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Types of Exemptions in the Private Placement Market

Companies using the private placement market to raise capital typically graduate from one exemption type to another as they grow.

There are five exemptions that private companies typically use to sell securities to investors.

1. Private Issuer Exemption 

A company that meets the definition of a private issuer may sell its securities to qualified shareholders—that is: directors, officers, or major shareholders (“principals” of the company; close family, friends, or business associates of a principal; accredited investors; and current shareholders). 

Companies using this exemption are not required to file any reports with the BC Securities Commission (BCSC) until they exceed the 50-shareholder limit or sell shares to an unqualified investor. 

2. Family, Friends, & Business Associates Exemption 

A company may sell its securities to you if you are a close relative, close friend, or a close business associate of a director, executive officer, or major shareholder of the company. The definition of who qualifies under this rule is very strict: 

  • A close relative is a spouse, parent, grandparent, sibling, child, grandchild, or in-law. 
  • A close friend is someone who has known a principal of the company for enough time to be able to judge that person’s capabilities and trustworthiness. The relationship must be direct. It’s not enough to belong to the same organization, association, to be a friend-of-a-friend, or be connected through some form of social media. 
  • A close business associate is someone who has enough prior business dealings with a company principal to be able to judge that person’s capabilities and trustworthiness. You don’t qualify just because you are a customer, client, co-worker, or colleague. 

3. Accredited Investor Exemption 

A company may sell its securities to you if you qualify as an “accredited investor”. 

To qualify as an accredited investor, an individual must have at least one of the following financial qualifications: 

  • At least $1 million in financial assets (cash and securities) before taxes, net of any debts – neither your home nor any other real estate you own are considered financial assets. 
  • Net income before taxes of more than $200,000 consistently over the past two years ($300,000 when combined with a spouse’s net income). 
  • Net assets of at least $5 million. Net assets exclude all liabilities. 

If you qualify to buy securities under the above categories of an accredited investor, you will be asked to sign a 45-106F9 Form for Individual Accredited Investors that describes, in plain language, the categories of individual accredited investors and identifies the key risks associated with purchasing securities in the private placement market. You must confirm that you understand the risk of the investment and the exemption that applies to you. 

4. Start-up Crowdfunding Exemption 

Start-up companies and small businesses can use this exemption to raise money from anyone, even if they do not have an existing relationship with a director, executive officer, or major shareholder of the company or are not an accredited investor. 

To raise money through start-up crowdfunding, a company must first complete an offering document outlining its idea and make it available online through a funding portal. The offering document contains basic information about the project, including the minimum amount of money that needs to be raised to proceed, and the deadline for raising this minimum amount. 

The maximum a business can raise from each investor for a project is $2,500. However, you can invest up to $10,000 if the offering is being conducted through a registered dealer and the dealer has determined that the investment is suitable for you. The company is required to file the offering document with the BCSC, but the BCSC does not review it before it goes to investors. 

Before you invest, you will be asked to confirm that you have read and understood the offering document and the risks of the investment you are about to undertake. Pay attention! These investments are risky and you could lose your entire investment. 

5. Offering Memorandum (OM) Exemption 

A company may sell its securities to anyone using the OM exemption. An OM is a legal document like a prospectus, but much shorter and less detailed. It must describe the company’s business, provide annual financial statements, discuss the relevant risks, and tell how the company will use the money it raises. The company is required to file the OM with the BCSC, but the BCSC does not review it before it goes to investors. 

If you purchase shares under the OM exemption, you will be asked to sign the 45-106F4 Risk Acknowledgement Form, which describes in plain language the risks of the investment and how to exercise the withdrawal right. You also have a right to cancel your purchase by delivering a notice to the issuer before midnight on the second business day after you agree to purchase the securities. 

Crypto Quiz

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QUESTION 1/10

Cryptocurrencies and blockchain are the same thing.