Legal Matters: Exercise care, to avoid despair, when issuing a share

Question: 

I have decided to incorporate my business. What should I know before I start issuing shares?

Answer:

Your lawyer has incorporated a company for you. Excited and eager, you now want to bring shareholders on board, to build and develop your business.

Make sure you issue shares in the company with care. If you do not, you could find yourself in violation of Ontario’s Securities Act.

Pursuant to Ontario’s Securities Act, a company cannot issue shares to a party unless the company has issued a prospectus. A prospectus is a document that contains details about the company, its share offering and the rights of a purchaser. The preparation and filing of a prospectus can be a challenging exercise.

Understanding that preparing and filing a prospectus can be overwhelming and impractical for new companies, certain exceptions were made available.

For private companies, a commonly used exemption is the Private Issuer Exemption, under which shares can be issued to certain people or entities without filing a prospectus. Some, but not all, of the eligible people or entities include:

• a director, executive officer, employee, founder or control person of the company;

• certain family members, close friends or business associates of the above-noted people;

• an officer of the company;

• certain sophisticated investors, referred to as “accredited investors”; or

• an existing shareholder.

If a company issues shares to a person or entity that is not permitted under the Private Issuer Exemption, then it will no longer be able to rely on the Private Issuer Exemption moving forward. This can make issuing shares more complicated, which can hurt future growth.