Understanding Securities Laws for Startup Fundraising: What Every Entrepreneur Should Know
Raising capital is an essential part of starting and growing a successful business, but it can be a complex legal landscape to navigate, especially when it comes to securities laws. Entrepreneurs need to understand these laws to avoid costly legal pitfalls.
In this article, we will discuss what every entrepreneur should know about securities laws in Canada for startup fundraising.
The Basics of Securities Laws in Canada
Securities laws in Canada are designed to protect investors from fraud and ensure that securities are sold in a fair and transparent manner. The laws apply to the sale of all securities, including stocks, bonds, and other investment products. These laws are enforced by the Canadian Securities Administrators (CSA), which is made up of securities regulators from each province and territory.
Understanding Accredited Investors in Canada
In Canada, accredited investors are defined as individuals or entities that meet certain financial criteria, such as having a net worth of over $5 million or an annual income of at least $200,000. Accredited investors are allowed to invest in private offerings, which are exempt from certain securities laws.
The Difference Between Private and Public Offerings in Canada
Public offerings in Canada are offerings of securities that are made to the general public and must be prospectus filed with the securities regulator. Private offerings in Canada are offerings of securities that are made to a limited number of investors and are exempt from prospectus requirements under certain circumstances.
Understanding National Instrument 45-106
National Instrument 45-106 (NI 45-106) is a set of CSA rules that provide exemptions for private offerings in Canada. Under NI 45-106, companies can raise capital from accredited investors without prospectus filing with the securities regulator. However, companies must still comply with certain requirements, such as filing a Form 45-106F1 with the securities regulator.
Complying with Provincial Securities Laws in Canada
In addition to federal securities laws, companies must also comply with provincial securities laws in Canada, which can vary from province to province. Some provinces have their own securities laws and registration requirements that must be followed.
The Importance of Disclosure in Canada
Even in private offerings, companies are required to provide certain disclosures to investors in Canada. This includes providing investors with a offering memorandum or subscription agreement that outlines the terms of the offering and the risks associated with investing.
The Consequences of Non-Compliance in Canada
Non-compliance with securities laws in Canada can have serious consequences, including fines, lawsuits, and criminal penalties. Entrepreneurs who violate securities laws can face personal liability, and the company may be forced to return investor funds.
In conclusion, understanding securities laws in Canada is essential for entrepreneurs who are raising capital for their startups. Entrepreneurs must be aware of the basics of securities laws in Canada, the definition of accredited investors in Canada, the difference between private and public offerings in Canada, National Instrument 45-106, provincial securities laws in Canada, the importance of disclosure in Canada, and the consequences of non-compliance in Canada. By following these guidelines, entrepreneurs can ensure that their fundraising efforts comply with securities laws in Canada and avoid costly legal pitfalls.
How Fauri Law can help:
At Fauri Law, our experienced lawyers can assist you in evaluating how securities laws impact your business and whether you are in compliance. For expert guidance, please contact us or schedule a free call.
Disclaimer: The information in this publication is accurate as of July 01, 2023.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Fauri Law to discuss these matters in the context of your particular circumstances. Fauri Law, its founders, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.