What is a private issuer? What are the advantages & what happens if you lose your private issuer status?
Qualifying as a private issuer under Canadian securities law has a number of advantages. On the flip side, losing private issuer status has several regulatory pitfalls that are often not well-understood by an issuer until it is too late.
This blog post sets out what private issuer status is, what it does, how it is lost and the regulatory consequences of losing it. Understanding these matters is crucial for issuers wishing to navigate and comply with applicable securities laws in Canada.
What is a private issuer?
In Canadian securities law, a private issuer is an issuer that is not a reporting issuer or investment fund, whose securities (excluding non-convertible debt securities) are subject to restriction on transfer and beneficially owned by not more than 50 persons (excluding current and former employees of the issuer or an affiliate).
What are the benefits of being a private issuer?
While there are several advantages to being a private issuer, the main one is that the issuer may utilize the private issuer exemption under National Instrument 45-106 – Prospectus Exemptions (“NI 45-106”). This exemption allows a company to distribute securities to the following subscribers without filing an exempt distribution report with (and paying associated fees to) the applicable securities commissions:
- A director, officer, employee, founder or control person of the issuer;
- A director, officer or employee of an affiliate of the issuer;
- A spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer, founder or control person of the issuer;
- A parent, grandparent, brother, sister, child or grandchild of the spouse of a director, executive officer, founder or control person of the issuer;
- A close personal friend of a director, executive officer, founder or control person of the issuer;
- A close business associate of a director, executive officer, founder or control person of the issuer;
- A spouse, parent, grandparent, brother, sister, child or grandchild of the selling security holder or of the selling security holder’s spouse;
- A security holder of the issuer;
- An accredited investor;
- A person of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in paragraphs (a) to (i);
- A trust or estate of which all of the beneficiaries or a majority of the trustees or executors are persons described in paragraphs (a) to (i); and
- A person that is not the public.
Another important consideration is that, if issuers have less than 50 securityholders (excluding current and former employees but including non-convertible debt securities), and other conditions are met, they may access the “non-reporting issuer exemption” for issuer bids under National Instrument 62-104 – Take-Over Bids and Issuer Bids. Issuer bids involve buying securities back from security holders. Without an exemption, issuer bids can be a very costly and cumbersome regulatory process for issuers.
How can you lose your private issuer status?
There are three main ways that issuers can lose their private issuer status:
- Over 50 securityholders
Companies issue securities (excluding non-convertible debt securities) to more than 50 persons that are beneficial owners (excluding current and former employees of the issuer or its affiliates).
This can happen on purpose or by accident. An example of how this can happen by accident is if a company has issued securities to 49 persons, but one of the securityholders is a company created or used solely to purchase or hold securities for three individuals. In these circumstances, there are three beneficial owners that must be counted for that securityholder and the issuer actually has 51 beneficial owners.
Accordingly, it is very important for companies to track and maintain proper records of its beneficial securityholders and/or ensure that subscribers represent to the issuer that the companies used for investment were not created solely for the purpose of holding securities of that issuer.
- No restriction on transfers
The securities issued by the company are not subject to restrictions on transfer in the issuer’s constating documents or shareholders agreement.
- Distributing securities using other exemptions
The securities have been distributed to subscribers that are not included on the list of persons described in “What are the benefits of being a private issuer?” above. If, for example, an issuer was to issue securities under the offering memorandum exemption in NI 45-106, subject to limited exceptions described below, this would then preclude that issuer from using the private issuer exemption in the future.
What are the consequences to losing your private issuer status?
There are a number of consequences to losing private issuer status. The most notable are:
Losing the private issuer exemption
If an issuer loses their status as a private issuer, that issuer can no longer distribute securities in reliance on the private issuer exemption in NI 45-106. Accordingly, the issuer would need to rely on other exemptions from the prospectus requirement in order to issue securities to investors.
Exempt distribution reports
If an issuer distributes securities in reliance another issuer will likely be required to file an exempt distribution report (in the form of National Instrument 45-106F1 – Report on Exempt Distributions) with, and pay fees to, the applicable securities regulatory authorities. The amount of fees varies depending on the jurisdiction.
Issuer bid issues
As noted above, in the event that an issuer loses their private issuer status, it may no longer rely on the non-reporting issuer exemption in NI 62-104 for any issuer bids. Accordingly, they will need to either rely on other exemptions in that instrument or comply with the often costly and cumbersome regulatory process for issuer bids under that instrument.
Solicitation of proxy issues
While not specifically tied to private issuer status, issuers with more than 50 shareholders should check the proxy solicitation requirements under their respective corporate statutes. The Canada Business Corporations Act, for example, requires management of a corporation to solicit and send regulated proxy materials to its shareholders in connection with any meeting of shareholders if it has more than 50 shareholders. No such requirement exists under The Corporations Act (Manitoba).
Can you get your private issuer status back once you lose it?
The only way to restore private issuer status is to make an application to the applicable regulatory authority for an order restoring an issuer’s private issuer status. This would only be granted in very limited circumstances.
If you have any questions about your private issuer status or the private issuer exemption, please contact the author.
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.
