In accordance with the Québec Securities Act, any person wishing to distribute securities must prepare a prospectus. However, Regulation 45-106 offers several exemptions from prospectus requirements. In addition to these exemptions, the Autorité des marchés financiers may also grant discretionary exemptions, as long as it is deemed not to affect the protection of investors.
This article reviews the most common prospectus exemptions, which are the accredited investor, the private issuer, and the family, friends, and business associates exemptions.
Accredited investors are defined by Section 1.1 of Regulation 45-106 as including banks, pension funds, brokers, advisers, investment funds, and certain individuals. Those individuals must fit in at least one of the four following categories in order to be considered an accredited investor :
- An individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000;
- An individual who beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5,000,000;
- 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;
- An individual who, either alone or with a spouse, has net assets of at least $5,000,000.
Generally, an accredited investor is considered to be a person who, as a result of their financial resources and knowledge, does not require the protection of a prospectus.
The private issuer exemption is typically used by small businesses. For this exemption to apply, there must be a maximum of 50 shareholders at the time of the offering. The corporate documents must also establish a restriction on the free transfer of shares. The persons covered by this exemption include : (i) accredited investors; (ii) founders of the issuer; (iii) close personal friends of an executive officer, a director, a founder or a control person of the issuer; (iv) persons that are not “the public”; and (v) any other person specfied in Section 2.4 (2) of Regulation 45-106.
When it comes to securities trading, the courts have interpreted “the public”, as in “a person that is not the public” very broadly. Whether a person is a member of the public will be determined by the factual circumstances of each case. In addition, two tests have been established by case law to determine whether a person is or is not part of the public. Autorité des marchés financiers c. Archer Or Inc., 2011 QCBDR 123 states that the first test, the “need to know” test, is based on the premise that people can find the information on their own or already have access to the information contained in a prospectus in order to make informed investment decisions without needing the protection offered by securities legislation. In brief, individuals who are capable of handling themselves or already have access to all the information usually contained in a prospectus are not members of the public.The second test, the “common bonds” test, refers to the relationship between the seller and the buyer, which ensures that the seller will not use unfair, abusive, or fraudulent practices against a buyer and that the buyer will be able to assess the seller’s integrity and probity. Thus, those with a common bond of interest or association to the seller are not members of the public.
In the event that a private issuer distributes securities to a person other than the persons listed in Section 2.4(2) of Regulation 45-106, regardless of whether they do so under another exemption, the private issuer will no longer be considered as such and will no longer be able to use the private issuer exemption. The issuer would therefore have to rely on another exemption to distribute its securities without a prospectus.
Family, Friends, and Business Associates
The family, friends, and business associates exemption applies to purchasers who have a special relationship with the issuer and are acquiring the securities for their own account.
This exemption includes: (i) close personal friends of a director, an executive officer, a control person of the issuer, or of an affiliate of the issuer; (ii) foundersof the issuer; (iii) close business associates of a director, an executive officer, a control person of the issuer, or of an affiliate of the issuer; (iv) parents of a founder of the issuer; and (v) anyone mentioned in Section 2.5 (1) of Regulation 45-106.
The founders of the issuer should be actively involved in the company for the prospectus exemption to apply. Autorité des marchés financiers c. 9246-8420 Québec inc. (GI-25), 2020 QCCQ 3286 states that merely rendering certain services on a few occasions or signing a shareholders’ agreement does not suffice to demonstrate an individual’s active involvement in the company.
Policy Statement 45-106 and case law have clarified the concept of “closeness”. In particular, Autorité des marchés financiers c. Verville, 2017 QCCQstipulates that friendship ties must be strong and clear. An individual can only have a limited number of close friends. A sufficient number, importance, and intensity of shared activities must exist between the parties to create a moral obligation of loyalty, respect, and protection. Factors such as the frequency of contact, the nature of the relationship, the level of trust, and the length of the relationship will also be considered. Moreover, there must be a direct relationship between the two individuals, as the exemption doesn’t apply to close personal friends or relatives of close personal friends.
