Private issuer exemption

If you have already formed a company, limited partnership, trust or co-operative association, you probably relied on the private issuer exemption without even knowing it. After forming your organization, you may need additional financing in order to continue your operations. By using the private issuer exemption, you can issue securities to form your organization and you can sell securities in any amount without any disclosure, provided these trades are only to the following:

  • directors, officers, employees or control persons of the issuer
  • family members (spouse, parent, grandparent, sister, brother or child) of the directors, senior officers or control persons,
  • close personal friends or close business associates of the directors, senior officers or control persons
  • current security holders
  • family members of the selling security holder
  • accredited investors

You do not have to report the use of the private issuer exemption to the Commission. However, you should keep a record of all the persons you have sold securities to and note how they fit the terms of the exemption.

It is a good idea to have each purchaser sign a purchase agreement for the securities. The purchase agreement should set out the number of securities bought, the amount paid for the securities and the relationship of the purchaser to the issuer or whether the purchaser is an accredited investor. For example, for the parent of a director, the purchase agreement should include a statement that the purchaser is the father or mother of the director. You should also ensure that the purchaser signs the purchase agreement. This precaution can help you if the purchaser ever decides to make a complaint to the Commission.

2013 – BC Securities Commission

Forming a corporation is fairly straightforward if you are the sole shareholder. If however there are co-founders, the BC Corporations Act will impose rights and obligations on shareholders and directors. Lawyers typically draft a shareholders’ agreement to complement the articles etc. when there is more than one arm’s-length shareholder.

Taking on new investors will also complicate things. For example angel investors may demand a particular kind of share structure. From my perspective it is often best to start with a very simple, straightforward structure – primarily to facilitate tax planning for things like scientific research and experimental development tax credits (“SR&ED”) and other incentives that rely on the existence of a corporate structure.

It is probably not reasonable to anticipate what structure investors will want at the outset, since every investor is different. For that reason a plain, vanilla structure may satisfy your tax planning needs as a sole shareholder. Consulting with a lawyer is certainly advisable when there are 2 or more shareholders with opposing interests, or when you are considering taking on new investors.

Whether or not you engage a lawyer, if your company is incorporated there are compliance requirements that must be attended to at least annually. For the first year or 2 a sole shareholder may get away with handling these personally. If the company doesn’t get legal advice periodically however, there could be some fairly serious repercussions. I have seen circumstances where a husband and wife (shareholders) failed to file the required annual reports, resulting in the corporation ceasing to exist. This can be problematic if for instance you apply for a SR&ED refund, only to be informed that the company was dissolved 8 months ago.