Raising capital is a crucial step in the growth and development of many businesses. In Ontario, as elsewhere in Canada, securities laws are designed to protect investors by ensuring that businesses disclose material information about their operations, risks, and financial condition. One of the primary disclosure documents in this process is the prospectus. However, preparing a prospectus can be time-consuming and costly, and not every capital raise requires one.
In this blog, we will explain when a prospectus is required and when it is not and how Ontario businesses can navigate the various exemptions available under securities law.
What Is a Prospectus?
A prospectus is a detailed legal document that a company must prepare and file with securities regulators when it offers securities (such as shares, bonds, or other financial instruments) to the public. It provides prospective investors with essential information about the company, including its business operations, financial statements, management team, material risks, and use of proceeds from the offering. The goal is to ensure transparency, enabling investors to make informed decisions about whether to invest.
In Ontario, the Ontario Securities Commission (OSC) oversees the prospectus filing process as part of its mandate to protect investors and foster fair, efficient capital markets.
When Is a Prospectus Required?
Under Ontario’s Securities Act, a company must file a prospectus and obtain a receipt from the Ontario Securities Commission before distributing securities unless an exemption applies.
Generally, a prospectus is required if:
- The company is offering securities to the general public;
- The securities are being listed on a public stock exchange; and
- No applicable exemption can be relied upon.
Failure to comply with prospectus requirements can lead to significant penalties, regulatory actions, and civil liability.
Why Prospectuses Are Rare for Private Companies
Despite the prospectus’s central role in public offerings, many private companies avoid filing one. This is mainly due to the cost, complexity, and time commitment. Preparing a prospectus often requires input from legal counsel, auditors, and underwriters. Moreover, once a company files a prospectus and becomes a reporting issuer, it is subject to ongoing disclosure obligations, such as quarterly and annual filings, that many private companies prefer to avoid.
Fortunately, Ontario law provides several prospectus exemptions that allow companies to raise capital without the burden of full prospectus disclosure.
Common Prospectus Exemptions in Ontario
Ontario’s securities laws offer several exemptions that businesses frequently use to raise capital privately. Below, we review the most commonly used exemptions.
1. Accredited Investor Exemption
The Accredited Investor Exemption is one of the most widely used. Under this exemption, companies can sell securities to “accredited investors” without preparing a prospectus.
Accredited investors include:
- Individuals with net financial assets (excluding real estate) exceeding $1 million;
- Individuals whose net income exceeded $200,000 (or $300,000 with a spouse) in each of the past two years; or
- Companies and institutional investors meeting specified financial thresholds.
Issuers relying on this exemption must ensure that investors meet the criteria and, in most cases, obtain a signed Risk Acknowledgment Form.
2. Private Issuer Exemption
Companies that qualify as private issuers can also raise funds without filing a prospectus. A private issuer is a company that:
- Has no more than 50 shareholders (excluding employees and former employees);
- Only sells securities to a select group, such as family members, close personal friends, or accredited investors; and
- Has not engaged in any public solicitation or advertising to sell its securities.
This exemption is beneficial for early-stage businesses raising money from friends, family, and other close connections.
3. Offering Memorandum Exemption
The Offering Memorandum (OM) Exemption allows companies to raise capital by providing investors with a disclosure document called an offering memorandum, rather than a full prospectus.
The OM must include:
- Detailed disclosure about the company and its operations;
- Financial statements (which may need to be audited depending on the size of the offering); and
- Risk factors associated with the investment.
This exemption is broader than the accredited investor exemption because it allows sales to a wider group of investors, subject to certain investment limits based on the investor’s income or net worth.
4. Minimum Amount Investment Exemption
Under the Minimum Amount Investment Exemption, a company can sell securities to an investor who purchases at least $150,000 worth of securities in a single transaction.
This exemption typically applies to sophisticated investors and institutions. It is important to note that this exemption is available only to non-individuals (e.g., corporations or partnerships), not individual investors.
Additional Prospectus Exemptions Worth Considering
Beyond the major exemptions discussed above, other less commonly used but potentially useful exemptions include the following:
- Employee, Executive Officer, Director and Consultant Exemption: Allows companies to issue securities to their personnel without a prospectus.
- Family, Friends, and Business Associates Exemption: Permits sales to individuals with close relationships with company directors or officers.
- Start-up Crowdfunding Exemption: Allows small businesses to raise modest amounts from the public through licensed crowdfunding portals, subject to strict rules.
Each exemption has specific conditions and requirements. Businesses must fully comply with the terms of any exemption they rely on.
What Happens If You Do Not Qualify for an Exemption?
If a company cannot rely on any available exemption, it must file a prospectus with the Ontario Securities Commission before distributing securities. Public companies raising funds through public offerings or listing shares on an exchange like the Toronto Stock Exchange (TSX) typically fall into this category.
Filing a prospectus involves preparing detailed disclosure documents and distributing the prospectus to all prospective investors. The company must also undergo regulatory review by the OSC and respond to comments and questions from the regulator.
While costly, the prospectus process can provide access to a broader pool of investors and greater liquidity for securities.
Compliance With Prospective Requirements Is Critical
Relying on an exemption is not a shortcut to avoid legal obligations. Companies must maintain proper records of each exempt distribution and file all necessary reports with the OSC, such as Form 45-106F1 (Report of Exempt Distribution). They must also ensure that all offering documents are accurate and not misleading, and they must understand and comply with any ongoing obligations (for example, providing audited financials under the OM Exemption).
Errors or omissions, even if unintentional, can expose a company and its directors to liability under securities laws.
Seek Legal Guidance Early
Navigating Ontario’s prospectus requirements and exemptions is a complex area of law. While exemptions offer valuable opportunities for private fundraising, each exemption has technical rules that must be strictly followed.
Early consultation with experienced legal counsel can help companies choose the appropriate exemption, prepare necessary documentation, and reduce legal and regulatory risks. It also helps position them for future financing rounds, including potential public offerings.
Bader Law: Mississauga & Oakville Business Lawyers Providing Robust Prospectus Advice
The experienced business lawyers at Bader Law advise businesses of all sizes on capital raising strategies, securities compliance, and corporate structuring. Whether you are an early-stage startup or a growing private company, we can help you understand your options and proceed confidently. We proudly serve clients in Mississauga, Oakville, and throughout the Greater Toronto Area. To book a consultation, please call (289) 652-9092 or contact us online.