Policy Statement 45-106 also states that a family member not specifically mentioned in the exemptions may also qualify as a close personal friend if said family member meets the aforementioned criteria.
It is the issuer’s responsibility to ensure that all the conditions of an exemption it intends to use are met. To ensure that exemptions are available under the circumstances, the issuer should make the appropriate inquiries and maintain the relevant records in order to demonstrate it made a proper determination that such exemptions were applicable.
In addition, the issuer wishing to use the family, friends and business associates and the accredited investor exemptions must file a report of exempt distribution and pay fees representing 0.025% of the gross value of the securities distributed in Québec, subject to a minimum of $301. It is also required to submit a form of risk acknowledgement for the accredited investor exemption. If an issuer uses the private issuer exemption, no report of exempt distribution is required.
Failure to comply with a term and condition of a prospectus exemption can result in a violation of Section 11 of the Securities Act, which may lead to civil, penal and administrative sanctions. Penal sanctions can include a minimum fine of whichever is the greatest amount between $5,000, double the profit realized or one fifth of the sums invested and a maximum fine of whichever is the greatest amount between $5,000,000, four times the profit realized or half the sums invested. Penal sanctions may also include imprisonment for up to 5 years less 1 day.
Under civil sanctions, if a person acquired or subscribed for securities in a distribution without the required prospectus, they can at their discretion apply to have the transaction rescinded or the price revised, at their discretion. They may also claim damages from the promoter of the venture, its officers and directors, or from the dealer responsible for the distribution.
Administrative penalties cannot exceed $2,000,000 per offense. Disciplinary action may also be taken by the Financial Markets Administrative Tribunal such as prohibiting, for a maximal period of 5 years, a person from acting as a director or officer of an issuer, and restricting or prohibiting all securities-related activities.
The court shall consider factors such as the harm caused to investors and the benefits derived from the violation in determining the penalty.
In the last two to three years, the Autorité des marchés financiers has launched a number of investigations into potential faulty reliance on prospectus exemptions, being of the view that an individual can only have a handful of close personal friends.
 Securities Act, CQLR c V-1.1
 Securities Act, art. 11
 Regulation 45-106 respecting Prospectus Exemptions, CQLR c V-1.1, r 21
 Securities Act, art. 263; Policy Statement to Regulation 45-106 respecting Prospectus Exemptions, art. 1.5
 Regulation 45-106, art. 1.1
 Regulation 45-106, art. 2.4 (1) (b) (ii)
 Regulation 45-106, art. 2.4 (1) (b) (i)
 Policy Statement 45-106, art. 3.6(1)
 Policy Statement 45-106, art. 3.6(5)
 Policy Statement 45-106, art. 2.4
 Autorité des marchés financiers c. Verville, 2017 QCCQ 14408; Solara Technologies Inc. BCSECCOM 163; S.E.C. v. Ralston Purina Co, (1953) 346 U.S. 119; R. c. Piepgrass, (1959) 1959 CanLII 310 (AB CA), 23 D.L.R. (2d) 220 (C.A. Alta.).
 Policy Statement 45-106, art. 2.7; Verville, par. 112
 Policy Statement 45-106, art. 2.7
 Policy Statement 45-106, art. 2.7
 Policy Statement 45-106, art. 1.9
 Bilinski 2002 BCSECCOM 102; Limelight Entertainment Inc. 31 OSCB 1727 (of 2007)
 Regulation 45-106, art. 6.1
 Securities Regulation R.S.Q., c. V-1.1, art. 267(4)
 Regulation 45-106, art. 6.5
 Securities Act, art. 214, 216
 Securities Act, art. 208.1, 202, 204.1
 Securities Act, art. 273.1
 Securities Act, art. 208.1,
 Securities Act, art. 214
 Securities Act, art. 273.1
 Securities Act, art. 202