Canadian Listed Company Association

Junior public companies have improved access to capital in Canada as a result of two recent changes in securities regulation:

1. the “Revised Short Form Prospectus Rule” came into force on December 30, 2005 (see National Instrument 44-101 Short Form Prospectus Distributions); and
2. the “New Exemptions Rule” came into effect on September 14, 2005 (see National Instrument 45-106 Prospectus and Registration Exemptions).

Venture Companies May Now Use a Short Form Prospectus

The biggest change for smaller cap public companies is that they may now raise capital using a short form prospectus.

Previously, a public company had to have a market capitalization of at least $75 million to sell equity using a short form prospectus. Companies falling below the $75 million market cap threshold, which included most companies listed on the TSX Venture Exchange, had to prepare a more expensive and time consuming long form prospectus to undertake a full blown public offering.

Under the Revised Short Form Prospectus Rule, the minimum market capitalization requirement has been eliminated.  The Revised Rule does require an issuer to meet other criteria to qualify – i.e., it must have an active business, be current in its continuous disclosure filings, have filed a current annual information form and be listed on an eligible exchange such as the TSX Venture Exchange or the Canadian Trading and Quotation System Inc. -- but does not close the door on smaller cap issuers.

As a result, qualified smaller cap issuers listed on the TSX-V or CNQ may now access public capital markets within weeks -- instead of months -- using a short form prospectus.

The New Exemptions Rule – A Step in the Right Direction

The New Exemption Rule consolidates -- in one document -- virtually all of the prospectus and registration exemptions that are typically used by public companies. The rule applies in all provinces and the territories (except Yukon).

The New Exemption Rule is a further step towards the national harmonization of the capital raising exemptions.  Fewer quirks now exist among the most frequently used capital raising exemptions; however, venture issuers will still face hurdles raising capital from residents of Ontario as it has not adopted either the “offering memorandum” or the “close persons” exemptions.

Some of the notable changes resulting from the New Exemptions Rule are as follows:

• The “$150,000” exemption is now effectively available across Canada. Ontario has re-adopted this exemption and the minimum required to be invested has been increased in other jurisdictions where it was formerly $97,000.
   
• The “accredited investor” exemption is also now effectively available across Canada. To qualify as an accredited investor, as individual must have a net income of $200,000 or higher or net financial assets of $1 million or greater.
   
• Both the “Offering Memorandum” and “TSX-V Short Form Offering” exemptions are now effectively available across Canada – with the notable exception of Ontario, which has no equivalent exemptions.
   
• The “offering memorandum” exemption is restricted to a purchase of no more than $10,000 in certain jurisdictions – i.e., Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Quebec and Saskatchewan -- unless the investor qualifies as an “eligible investor”, which includes an individual with a net income of $75,000 or higher.
   
• The “close persons” exemption is now effectively available across Canada – Ontario again being the notable exception. Ontario has adopted a more limited “family” exemption that includes a spouse, parent, sibling, grandparent or child of an executive officer, director or founder but does not include “close personal friends” or “close business associates”.

The foregoing summary was provided by Gary Floyd, a corporate finance and securities lawyer at Lang Michener. He is reachable by email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or by telephone at 604-691-6830.