Any startup requires sources of money to finance its activities. The initial financing for the startup is usually provided by its founders, either through the purchase of an ownership interest (equity) or a combination of equity and the provision of loans (debt) to the startup. Often the financial needs of the startup cannot be fully satisfied by its founders and accordingly the startup needs financial capital from other sources. The founders of a startup may choose to secure additional financial resources by way of debt. In order to secure this form of capital, the startup must be able to convince a lender of the viability of the startup, the stability of management, and its ability to service the loan. The startup will be required to support the debt financing through the grant of a security interest in all or some of its assets as security for the repayment of the debt and the principal shareholders will be asked to provide personal guarantees.
An alternative to borrowing from a financial institution is to raise funds by equity financing. A decision to sell equity in a startup is attractive because the startup may be able to eliminate or reduce ongoing costs, such as interest payments, associated with a debt financing. In addition, financing a portion of the startup's needs with equity, which ranks behind debt financing in priority, may be a requirement to a lender making a commitment to provide funds to the corporation by way of loan. The attractiveness of financing with equity will depend in part on the degree of dilution of existing ownership that the new issuance will cause and the price to be paid for the new shares. Equity is usually raised through the purchase of the startup's common shares or other securities that represent units of ownership in, or an entitlement to profits derived by, the startup.
The securities market in Ontario consists of essentially two components: the primary market and the secondary market. The primary market for securities is represented by business entities which issue such securities. These entities represent all types of business organizations and include both large public companies and smaller closely held companies. The secondary market comprises transactions involving the purchase and sale of previously issued securities. The most obvious example of secondary market is a stock exchange such as the Toronto Stock Exchange.
The principal source of securities legislation in Ontario is the Securities Act and the Regulations and rules made thereafter. The Ontario Securities Commission (OSC) is charged with administering the Act. The OSC is provided with considerable authority under the Act and has broad discretion in the exercise of that authority. In its regulatory capacity, the OSC has historically issued Notices and Policy Statements, which prescribe the manner in which it intends to interpret the Act and the Regulations. Every issuance of securities must comply with the Act. A startup which intends to trade in a security, where such a trade would be a distribution, must initially register with OSC and file with the OSC a preliminary prospectus and subsequently a final prospectus.