may never be able to sell them (liquidity risk).
- Take the time to understand the characteristics, risk and possible return of the company you want to invest in.
- Under the securities rules, companies that issue exempt securities—unlike exchange-listed companies, for example—are not required to disclose information to investors. You may receive little or no information about their activities. You will need to spend more time finding additional information about the company and its financial performance, business and officers.
- Make sure the person or firm you are dealing with has the right to sell you those investments. To do so, contact the AMF at 1 877 525-0337 or consult the Register of firms and individuals authorized to practise.
Some scammers are promoting fraudulent distributions, presenting then as “exempt” securities.
Make sure anyone who contacts you is registered with the AMF registered with the AMF.
To find out more, see our page 5 steps to avoid fraud.
