Under Canadian law, companies that sell securities such as stocks, options or bonds are generally required to file a prospectus – a legal document containing information about both the issuer and the security that’s meant to help investors make more informed decisions.
There are, however, exceptions to the rule.
Peter Roth, a corporate finance and securities lawyer with the Vancouver office of Farris, Vaughan, Wills & Murphy LLP, said a company would have to qualify for a number of exemptions if it didn’t want to prepare a prospectus.
Roth, who was recently elected chairman of the securities law section of the Canadian Bar Association’s B.C. branch, added that the exemptions used to be within each provincial securities act, but because of the trend in the past 15 years toward harmonizing securities regulations, they now reside in a single national policy.
According to National Instrument (NI) 45-106 – the policy Roth alludes to – an issuer can use a prospectus exemption if, for example, it issues securities to accredited investors.
“Securities law assumes that accredited investors can access the information needed to assess an investment without the help of a prospectus, as well as sustain the loss of their entire investment,” he said. “In other words, this person is obviously sophisticated enough and has enough resources to absorb a loss, therefore, they don’t need a prospectus.”
But in an effort to strengthen investor protection and market integrity by providing more transparency about the “exempt” market, the British Columbia Securities Commission (BCSC) is seeking public input on a proposal to overhaul NI 45-106 – at least where B.C. is concerned. The commission is seeking that input until November 9.
If instituted, the BCSC pitch would require companies raising capital in the province’s exempt market to file a new form disclosing more information about their business and monies raised, including facts about:
- their insiders;
- the promoters who help market their securities; and, in effect,
- who runs their company.
Under the new form, reporting and non-reporting companies would also be required to disclose additional data about the buyers of their securities, including purchaser names, any connection they have to the company (e.g., whether they are registrants or directors, officers or significant shareholders) and the securities bought.
According to BCSC director of corporate finance Martin Eady, the proposed changes are part of a broader commission commitment to take a closer look at the province’s exempt market in 2010.
“B.C.’s exempt market is huge, and very important for our prosperity,” Eady told Business in Vancouver. “Billions of dollars are raised within it annually, so we wanted to make a review of the market a priority this year.”
The provincial exempt market is an important source of financing for venture capital companies. But in many cases the investments are in startups that are higher risk and often illiquid, which increases transparency concerns.
“Prospective investors are entitled to a certain basic level of information about every company, whether it’s publicly traded on the stock exchange or not,” said Eady.
He added that the changes would also support legitimate venture capital companies trying to raise money for their businesses.
“That’s what we’re trying to do with this proposal.”
Roth agreed.
“There are investors out there who would like to see this information and more transparency in general,” he said. “It may create more work for companies, who will have to file an additional form, but in terms of the marketplace, it’s always better to have disclosure.”
Roth added that if the proposal is approved, it will be a first in Canada.
“This initiative sticks out in that it’s exclusive to the BCSC and doesn’t apply to the rest of the country. Normally what we expect to see trend-wise is a move to harmonize national securities law. B.C. has stood up and said, ‘We want to take this in a new direction. We’re doing something different.’”