the underlying shares, if and when they are exercised. In order to qualify for an exemption from the prospectus requirement under NI 45-106 as a private issuer, either the charter documents of the corporation or an agreement among all security holders must: (i) permit a maximum of 50 shareholders (not counting former or current employees, directors or officers); (ii) impose restrictions on the free transfer of all securities (such as board or shareholder approval); (iii) prohibit any distribution of securities other than to the permitted categories of potential security holders (generally the founders, directors and officers and their respective family members, close personal friends and close business associates), as well as those who qualify as accredited investors (generally institutions or high net worth individuals or entities). The accredited investor exemption will apply to individuals in several circumstances, including: (i) individuals, either alone or with a spouse, having financial assets (generally cash or securities but not real estate or non-financial personal property) with net pre-tax realizable value of over $1 million; (ii) individuals, either alone or with a spouse, having net assets of at least $5 million; (iii) individuals with net pre-tax income in each of the last 2 calendar years over $200,000, or $300,000 together with a spouse, and a reasonable expectation of higher income in the current calendar year. Individual accredited investors, except those who qualify as permitted clients (as defined in NI 31-103), must complete, and sign a risk acknowledgement form, indicating how they meet the criteria for an accredited investor. The form also requires identification of any salesperson who meets with or provides information to the investor with respect to the

investment. If the accredited investor requirements are not met, the corporation will not be a private issuer and must file a prospectus in order to issue shares or deal in ( e.g., transfer) its shares, unless another exemption under NI 45-106 is available. Most of the other exemptions require that a filing be made with the securities regulators in each province or territory in which affected shareholders are located, which can entail significant fees being payable in the event of a large financing. This would also pose a serious problem in the event that a potential purchaser or investor wishes to obtain an opinion that the target company is indeed a private issuer, and that all securities legislation and regulations have been complied with as a pre-condition to concluding a particular transaction, as is frequently the case in Canadian deals. Employment Law In general, Canadian employment law is much more protective (if not overtly biased in favour) of employees than its American counterpart. Employee rights are enshrined in the Canada Labour Code and the Canadian Human Rights Act and their various provincial and territorial counterparts across Canada. This legislation prohibits any form of discrimination in the hiring and treatment of employees. Both provincial/territorial and federal privacy laws protect an employee’s right to privacy and personal information. Acts and policies which are taken for granted in the United States (such as drug testing and video or other forms of electronic surveillance, including monitoring of electronic or telephone communications) must be carefully reviewed to ensure compliance with Canadian laws, which are more stringent in these regards. For example, as of January 1, 2023, Ontario employers with more than 25 employees on

ILN Corporate Group – Establishing a Business Entity Series

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