by Patrick Hlavac-Winsor

    Unique Financing Options Through Exempt Securities

    Raising Corporate Capital While Mitigating Costs

    As an oil and gas lawyer in private practice and currently as a securities lawyer at a quasi-judicial body, I have learned to be cautious when expressing personal views. On that note, I need to preface that this overview is not intended as legal advice, and a lawyer with securities expertise should be consulted before these exemptions are contemplated. The exempt market is risky in that, among other things, the securities purchased may not be liquid and may not be appropriate for the risk profile of individual purchasers. My views do not necessarily reflect the views of my employer or colleagues. That being said, I hope that the following brief overview serves to educate readers that securities in the exempt market are another means of raising capital for the energy sector in addition to the widely familiar public markets.

    The typical starting point for raising capital, and for a company going public, is a prospectus. When a company decides to go public, the prospectus describes in detail the offering of securities as well as, among other things, the company’s future plans, capitalization, and use of proceeds from the sale of the securities.

    Within the current economic climate, many early-stage oil and gas companies frequently face difficulties in raising capital through prospectus offerings. Even though we are technically out of a “recession,” the 2008 crisis profoundly impacted the oil and gas sector and corporate finance on the whole. This means that for many companies the cost of a prospectus may prove to be prohibitive given the limited pool of available capital, as a result of the sluggish recovery and investor apprehension in the aftermath of the recent financial crisis. However, the Alberta energy industry does have numerous options for capital raising without the high cost of producing a prospectus.

    Energy industry participants should get familiar with National Instrument 45-106, Prospectus and Registration Exemptions (NI 45-106), which contains several exemptions to the prospectus regime that may serve financing needs of early-stage companies. Some of the exemption highlights are outlined below:

    The Private Issuer Exemption

    Under section 2.4 of NI 45-106, a “private issuer” is exempted from the prospectus requirement. To qualify as a private issuer, the company cannot be a reporting issuer or an investment fund (e.g., it has not filed a prospectus previously). A private issuer must also not have shares beneficially owned by more than 50 persons, not including employees and former employees of the company or its affiliates. A private issuer is permitted under this exemption to sell to the following: accredited investors; family, close personal friends, and close business associates; existing security holders; and anyone else that is “not the public.”

    While only available to “private issuers,” unlike other prospectus exemptions, there is no reporting requirement to the securities commission and no associated fee.

    Family, Friends And Business Associates Exemption

    Many oil and gas industry veterans know firsthand that a new company often starts with close friends and family believing in the idea before any investor in the broader market shows interest. Family, close personal friends, and close business associates may invest in the company directly without the normal and extensive disclosure requirements of the prospectus regime under section 2.5 of NI 45-106. This exemption is available to private or non-reporting issuers, but stipulates that no commission or finder’s fee may be paid “to any director, officer, founder, or control person of an issuer or an affiliate of the issuer in connection with a distribution.” It is important to note that the exemption is not available in Ontario.

    Offering Memorandum Exemption

    The “offering memorandum” exemption described in section 2.9 of NI 45-106 is a prospectus exemption that is contingent on the investor being provided certain specified disclosure and completing a prescribed risk acknowledgement form.

    Although the required disclosure is less extensive than a prospectus, it does have some of the same features. For example, it must not contain a misrepresentation and must include, among other things, the business structure and description of the business. It must also include the long- and short-term objectives, details on the use of funds, key terms of material agreements, as well as details pertaining to directors, officers, and promoters. In Alberta, there is a $10,000 cap on the amount that a purchaser can invest unless the purchaser is an “eligible investor” as defined in NI 45-106 (e.g., has had and expects to have income over $75,000 or net assets over $400,000).

    Accredited Investor Exemption

    The most commonly used exemption is the “accredited investor” exemption in section 2.3 of NI 45-106. The definition of accredited investor includes banks, trust companies, governments, pension funds, and insurance companies. The definition also extends to an individual who, either alone or with a spouse, has net realizable financial assets (i.e., cash and securities) of at least $1,000,000 or net assets of at least $5,000,000, or whose income before taxes exceeded $200,000 in each of the two most recent calendar years (or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the two most recent calendar years) and reasonably expects to exceed that net income level in the current calendar year.

    Minimum Amount Investment Exemption

    The “minimum amount” exemption in section 2.10 of NI 45-106 exempts a company from the prospectus requirement if the distribution is to a person purchasing as principal, and in an amount greater than $150,000. The exemption is not contingent on a prescribed form of disclosure.

    In a tough economic climate, it is crucial for companies to explore all the options available to them that may help lay the groundwork for ultimate success. While some regional differences exist, the capital raising exemptions discussed in this article may provide potential opportunities for funding oil and gas ventures as an additional option to the big step of the company offering securities to the public via a prospectus either in an initial public offering (thus becoming a reporting issuer) or via a secondary offering (if the company is already a reporting issuer).

    Note: this overview is not intended as legal advice and a lawyer with securities expertise should be consulted before these exemptions are contemplated. The exempt market is risky in that, among other things, the securities purchased may not be liquid and may not be appropriate for the risk profile of individual purchasers.


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    1 comment
    • Tim Keskic

      Insightful article and valuable information. Thank you for taking the time to share your thoughts.