On September 1, 2021, the Alberta Securities Commission (ASC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAA) adopted the Small Business Financing prospectus exemption (“Small Business Exemption”) in an effort to address the financing challenges of private businesses headquartered in Alberta and Saskatchewan which do not currently have the profile or growth prospects to attract the interest of venture capitalists or public capital markets. The Small Business Exemption allows issuers headquartered in Alberta and Saskatchewan to raise up to CA$5 million from the general public in those provinces by using a new streamlined offering document and eliminates the need for issuers to rely on other prospectus exemptions which may not be available if potential investors do not satisfy the requisite criteria.

The Small Business Exemption has been implemented on a three-year pilot basis.

The Offering Document and ongoing obligations

When utilizing the Small Business Exemption an issuer must provide purchasers with an offering document in the form specified in Form 45-539F1 (“Offering Document”) which requires the issuer to disclose, among other things: (i) basic information about the issuer, its business and the offering; (ii) how the issuer will use the funds raised; and (iii) the relevant risks of the business or project.

If an issuer, or its affiliates and certain persons or companies engaged in a common enterprise with the issuer (“Issuer Group”), raises less than CA$1.5 million under the Small Business Exemption in a 12-month period (not including investments by purchasers who are qualified to invest under the accredited investor exemption, the family and friends and business associates exemption, the foreign investor exemption and the self-certified investor (the “Specified Exemptions”), then the Offering Document does not need to include financial statements for the issuer. If an Issuer Group raises more than CA$1.5 million under the Small Business Exemption in a 12-month period (not including investments by purchasers who are qualified to invest under the Specified Exemptions), then financial statements are required to be provided in the Offering Document.

The financial statements required to be provided in the Offering Document pursuant to Form 45-539F1 may be prepared in accordance with Canadian GAAP for private enterprises and do not need to be audited provided that the financial statements have been subject to a review engagement by a chartered professional accountant (the “Financial Statements”).

For the three financial years following a distribution relying on the Small Business Exemption, an issuer that is required to include Financial Statements in the Offering Document is obligated to deliver its Financial Statements and a notice disclosing in reasonable detail the use of the aggregate gross proceeds raised under the Small Business Exemption, or make such documents reasonably available to each holder of a security distributed under the Small Business Exemption.

Investment limits

The aggregate lifetime maximum that an Issuer Group can raise under the Small Business Exemption is CA$5 million (not including investments by purchasers who are qualified to invest under the Specified Exemptions).

When Financial Statements are not provided in the Offering Document, the maximum amount that a purchaser (who would not qualify to invest under one of the Specified Exemptions) could invest in an Issuer Group over a 12-month period is CA$2,500 or CA$10,000 if the purchaser is a “Minimum Income Investor” which refers generally to those individuals having had annual net income for the last two years in excess of CA$75,000 or CA$125,000 with their spouse and, in the case of non-individuals, generally to persons or companies that are controlled by Minimum Income Investors.

When Financial Statements are provided in the Offering Document, the maximum amount that a purchaser (who would not qualify to invest under one of the Specified Exemptions) could invest in an Issuer Group over a 12-month period is CA$5,000 or CA$20,000 if the purchaser is a Minimum Income Investor or if the purchaser has obtained advice from a register dealer that the investment is suitable for the purchaser.

Considerations before utilizing the Small Business Exemption

While the Small Business Exemption will assist in addressing certain financing challenges faced by small businesses in Alberta and Saskatchewan, issuers must consider if the Small Business Exemption is appropriate for them and consider the following:

• The Offering Document will constitute an offering memorandum under securities legislation which provides purchasers with additional rights of action in the event of a misrepresentation in the Offering Document;

• An issuer that relies on the Small Business Exemption will no longer be considered a “private issuer” under National Instrument 45-106 Prospectus Exemptions;

• The Small Business Exemption does not provide an exemption from the dealer registration requirement or any other requirement of securities legislation;

• The Small Business Exemption is not available to reporting issuers or investment funds;

• The Small Business Exemption is only available for the distribution of certain specified securities (including but not limited to common shares, preference shares, debt securities and units of a limited partnership); and

• The issuer may be required to prepare and deliver Financial Statements for a three-year period.

Repeal of ASC Rule 45-517 – Prospectus Exemption for Start-Up Businesses

In connection with the implementation of the Small Business Exemption, the ASC will repeal ASC Rule 45-517 Prospectus Exemption for Start-Up Businesses, effective November 24, 2021.

For more information on the Small Business Exemption, please contact Danny Wakeling or Ty Buhler.

Full details on the exemption are set out in the Multilateral CSA Notice of Implementation Alberta and Saskatchewan Orders 45-539 Small Business Financing and on the websites of the ASC and the FCAA.

The authors would like to thank articling student Gabriel Simons for his assistance with this article.