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Demystifying The Impact Of 50 Shareholders

Posted by FrontFundr on October 30, 2015
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Since we closed Canada’s first equity crowdfunding deal last month, there’s been tremendous buzz and excitement around the ‘New Capital Market’ that FrontFundr has introduced. Companies are curious to learn how they can maximize the opportunity to raise money from a broad spectrum of investors. With any new regulation, questions arise as people begin to understand how the new rules can be applied. 

The short answer is, no.

The long answer is slightly more complicated. 

Typically, a company is formed and starts raising money from shareholders using the Private Issuer Exemption, given they have less than 50 shareholders. To be clear, ‘exemption’ in this respect does not mean that the company is exempt from securities regulation, it means that the private placement rule used to issue securities exempts the company from filing a full prospectus. The Private Issuer Exemption allows companies to raise money from the following groups of people, with no need to file a report of distribution of securities after closing of the capital raise with the securities commission(s):

  • Accredited investors
  • Family members of the directors, senior officers or control persons
  • Close personal friends or close business associates of the directors, senior officers or control persons
  • Directors, officers, employees or control persons of the issuer
  • Current security holders of the company

Once a company has more than 50 shareholders, they can no longer use the Private Issuer Exemption. However, a company can still raise funds from the groups of people mentioned above, by using a separate prospectus exemption for each category of investor. In utilizing these separate exemptions, the company does not become a reporting issuer or a public company.   

Losing ‘private issuer’ status simply means that, after the raise, there is a required one-time filing of a document called a ‘Report of Exempt Distribution’. This report includes information such as name of investor, number of securities and the prospectus exemption being used. At FrontFundr, we collect investor information throughout the raise and work alongside companies to make the process of filing with the commission as simple as possible. 

As for a requirement of audited financial statements, this process remains unchanged by taking on 50 or more shareholders.  Companies are still required to obtain consent from all shareholders to waive the appointment of an auditor.  This is no different than what companies already must comply with. 

It is important to understand that having more than 50 shareholders does not need to be complicated, it simply involves a  slightly different process, made efficient with FrontFundr.

This article is for general information only. It is not intended to provide specific customized advice including, without limitation, investment, financial, legal, accounting or tax advice.

The contents of this article are given in summary form and do not purport to be complete.

FrontFundr recommends companies and investors to obtain professional legal advice before any capital raise or investments are considered. For further information regarding private placements in BC, please visit the BC Securities Commission website.

 

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