Equity financing

How BC law treats it

Corporate approval is governed by the Business Corporations Act, SBC 2002, c 57 (BCBCA). The directors authorize the issuance by resolution, set the price, and may issue only shares within the authorized share structure. If a new class or series is needed, such as preferred shares for a venture investor, the articles and notice of articles must first be altered, usually by special resolution. Pre-emptive rights and approval requirements in the articles or a shareholders agreement must also be followed. Under the Securities Act, RSBC 1996, c 418, every sale of shares is a distribution that requires a prospectus unless an exemption applies. Most private company raises rely on exemptions in National Instrument 45-106 Prospectus Exemptions: the private issuer exemption (s. 2.4), the accredited investor exemption (s. 2.3), the family, friends and business associates exemption (s. 2.5), or the offering memorandum exemption (s. 2.9). These exemptions require no regulator approval, but some, such as the accredited investor and offering memorandum exemptions, require a report of exempt distribution to be filed with the BC Securities Commission within 10 days, and resale of the shares is restricted. Typical documents include a term sheet, subscription agreements, a shareholders agreement or investor rights agreement, directors' resolutions, share certificates or DRS advices, and updated central securities and transparency registers.

What it means for your business

Equity financing brings in capital without repayment obligations, but it dilutes founders and gives investors rights over the company's future. Using the wrong exemption, or none, can give investors a right to rescind and draw regulator attention. Founders should understand valuation, liquidation preferences, board seats and protective provisions before signing a term sheet, and keep clean records so later rounds and exits run smoothly. Example: A Victoria clean tech startup raises $1.5 million from angel investors at a seed round. Each investor signs a subscription agreement confirming accredited investor status, the board approves the issuance, and the company files a report of exempt distribution within 10 days.

Risks and common mistakes

Taking money from friends or investors without identifying and documenting a prospectus exemption. Issuing a new class of preferred shares before altering the articles and notice of articles. Missing the 10 day deadline to file a report of exempt distribution where one is required. Ignoring pre-emptive rights or consent rights in an existing shareholders agreement. Failing to update the central securities register and transparency register after closing.