Equity Drives For Cooperatives – Private Placement And Prospectus Exemptions
By Kristen Wittman on 2013/04/17
What follows is a summary of the restrictions and options available to a Cooperative registered under Manitoba laws, that wishes to raise funds, either from the public or on a private placement basis. The following assumes that investors will be resident in Manitoba only. If there are prospective investors who live outside of Manitoba, the rules for each investor would have to be investigated specifically. This information is accurate as of 2012 and is subject to any changes to the laws of Manitoba. This document is intended to assist Cooperatives in determining a course of action prior to consulting with legal counsel, but does not replace the need to consult with legal counsel.
There are two regimes under which funds can be raised by a cooperative: The Cooperatives Act permits the selling of shares or investment by way of loan (each a distribution of securities) in a cooperative to members and non-members, and The Securities Act permits the distribution of securities to the public. Although The Cooperatives Act states that any sale of securities to non-members falls under The Securities Act, there is a Blanket Order issued by the Manitoba Securities Commission which allows cooperatives to fall within The Cooperatives Act regime nevertheless.
The Securities Act
In respect of The Securities Act, there are two regimes pursuant to which investments can be offered: the first is National Instrument 45-106, which is an exemption from The Securities Act, and the second is Part XIII (and in particular, Section 91) of the regulations to The Securities Act.
Pursuant to National Instrument 45-106, there are three groups of people who are likely to be approachable in respect of the distribution of securities:
1) accredited investors (see definitions at end);
2) friends, family and close business associates. (see definitions at end); and
3) anyone (living in Manitoba), provided they have received a copy of the prescribed Offering Memorandum, and do not invest more than $10,000 each.
In respect of that last one, while it opens the door to receiving money from a much greater number of people, it also requires a fair bit of disclosure/work on the part of the Cooperative. In particular, the principals of the Cooperative are required to attach to the Offering Memorandum financial statements for the most recent financial year end of the Cooperative, and unfortunately those statements must be audited. If the financial statements of the most recent fiscal year have not yet been audited, it is permissible for the Cooperative to attach unaudited statements to the Offering Memorandum so long as audited ones are attached as soon as they are approved by the Cooperative, which can be no later than 120 days after the fiscal year end.
Under 45-106, when the Cooperative has raised sufficient funds to “close” the offering, Form 45-106F1 must be filed with the Manitoba Securities Commission, which identifies how many investors are friends and family, how many are accredited investors, and how many subscribed pursuant to the offering memorandum. If the offering memorandum exemption is used, the offering memorandum must also be filed at the same time. The Cooperative has 10 days within which to file, and can “close” more than once under the same offering memorandum, provided it is updated with any material changes.
Section 91 of the regulations to The Securities Act
There is a private placement exemption available under Regulation 491/88R of The Securities Act. Pursuant to Subsection 91(a) of that regulation, if the Cooperative distributes securities only to people who are related purchasers or informed purchasers (although there can only be 15 informed purchasers) there is no requirement to issue any offering statement of any kind (see definitions at end). The Cooperative does, however, have to collect a form (Form 24) from each investor and file that with the Manitoba Securities Commission within 180 days of the date notice of intention to have an equity drive has been filed. This exemption can only be used by any particular Cooperative once, so after the 180 day time limit, no further securities can be distributed unless the distribution qualifies under another exemption.
Under Subsection 91(b), the Cooperative can raise money from related purchasers and no more than 50 sophisticated investors, but to do so the sophisticated investors must receive an offering memorandum. The prescribed form does not require audited financial statements. Please see the definitions for the meaning of related, informed and sophisticated investors. They are substantially similar to those described in the 45-106 definitions, but may be somewhat less onerous.
Under either 91(a) or 91(b), there is no limit to the amount any one purchaser subscribes for, but the subscription must be received within 180 days of the date upon which the selling begins.
