Private equity refers, on a basic level, to the direct investment into private companies by private equity firms and accredited investors. It can also refer to a buyout of a public company, resulting in the delisting of the shares of the public company.
A company seeking to issue securities and raise capital must ensure that it complies with the relevant corporate law, as well as securities law. There is a misconception that private companies have no requirement to register under the securities legislation when issuing shares. However, the default rule is that any issuance of securities of a company is subject to registration requirements, unless a specific exemption is met. Furthermore, a prospectus must also be issued, unless a specific exemption is met. The most common exemption relied upon by companies that issue securities (often without the founders being aware that they are in fact relying on any exemption whatsoever) is the “private issuer” exemption, which is contained in National instrument 45-106 (“NI 45-106”).
To fall into the “private issuer” exemption, there are essentially two steps. Firstly, the company must meet the definition of “private issuer” which is contained in subsection 3.4(1) of Part 3 of NI 45-106. The main components of this definition are that the securities issued by the company are subject to restrictions on transfer in the company’s constating documents or shareholders’ agreement, and that the securities of the company are held by not more than 50 persons.
Secondly, the securities can only be issued to certain classes of people including, without limitation, a director, officer, employee, founder or control person of the company, certain family members of these individuals, a close personal friend of a director, executive officer, founder or control person of the company and, of course, an accredited investor.