Farmers and those in the agricultural industry in Alberta have a number of options for raising capital – but navigating securities laws while tending to business is often a challenge. In the first of this three-part blog series, we’ll cover some basics on how Alberta farmers can raise capital for agriculture projects and some challenges they may face.
For the most part, agribusinesses in Alberta aren’t reporting issuers, which basically means that shares of their companies are not listed for trading on a stock exchange. In general, a common way to become a reporting issuer is to file a prospectus with a securities regulator for review and receipt before selling new shares to the public. This can be a lengthy process, and the fees for professional advisors can add up quickly so the cost may not be worth it if a company does not expect to raise funds from the public regularly. An alternative is to sell securities based on an exemption from the prospectus requirement, which is also often called a “private placement.” This alternative allows companies to raise capital more quickly and efficiently by selling its securities, although the range of potential investors is much smaller.
Two of the most common exemptions relied on are the “accredited investor” and “private issuer” exemptions. An accredited investor is generally a high-net-worth or high-earning person who satisfies certain criteria. A private issuer is a company that can sell securities to many different types of investors including directors, officers, employees, close personal friends and business associates of the issuer, provided it meets certain criteria. One key requirement of this exemption is that the company cannot have more than 50 shareholders (not including employees). Unfortunately for farmers, many agribusinesses will not qualify as a private issuer because they often have more than 50 shareholders.
Fortunately, there are other prospectus exemptions that allow farmers in Alberta to raise capital. The following is a brief overview of two options that we believe will be helpful for farmers: the offering memorandum exemption and the small business financing exemption.
Offering Memorandum Exemption
This exemption allows businesses to raise capital by providing investors with an “offering memorandum,” which is a document that describes the business, its management and the risks of investing in the company, among other criteria. Notably, issuers must provide investors with annual audited financial statements under the offering memorandum exemption, as well as notices about how it will use the funds it has raised.
In Alberta, under this exemption, investment limits of up to $10,000, $30,000 or $100,000 per year are imposed on individual investors depending on whether they meet certain income or asset thresholds, and whether they have received advice from a financial professional.
Small Business Financing Exemption
This exemption allows early-stage companies with headquarters in Alberta to sell shares by providing investors with a more streamlined offering document that describes the business and its management, and how the company intends to use the funds it raises.
Issuers that raise less than $1.5 million using the small business exemption (a tier 1 raise) are not required to provide financial statements to its investors, whereas issuers that raise more than $1.5 million (a tier 2 raise) must provide financial statements, but the requirements for those statements are less onerous than those requirements under the offering memorandum exemption. The statements will not need to be audited, although they must be reviewed by a chartered professional accountant.
The investment limits are generally lower under the small business financing exemption than the offering memorandum exemption – between $2,500 and $10,000 for a tier 1 capital raise, and between $5,000 and $20,000 for a tier 2 capital raise.
Resale Restrictions and Discretionary Exemption for Agriculture Projects
One downside of the offering memorandum and small business financing prospectus exemptions is that those investors who have purchased shares using such exemptions are bound by resale restrictions, which legally prohibit the owner from selling the shares to another purchaser unless certain criteria are satisfied. One of the objectives of making shares issued under some prospectus exemptions subject to transfer restrictions is to have such securities only purchased by suitable investors who can bear the full risk of the loss and are aware the shares cannot be freely resold to the public.
In our next blog, we’ll discuss the nuts and bolts of both the offering memorandum and small business financing exemptions to help you decide which option might be best for your business. 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.