The Cooperatives Act
Pursuant to the Blanket Order and notwithstanding Section 88 of The Cooperatives Act, before a Cooperative can start to raise funds, and provided it is issuing securities in the Cooperative directly, the Cooperative can file an Offering Statement (not the same as an offering memorandum, but quite similar) with the Cooperatives Branch, and if they are satisfied with the disclosure in the Offering Statement, they will issue a receipt which will allow the Cooperative to raise funds from members or non-member investors. There is no specific requirement that financial statements be attached or audited, however, the Cooperatives Registrar is given the discretion to require them. Currently, the Cooperatives Registrar has adopted the approach that financial statements should be audited unless the Cooperative can provide an acceptable explanation as to why they should not be audited. A reasonable explanation can include that there have been no activities in the Cooperative to date.
As well under this regime, the receipt that is issued by the Cooperatives Registrar will contain a time limit on the offering, which is typically one year. The Cooperative is therefore restricted to raise the funds required within one year, as the receipt would expire on its stated deadline, preventing the Cooperative from continuing to raise funds thereafter, without reapplying for a new receipt (and paying the prescribed fee). There is no filing obligation upon closing the offering, however.
Given the confusing nature of the foregoing, I’ve also attempted to provide a comparison of the rules in the attached chart.
Finally, in respect of any type of offering, it is possible that the shares sold will qualify for either the Community Enterprise Development Tax Credit, or the Small Business Ventures Tax Credit. In each case, the tax credit is up to 30% of the investment.
CED Tax Credit
The tax credit is available if raising less than $1,000,000, but the amount must be raised within 6 months, and the proceeds must be used within a certain period of time set by the Minister. There is a hold on the shares of three years (subject only to death, or a qualified arm’s length buyer). The maximum investment any individual can make is $30,000, and this can represent no more than 10% of the entire issue. The assets of the issuer cannot exceed $10,000,000 net or $20,000,000 gross and there must be no more than 200 employees, 25% of whom are employed and resident in Manitoba.
During the three year hold period, the issuer must continue to qualify as an eligible business (in that it falls within the above restrictions). As well, the reporting obligations under the CED Tax Credit require annual audited financial statements.
SBV Tax Credit
The SBV Tax Credit is available for issues of a minimum of $100,000. Gross revenue of the issuer must not exceed $15,000,000, and the issue can have no more than 50 employees, 25% of whom must be resident and employed in Manitoba. The minimum investment by any single taxpayer must be $20,000, and the taxpayer must be either an accredited investor, or have signed a risk acknowledgement in the form required by the Minister. There is a three year hold period on sale of the investment. Reporting requirements do not require audited financial statements. The tax credit is limited to an aggregate of $135,000 to any single taxpayer, and only up to $45,000 can be used in any year (with the balance carrying forward).
45-106 definitions and terms
(k) an individual whose net income before taxes exceeded $200 000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300 000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year,
(l) an individual who, either alone or with a spouse, has net assets of at least $5 000 000,
(m) a person, other than an individual or investment fund, that has net assets of at least $5,000,000 as shown on its most recently prepared financial statements,
Prospectus exemption for friends/family/close business associates:
The prospectus requirement does not apply to a distribution of a security to a person who purchases the security as principal and is:
(a) a director, executive officer or control person of the issuer, or of an affiliate of the issuer,
(b) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer or control person of the issuer, or of an affiliate of the issuer,
(c) a parent, grandparent, brother, sister, child or grandchild of the spouse of a director, executive officer or control person of the issuer or of an affiliate of the issuer,
(d) a close personal friend of a director, executive officer or control person of the issuer, or of an affiliate of the issuer,
(e) a close business associate of a director, executive officer or control person of the issuer, or of an affiliate of the issuer,
(f) a founder of the issuer or a spouse, parent, grandparent, brother, sister, child, grandchild, close personal friend or close business associate of a founder of the issuer,
(g) a parent, grandparent, brother, sister, child or grandchild of a spouse of a founder of the issuer,
(h) a person of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in paragraphs (a) to (g), or
(i) a trust or estate of which all of the beneficiaries or a majority of the trustees or executors are persons described in paragraphs (a) to (g).
