Finding and accessing capital investment continues to be a challenge for many small businesses in Manitoba.
In an effort to address this issue, among other funding activities and policy initiatives, the Government of Manitoba can be credited with implementing the Small Business Venture Capital Tax Credit Program (the “Program”).
This innovative program offers eligible investors a 45% tax credit on taxes payable in Manitoba for investments made in approved small businesses in the province. Under the Program, each investor making the maximum investment allowed of $500,000 per eligible small business is entitled to a $225,000 tax credit. For more information about the Program, see our prior blog.
Limitations of the Small Business Venture Capital Tax Credit Program
As the Program is effective for generating capital investment for Manitoba small businesses, we’ve observed its use among our clients continue to expand.
The Program has two notable limitations, however, that likely make it inaccessible to most Manitoban investors.
- Eligible investors must either:
- Qualify as an accredited investor under applicable securities laws (which means that they meet a prescribed income or financial asset threshold allowing them to sustain risky investments); or
- Qualify for another exemption under applicable securities laws, such as being a close friend, family member and/or business associate of an officer, director or founder of the issuer company.
- The minimum investment under the Program is $10,000.
An individual is an accredited investor, if the individual:
- Earned more than $200,000 net income before taxes in each of the two most recent calendar years (or more than $300,000 including their spouse’s income) with reasonable expectation of earning the same for the current year; or
- Has financial assets (together with their spouse) having an aggregate realizable value that, before taxes but net of any related liabilities, exceed $1 million. Financial assets are cash and securities and, therefore, exclude the value of an individual’s house, cottage and other assets.
For context, according to Statistics Canada’s census data, in 2020 only 2.3% of Manitobans of working age earned more than $150,000. We can then assume that the percentage of Manitobans that individually earn over $200,000 a year, or who have a household income of more than $300,000 a year, is substantially lower.
Potential solutions
While securities laws are, in part, designed to protect people from high-risk and/or speculative investments that could be unsuitable, the current rules create a situation where highly educated, experienced and sophisticated investors are prohibited from taking advantage of offerings and/or offerings qualified and approved under the Program. There are two practical solutions that are potentially available, which are:
- Implementing the self-certified investor exemption in Manitoba and allowing the self-certified investor exemption to be used concurrently with the Program; and
- Lowering the minimum investment in the Program from $10,000 to $5,000.
Self-certified exemption
The exemption was implemented on a trial-run basis in Alberta and Saskatchewan in 2021 and in Ontario in 2022. All three provinces have since extended these exemptions. The exemption allows issuers to raise capital without a prospectus from investors who may not meet the test to qualify as an accredited investor, subject to a number of technical requirements.
In order to use the exemption, in Ontario the investor must sign prescribed certificates to the issuer certifying that:
- They possess certain knowledge, skills or experience (as outlined further below); and
- They acknowledge that they have read and understood a regulated list of risks that are associated with investing.
The issuer cannot know or would reasonably be expected to know that the statements made by the investor in the certificates are false.
In Ontario, the exemption may also only be used for a maximum of $30,000, in the aggregate, in any and all businesses in Ontario in any 12-month period. To that end, the subscription agreement between the investor and the company for the investment must include a contractual representation from the investor to the company that the aggregate acquisition cost of securities of all companies acquired by that investor in the preceding 12 months as a self-certified investor does not exceed $30,000.
In Ontario, to be considered qualified under the self-certified exemption, investors need to have at least one of the following:
- A designation as a Chartered Financial Analyst (CFA), Chartered Investment Manager (CIM), Chartered Business Valuator (CBV), Chartered Professional Accountant (CPA), Certified International Wealth Manager (CIWM) from the Canadian Securities Institute, or Certified Financial Planner (CFP) from FP Canada;
- A Master of Business Administration (MBA) degree focused on finance, a finance degree or a business and/or commerce degree focused on finance or investment from a Canadian university or accredited foreign university;
- Admitted to practice law and actively practises with at least one-third of the practice in securities law or mergers and acquisitions;
- Passed the Canadian Securities Course Exam administered by the Canadian Securities Institute;
- Passed the Exempt Market Products Exam administered by the IFSE Institute;
- Passed the Canadian Investment Funds Course Exam administered by the IFSE Institute;
- Passed the Investment Funds in Canada Course Exam administered by the Canadian Securities Institute;
- Passed the Series 7 Exam administered by the Financial Industry Regulatory Authority in the United States;
- Holds a financial planner or financial advisor credential from a credentialling body approved by the Financial Services Regulatory Authority of Ontario; or
- Has management, policy-making, engineering, product or other relevant operational experience at a business that operates in the same industry or sector as the company that the investor wishes to invest in. As a result of this experience, the individual is able to adequately assess and understand the risk of investment in that company.
There are some notable differences between the exemptions in Alberta and Saskatchewan and Ontario. We note that in Alberta and Saskatchewan:
- The list of potential qualified investors in Saskatchewan and Alberta is smaller than Ontario;
- There is a limitation on the exemption of $10,000 per year in any one single company in a year, provided that the $30,000 aggregate limitation and $10,000 single company limitation does not apply if the company is listed on a Canadian stock exchange and that investor receives advice regarding suitability of the investment from a qualified advisor.
- A distribution to anyone that is using the self-certified exemption must occur concurrently with a distribution to an accredited investor and the self-certified investor must have access to the same information about the distributed securities as any accredited investor.
- In addition to the prescribed certificates certifying the investor’s eligibility and that the investor has read and understood the risks of investing, as in is the case in Ontario, in Alberta and Saskatchewan, investors must also provide to the issuer a statutory declaration in a prescribed form. The statutory declaration cannot be older than 36 months from the date of distribution and the issuer must hold a copy of that acknowledgement and statutory declaration for a period of eight years after the distribution.
- Special purpose vehicles may be considered self-certified investors if certain technical conditions are met.
Key takeaways
The self-certified investor exemption is designed to strike an appropriate balance between lowering the high barrier of entry for investors to participate in private placement offerings, while ensuring that those investors have the requisite knowledge, experience and skill to do so.
If the Government of Manitoba and the Manitoba Securities Commission consider and deem the self-certified exemption to be appropriate for Manitoba, they could adopt either of the existing models or take a customized approach.
Implementing the exemption and allowing it to be used concurrently with the Program would effectively unlock a whole new pool of prospective investors for Manitoba small businesses to access and allow more Manitobans to use and take advantage of the Program.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.