Knowing Who Your Friends and Family Are when Raising Capital
If you run a private corporation, there may be times when you want to raise some money. Raising funds publicly requires the filing of a prospectus. The process of which can be costly and time consuming without assistance and may not be the best choice for you.
Friends, Family and Business Associates Exemptions
There are a number of exemptions available to private companies trying to raise some capital. One set are the Friends, Family and Business Associates exemptions. Private corporations issuing securities (“Issuers”) to these individuals don’t need to file a prospectus[1]:
(a) a director, executive officer or control person of the issuer, or of an affiliate of the issuer,
(b) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer or control person of the issuer, or of an affiliate of the issuer,
(c) a parent, grandparent, brother, sister, child or grandchild of the spouse of a director, executive officer or control person of the issuer or of an affiliate of the issuer,
(d) a close personal friend of a director, executive officer or control person of the issuer, or of an affiliate of the issuer,
(e) a close business associate of a director, executive officer or control person of the issuer, or of an affiliate of the issuer,
(f) a founder of the issuer or a spouse, parent, grandparent, brother, sister, child, grandchild, close personal friend or close business associate of a founder of the issuer,
(g) a parent, grandparent, brother, sister, child or grandchild of a spouse of a founder of the issuer,
(h) 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 (g), or
(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 (g).
The definition of “Family” is straightforward. It is two degrees vertically or one degree horizontally. Note that this is an inclusive list of all familial relationships that qualify.
A company is an “Affiliate” of another issuer if i) one of them is the subsidiary of the other, or ii) each of them is controlled by the same person.
A “Close Business Associate” is someone who has had enough prior business dealings with the named party in the Issuer or Affiliate to be able to assess that person’s capabilities and trustworthiness[2]. You could look at:
- the length of the relationship
- when the business contracts between the two started
- the amount of contracts between the two
- the number of business associates the issuer relied on (with more being worse)
A “Close Personal Friend” is a friend who knows the person in the Issuer or Affiliate well enough to be in a position to assess that person’s capabilities and trustworthiness. it can’t simply be because they are related, used to work together, or are a part of the same group/organization. Factors include[3]:
- Length of the relationship
- Nature of the relationship
- Bathroom test: Does the person know where the bathroom is in the named party’s house?
For both the Close Business Associate and Close Personal Friend exemptions, it isn’t enough to rely on a statement signed by the purchaser than they are one of the two. Further, the relationship must be direct, meaning it cannot be a Close Personal Friend of a Close Personal Friend, or a Close Business Associate of a Close Business Associate.
Residents of Ontario and Saskatchewan also need to fill out a risk acknowledgement form.
For more information on any of the above or to connect with one of our experienced securities lawyers, feel free to contact us at 604-629-5400 or by visiting our Vancuver office or better yet, via e-mail at [email protected]
Disclaimer
***The above blog post is provided for informational purposes only and has not been tailored to your specific circumstances. This blog post does not constitute legal advice or other professional advice and may not be relied upon as such.***
Links
[1] National Instrument 45-106 at s. 2.5(1)
[2] Companion Policy to National Instrument 45-106 at s. 2.8
[3] Companion Policy to National Instrument 45-106 at ss 2.7-2.8
