Authors: Sean MacLachlan, John A. Brigidear, Tony Basu
If you’re an Alberta-based agribusiness looking to raise capital, you have several options to consider – but how do you know which option is right for your business?
In the first part of our three-part blog series, we gave you a brief overview of two prospectus exemptions available to the agricultural industry in Alberta: the offering memorandum exemption and the small business financing exemption. Both allow agribusinesses to raise capital without filing a prospectus with the Alberta Securities Commission (ASC) and come with their own pros and cons.
This week, we’ll take a closer look at each exemption to help you determine which is a better fit for your capital-raising objectives.
Offering Memorandum Exemption
Investment Limits
The offering memorandum exemption allows you to raise capital from a wider range of investors than other prospectus exemptions available in Alberta. There is no cap on the amount you can raise using the exemption, although there are limits on the amount that can be raised from certain categories of investors.
There are no investment limits for:
- investors that are not individuals
- accredited investors (e.g., financial institutions, pensions and high-net-worth individuals)
- investors who qualify for the family, friends and business associates exemption
For investors who do not fall within the above categories, the investment limits looking back on a rolling 12-month time period are:
- $10,000 for individuals who do not meet the definition of an “eligible investor”
- $30,000 for eligible investors
- $100,000 for eligible investors who received advice from a portfolio manager, investment dealer or exempt market dealer that an investment above $30,000 is suitable
Disclosure Requirements
To qualify for and rely on the offering memorandum exemption, businesses must prepare and deliver an offering memorandum to investors that describes your business, its management, the securities you are offering and the risks of investing in your company. Importantly, you are required to include audited annual financial statements of your business.
The requirement to provide audited annual financial statements is more onerous than the reporting requirements for the small business financing exemption. Once you have relied on the offering memorandum exemption, you must annually file audited financial statements and a Notice of Use of Proceeds detailing how you used the funds you raised from investors.
When relying on this exemption, you must file a Form 45-106F1 Report of Exempt Distribution with the Alberta Securities Commission within 10 days.
Risk Acknowledgment and Investor Rights
Businesses relying on the offering memorandum exemption must obtain a risk acknowledgment form from each investor.
Individual investors must complete two schedules found in the form. The first confirms whether they are an eligible investor, accredited investor, or an investor who would qualify under the family, friends or business associates exemption. The second schedule is an acknowledgment of potential investment limits and confirmation those limits have not been exceeded.
Investors have a two-day “cooling off” period to cancel their investments. They can also sue your company, its directors, CEO and CFO if your offering memorandum, or marketing materials used in association with the offering memorandum, contains a misrepresentation.
Small Business Financing Exemption
Investment Limits
The small business financing exemption is targeted at start-up and early stage businesses, and allows for two tiers of capital raises, both of which have limits on the maximum amount you can raise. To qualify for the small business financing exemption, your head office must be in Alberta or Saskatchewan and your business cannot already be a reporting issuer.
Under a Tier 1 raise, businesses can raise up to $1.5 million in a year. Per year, an investor can contribute a maximum of $2,500 per year to your company. That limit rises to $10,000 if the investor:
- meets the definition of a “minimum income investor” or is a company controlled by a minimum income investor; or
- has obtained advice from a registered dealer that the investment is suitable for the investor
Under a Tier 2 raise, businesses can raise an aggregate lifetime maximum of $5 million from investors (excluding funds raised from investors who qualify under another specified exemption). Investors can contribute up to $5,000 per year. That limit rises to $20,000 if the investor:
- meets the definition of a minimum income investor; or
- has obtained advice from a registered dealer that the investment is suitable for the investor
The offering must close within 120 days.
Disclosure Requirements
You must provide investors with an offering document that describes your business, its management, the securities you are offering, how you plan to use the funds you raise, and the minimum offering amount.
For Tier 1 raises, you are not required to provide financial statements with the offering document. For Tier 2 raises, you must provide financial statements with your offering document. However, the accounting standards used in financial statements issued under the small business financing exemption are less onerous than the offering memorandum exemption.
For Tier 2 Raises, you must also deliver the Small Business Undertaking Form to the applicable securities regulators, undertaking to deliver your annual financial statements, and file an annual Notice of Use of Proceeds. You must make both of these documents reasonably available to investors under the exemption.
Risk Acknowledgment
Every investor must confirm they have read and understood the offering document, and the enhanced risk warning in the Small Business Risk Acknowledgment form.
In Alberta, a business that relies on this exemption must file a Report of Exempt Distribution Form with the Alberta Securities Commission within 30 days.
Which Option Is Best for You?
The offering memorandum exemption allows you to raise more money from a wider variety of investors, but comes with more onerous reporting requirements. If you aren’t looking to raise large amounts of capital, the small business financing exemption – which bears some similarities to the crowdfunding exemption we described in a recent blog – comes with less stringent disclosure obligations.
Both of these exemptions, however, come with the same drawback: tight restrictions on the resale of shares held by your investors, which is a topic we touched on last week. Next week, we’ll look at how the ASC is planning to ease some of those restrictions. In the meantime, the lawyers in our Agriculture & Food and Corporate Finance & Securities groups have wide-ranging experience advising agricultural clients on raising capital. Contact us to learn more.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.