Let's talk securities laws! It may not be the most exciting topic but if you are a start-up, it is crucial for you to understand how to navigate the various securities law requirements, especially if you are looking to raise capital.

It is a common misconception that securities laws do not apply to privately-held companies. In fact, securities laws apply to all entities that distribute securities, regardless of whether they are listed on a stock exchange. Every issuer of securities must comply with securities laws from the moment of their incorporation or formation. And yes, shares count as securities, and so do SAFEs, stock options, and convertible debt instruments.

In our next two articles, we'll talk about what you need to know to make sure your start-up is complying with securities regulations. In this post, we'll break down the registration and prospectus requirements in BC, and give you an overview of the most common exemptions from the prospectus requirement. We'll also touch on the documentation and filing requirements that go with those exemptions. In our next post, we'll get into the nuts and bolts of those exemptions and break down the requirements for each.

Registration and Prospectus Requirements

The two basic requirements underlying securities laws in British Columbia are:

1. Registration, requiring every person who is in the business of trading securities to be registered with the British Columbia Securities Commission (the BCSC); and

2. Prospectus, requiring every person who distributes securities being issued for the first time to file a prospectus disclosing all material information about the issuer and the securities being sold.

In BC, a "person" has a broad meaning and includes an individual, corporation, partnership, trust, fund, association, or any other organization. "Securities" also has a broad meaning and includes common and preferred shares, options, warrants, debentures, notes, limited partnership units, memberships in co-operative associations, or units in a resort property.

The registration and prospectus requirements are intended to protect the public by making sure that the people selling securities are knowledgeable enough to properly advise investors and that investors receive sufficient information to make informed decisions.

Every issuer of securities must comply with the registration and prospectus requirements or rely on an exemption from those requirements each time they issue new securities.

Common Exemptions from the Prospectus Requirement

To balance the goal of protecting investors with the desire for fair and efficient capital markets, the BCSC has created several exemptions from the registration and prospectus requirements. The most common ones privately-held companies use include:

  • Private Issuer Exemption
  • Employee, director, officer, and consultant exemption
  • Family, friends, and business associates exemption
  • Accredited investor exemption

Most provincial securities commissions across Canada have adopted uniform policies called National Instruments, so that the criteria for these exemptions are the same. We'll get into the nuts and bolts of those criteria in our next post.

Required Documentation

To distribute securities under one of the prospectus exemptions, you have to make sure the investors buying your securities meet the requirements set out for that exemption. If an investor lives outside of BC, then you also need to make sure there is an available exemption in the province or state where that investor lives.

To rely on one of these exemptions, you'll need a written agreement (called a Subscription Agreement) with each investor where they confirm that they meet the specific requirements of that prospectus exemption and acknowledge that they are not receiving prospectus-level disclosure about the company and its business.

Filing Requirements

Unless you're relying on the private issuer exemption or the employee, director, officer, and consultant exemptions, you will also need to prepare and file a report of exempt distribution with the BCSC each time you use one of the exemptions listed above. Additional filings may be required in other jurisdictions if securities are sold to investors outside of BC.

Final Thoughts

It is critical for start-ups to consider relevant securities laws and comply with the registration and prospectus requirements or rely on an exemption from those requirements. The best course of action is to work with your lawyer from the beginning to identify and address any potential securities issues before they arise, as well as to ensure that appropriate documentation is in place. Reactive legal advice is always more expensive than proactive legal advice. And trust us on this one, you don't want the BC Securities Commission to be the reason you need reactive legal advice!

Originally published 17 July 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.