Securities Act Section 91 definitions
“informed purchaser” means,
(a) a purchaser that has obtained expert advice with respect to the merits and risks of an investment in securities, including the ability of the purchaser to discharge any continuing commitments associated with the investments and to bear the economic impact of any loss of the investment, or
(b) a purchaser that has the knowledge, experience and sophistication to assess an investment in securities as a result of previous experience with investments in like securities and, by reason of a previous relationship or association with the issuer or any promoter of the issuer, has access to or is able to obtain sufficient information concerning the business and affairs of the issuer to enable the purchaser to evaluate the merits and risks of an investment in the securities of the issuer,
and as a result does not require the information and protection that would otherwise be provided under the Act;
“related purchaser” means,
(a) a purchaser that is a general partner of the issuer, a promoter of the issuer or a senior officer or director of either of them or of the issuer, or
(b) a purchaser that is a parent, brother, sister, or child of a person described in clause (a), or the spouse of any of them, or
(c) a purchaser that is a close friend or close business associate of a person described in clause (a), or
(d) a corporation all of the equity shares of which are owned by persons described in clause (a), (b) or (c);
“sophisticated purchaser” means a purchaser who has the financial ability to withstand a loss that might occur as a result of an investment in a security by reason of the fact that,
(a) if the purchaser is an individual, he or she has either,
(i) a minimum net worth of $250,000 exclusive of home, car and furnishings, or
(ii) a minimum net worth of $50,000 exclusive of home, car and furnishings and some income in the last taxation year that would have been taxed at the highest marginal rate applicable to individuals under The Income Tax Act had it not been for his or her use of tax shelters; or
(b) if the purchaser is a corporation, it
(i) has shareholder equity (paid-up capital plus retained earnings) in excess of $50,000., or
(ii) had net income in the last taxation year of at least $50,000.,
and the purchaser has the knowledge, experience and sophistication to assess an investment in the securities, either from previous investments in like securities or from expert advice, as a result of which the purchaser does not require the information and protection that would otherwise be provided under the Act.
|Coop Securities to Members only||Coop Securities to Non-Members||45-106||91(a)||91(b)|
|Offering Memorandum or Statement required||Only if cost of member share is greater than $1,000*||Yes||Yes, if offering to more than friends, family, and accredited investors||No||Yes|
|Financial Statements required||No||Yes||Yes||No||Yes|
|Financial Statements to be audited||Not applicable||Maybe: within discretion of Cooperatives Registrar||Yes||Not applicable||No|
|Restrictions on who can invest||Yes, must be member* the regulations are currently under review, with a proposal to increase the limit from $1000.^ regardless of the restrictions on timing set forth under the securities rules, to qualify for either tax credit currently available in Manitoba, there is a six-month time limit on issuing securities.||No||Yes, must not invest more than $10,000||Yes, no more than 15 informed purchasers||Yes, no more than 50 sophisticated purchasers|
|Restrictions on timing ^||No||Yes, set by Registrar, usually 12 months||No, but offering memorandum must contain all material changes||Yes: 180 days||Yes: 180 days|
|Filing obligations||None||Offering Statement must be filed prior to offering||Offering Memorandum and Form 45-106F1 must be filed within 10 days of closing of offering||Prior to offering, Notice of Intention must be filed, Form 24 from each investor must be filed following close of offering||Prior to offering, Notice of Intention must be filed, Form 25 from each investor must be filed following close of offering|
* the regulations are currently under review, with a proposal to increase the limit from $1000.
^ regardless of the restrictions on timing set forth under the securities rules, to qualify for either tax credit currently available in Manitoba, there is a six-month time limit on issuing securities.
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