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 Chapter 8

SECURITIES LAW CONSIDERATIONS WHEN OBTAINING VENTURE

FINANCING

FOCUS

In this chapter we introduce several major legal aspects of fundraising for the new
venture. We discuss the central role of the Securities Act of 1933 and the exemptions
available to ventures seeking to issue securities without having to register them with the
Securities and Exchange Commission.

LEARNING OBJECTIVES

1. Identify four relevant components of the federal securities laws

2. Explain what is meant by “blue sky” laws
3. Define “security” according to the Securities Act of 1933 and explain why such a
designation matters
4. Describe what is involved in registering securities with the Securities and Exchange
Commission (SEC)
5. Identify some of the securities that are exempt from registration with the SEC
6. Identify some transaction exemptions granted under the Securities Act of 1933
7. Describe and discuss how the SEC’s Regulation D serves as a securities registration
“safe harbor”
8. Explain how Rules 504, 505, and 506 of Regulation D differ from one another
9. Describe Regulation A and explain how and when it is used

CHAPTER OUTLINE

8.1 REVIEW OF SOURCES OF EXTERNAL VENTURE FINANCING

8.2 OVERVIEW OF FEDERAL AND STATE SECURITIES LAWS
A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Investment Company Act of 1940
D. Investment Advisers Act of 1940
E. State Securities Regulation: “Blue-Sky” Laws
8.3 PROCESS FOR DETERMINING WHETHER SECURITIES MUST BE
REGISTERED
A. Offer and Sale Terms
B. What is a Security?
8.4 REGISTRATION OF SECURITIES UNDER THE SECURITIES ACT OF 1933
8.5 SECURITY EXEMPTIONS FROM REGISTRATION UNDER THE 1933 ACT
8.6 TRANSACTION EXEMPTIONS FROM REGISTRATION UNDER THE 1933
ACT
A. Private Offering Exemption
B. Accredited Investor Exemption

133
134 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

8.7 SEC’S REGULATION D: SAFE-HARBOR EXEMPTIONS

A. Rule 504: Exemption for Limited Offerings and Sales of Securities Not
Exceeding $1 Million
B. Rule 505: Exemption for Limited Offers and Sales of Securities Not
Exceeding $5 Million
C. Rule 506: Exemption for Limited Offers and Sales Without Regard to Dollar
Amount of Offering
8.8 REGULATION A SECURITY EXEMPTION
SUMMARY

APPENDIX A:
Schedule A (Securities Act of 1933, as Amended)
Requirements for Registration of Securities other than a Security Issued by
Foreign Government or Political Subdivision Thereof

APPENDIX B:
Selected Regulation D Materials
Regulation D’s “Preliminary Notes”
Rule 501: Definitions and Terms used in Regulation D
Rule 502: General Conditions to be Met
Rule 503: Filing of Notice of Sales
Rule 507: Reg D Disqualification Provisions
Rule 508: Reg D Insignificant Deviations Clause
Rule 144 (§ 230.144)

APPENDIX C:
Other Forms of Registration Exemptions and Breaks
Rule 701
Rule 1001
Regulation SB

DISCUSSION QUESTIONS AND ANSWERS

1. Briefly define the (a) Securities Act of 1933 and (b) Securities Exchange Act of 1934.

The Securities Act of 1933 is the main body of federal law governing the creation
and sale of securities. The Securities Exchange Act of 1934 deals with the
mechanisms and standards for public security trading.

2. Briefly discuss the (a) Investment Company Act of 1940 and (b) Investment Advisers
Act of 1940.

The Investment Company Act of 1940 provides a definition of an “investment

company.” The Investment Advisers Act of 1940 focuses on people and
organizations that seek to provide financial advice to investors and defines
“investment adviser.”
 Chapter 8: Securities Law Considerations When Obtaining Venture Financing 135

3. What is meant by the term “blue sky” laws and how do these laws apply when issuing
securities?

Blue Sky Laws are the state laws designed to protect individuals from investing in
fraudulent securities offerings. They are the state equivalent of the federal securities
laws.

4. Describe the meaning of a “security” in terms of the Securities Act of 1933.

The term “security” means any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profit-
sharing agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil, gas, or
other mineral rights, any put, call, straddle, option, or privilege on any
security, certificate of deposit, or group or index of securities (including any
interest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national securities exchange relating to
foreign currency, or, in general, any interest or instrument commonly known
as a “security,” or any certificate of interest or participation in, temporary or
interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to or purchase, any of the foregoing.

5. Why does it matter if an investment is, or is not, viewed as being a security?

Any investment considered to be a security under the 1933 Act comes under its
provisions. In particular, unless an exemption is secured, it must be registered with
the SEC prior to being offered to the public.

