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Equity Financing – the NEW British Columbia Regulations
Mar 15, 2002
Successfully financed companies have consistently been shown to obtain their early rounds of financing from family and friends. There are a number of reasons for this. For example, by delaying more substantial rounds of financing, a company is generally worth more, which also limits the dilution of the major shareholders’ equity position.
With the implementation of the new Regulations to the Securities Act, British Columbia will remain the easiest place in North American to raise venture capital.
Compliance with the Regulations is mandatory to ensure that you do not run afoul of the Securities Commission for illegally raising capital, which could result in criminal like proceedings against the directors, and ultimately prevent your company from ever “going public” in British Columbia.
All companies raising equity from the public in British Columbia must either file a prospectus or qualify for an exemption from doing so. The cost of preparing a prospectus, particularly for an “early stage” company, was prohibitive and usually not an option.
Previously, companies were severely limited to whom they could approach and for how much. Companies were usually forced to argue that their investors were not members of the public, with the accompanying risk that the Regulators would disagree. All of that has changed.
The new Regulations now permit you to raise an unlimited amount of money from up to 49 people over an unrestricted time period, without the need for a prospectus, if you are a private issuer. The Regulations have removed the uncertainty about who qualifies for this exemption. Previously, issuers had to argue that family, friends, and close business associates and other such investors were not members of the public.
This exemption, in a modified form, has also been extended to all companies, whether or not listed, provided that purchasers are friends, family and business associates. There is no restriction as on the amounts of money raised or the number of purchasers. This a major change.
The biggest relaxation relates to raising money not covered by the two previous exemptions. Previously, in addition to requiring an offering memorandum, purchasers had to meet one of several tests, including purchasing a minimum amount ($25,000), qualifying as a sophisticated purchaser or having the advice of an investment advisor. None of these tests now apply, and the form of offering memorandum now required is much less expensive to prepare.
In certain circumstances, the obligation to deliver an offering memorandum has also been waived. A family net worth in excess of $1,000,000, coupled with an annual income exceeding $200,000 (or $300,000 if combined with one’s spouse) gives an investor Accredited Investor status. An offering memorandum does not have to be delivered to an Accredited Investor.
As an aside, other Canadian jurisdictions, notably Alberta and Ontario, continue to be difficult regulatory environments in which to raise capital. For that reason, most early stage companies confine their pre-offering memorandum activities to British Columbia unless they meet a specific exemption in other jurisdictions (which happens rarely).
Having said all of this, fund raising remains a highly regulated activity and failing to comply with the new Regulations could lead to significant penalties. Do seek professional advice to ensure compliance. It is a small price to pay for avoiding the cost of defending yourself later.
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