“Anyone with money is a friend of mine.”* Traps to Avoid When Raising Private Placement Capital

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(* Statement given at an investigation interview with the BC Securities Commission)
– *updated August 30, 2015 –

any one with money is a friend of mine when raising private capitalWhen raising private capital in Canada companies rely on three main exemptions from the registration and prospectus requirements of the various Canadian securities acts and regulations: (1) the friends, family and business associate exemption, (2) the accredited investor exemption; and (3) the offering memorandum exemption.   Not all jurisdictions in Canada interpret  these three  exemptions in the same way.

Over the last five years the British Columbia Securities Commission (“Commission”) has stepped up its investigation of private issuers using exemptions in National Instrument 45-106 Prospectus and Registration Exemptions from the prospectus and registration requirements of the Securities Act in BC. The normal course of an investigation is to issue an order of production to the company who issued the securities and a polite letter and questionnaire to the investors identified in the Schedule “A” of the Form 45-106F1 or Form 45-106-F6 filed by the issuer.   As a result of these investigations a number of sanctions and notice of hearings have been issued:

What did these issuers do wrong?  More importantly, how can you avoid an escalation from an order of production to a full on hearing and sanctions being issued?

In this three part series, I will set out the definition and rules of the close personal friend exemption, the accredited investor exemption and the offering memorandum exemption.  I will also suggest steps you must and can take to meet your obligation to confirm a particular exemption may be relied upon by you when issuing securities.

Each section in this series can be read on its own.  Together they provide a solid background to the topic of raising capital in Canada.

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The articles on this website are not intended to create, and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.
Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter @AlixeCormick or on Google+.