One of the biggest challenges for any new business is raising the money needed to get the business started. Many entrepreneurs start with a loan from family, friends or a financial institution. For companies based on a new concept or technology, a bank loan may not be available until the product or service is proven. A loan from family or friends may not cover the costs of research and development.
Another method for raising money is to sell shares to investors. However, the regulations and restrictions that apply have made this method too costly for many new businesses. In response to this concern, the British Columbia Securities Commission adopted new rules in April to make it easier for businesses – especially small and medium size businesses – to raise money from investors. The new rules also increase the opportunities for investors to make speculative investments in amounts that fit within their personal comfort levels.
The rules create four new and expanded exemptions from the prospectus disclosure requirements that apply to companies raising money from the public.
The four exemptions are summarized below:
- Accredited Investor Exemption – allows companies to raise any amount of money from financial institutions, pensions, investment dealers, established companies and wealthy individuals (as defined in the rules) without a disclosure document.
- Family, Friends and Business Associates Exemption – allows companies to raise any amount of money from family members, close friends and close business associates (as defined in the rules) without a disclosure document.
- Private Issuer Exemption – allows “private issuers” (generally companies with less than 50 shareholders) to raise money from family members, close friends, business associates and wealthy individuals without a disclosure document.
- Offering Memorandum Exemption – allows companies to raise any amount of money from anyone provided that the investor acknowledges the risks of investing and receives an offering memorandum – a short, simple disclosure document. Investor protection provisions have been added giving purchasers almost identical rights to those they get under a prospectus. The rights include a two-day right to cancel the purchase and broader rights to cancel or sue for damages if there is a misrepresentation in the offering memorandum.
The new rules are the results of a joint project of the B.C. and Alberta Securities Commissions. The new rules apply in both provinces (although Alberta has additional restrictions for the offering memorandum exemption). If we can help your company take advantage of these new rules to raise capital, or if you have questions about how they might affect you as an investor, please call us.