6. Briefly describe what is meant by the statement “Registering securities with the
Securities and Exchange Commission (SEC) is both costly and a time-consuming
process.”

There is a great deal of expertise involved in preparing the documents and filings
associated with a public offering. Most ventures do not have the resources to employ
a staff specializing in this area. Consequently the venture will retain legal and
investment banking experts to assist in the offering. The associated costs are
substantial and require much of the information be provided by venture insiders (the
time element) who typically have been working on the non-financial aspects of
growing the venture.

7. Identify some of the types of securities that are “exempt” from registration with the
SEC.
136 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

Some of the exempt securities are: government securities (federal and state),
securities issued by banks, certain securities issued by insurance companies and
certain securities of not-for-profit issuers.

8. Briefly describe what is meant by an intrastate offering. What are the major
difficulties in assuring that an offer is intrastate?

An intrastate offering is one where the issuer and investors are considered by federal
securities law to be confined to one state. SEC Rule 147 lays out guidelines under
which the SEC will consider the offering to be intrastate.

9. Identify and briefly describe two basic types of transactions that are exempt from
registration with the SEC.

The most widely used exemption is the private placement exemption: transactions by
an issuer not involving any public offerings. The accredited investor exemption is a
second transaction exemption and lays much of the groundwork for the types of
exemptions that involve a certain type of investor.

10. What does the term accredited investor mean in terms of the Securities Act of 1933?
Why does the designation matter?

Accredited investors under the 1933 Act are assumed to have sufficient financial
expertise and wherewithal to make an intelligent and informed investment decision.
Formally:

2(a)(15) The term “accredited investor” shall mean:

(i) A bank as defined in Section 3(a)(2) whether acting in its individual or

fiduciary capacity; an insurance company as defined in paragraph (13) of
this subsection; an investment company registered under the Investment
Company Act of 1940 or a business development company as defined in
Section 2(a)(48) of that Act; a Small Business
Investment Company licensed by the Small Business Administration; or
an employee benefit plan, including an individual retirement account,
which is subject to the provisions of the Employee Retirement Income
Security Act of 1974, if the investment decision is made by a plan
fiduciary, as defined in Section 3(21) of such Act, which is
either a bank, insurance company, or registered investment adviser; or

(ii) Any person who, on the basis of such factors as financial

sophistication, net worth, knowledge, and experience in financial matters,
or amount of assets under management qualifies as an accredited investor
under rules and regulations which the Commission shall prescribe.
 Chapter 8: Securities Law Considerations When Obtaining Venture Financing 137

11. Briefly describe the importance of the 1953 SEC vs. Ralston Purina case in terms of
securities registration requirements.

The U.S. Supreme Court took an important step toward defining a private (nonpublic)
offering in SEC v. Ralston Purina. The case involved the sale of securities to
employees. The court found that because Ralston Purina’s offering included
employees who would not necessarily have access to the appropriate type of
information, it did not fall within the private placement exemption of the 1933 Act.

12. What is the purpose of the SEC’s Regulation D?

Reg D provides a set of safe harbor conditions under which an issuer can shield
themselves from SEC action for failure to register securities.

13. What are the restrictions on general solicitation and advertising covered in Rule
504?

Rule 504 is the most lenient and the only exemption in Reg D that allows for any
conditions under which the solicitation can be to the general public. The specific
conditions under which general solicitation and advertising are allowed, in the current
form of Reg D, relates to state registrations and information dissemination. Issuers
considering general solicitation in connection with a 504 offering would be well-
advised to seek specific legal counsel on the current conditions required in a 504
offering.

14. How do Rules 504, 505, and 506 of Reg D differ from one another?

Rule 506 has no limits on the amount raised, but has a limit of 35 investors that fall in
categories that have to be counted and those 35 must be “sophisticated.” Rule 505
has a monetary limit of $5 million and a limit of 35 investors that fall into categories
that must be counted. Rule 504 has a $1 million limit but no limit on the number or
sophistication of investors.

15. Provide a brief description of the use of Regulation A when issuing securities.

Regulation A is technically an exemption from full registration, but in practice is like

a limited registration where the process involves many of the same types of activities
in doing a full registration. The monetary limit is $5,000,000, the issuer is allowed to
“test the waters” for the offering, and the shares can be issued to the public and
eventually trade freely.

[Note: The following questions relate to the material presented in Appendixes B

and C.]

16. Briefly describe how the SEC’s Regulation D expanded the original Securities Act of
1933 definition of an “accredited investor.”
138 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

For the purposes of Reg D, investors are considered accredited if they fall into one of
eight categories. Rather than leaving the notion of “accredited” as vague (thus
making the safe harbor less certain), the SEC chose to provide specific criterion
whereby an individual can be designated as “accredited.”

17. What are the income and net worth requirements for being an accredited investor?
What in the requirements for designation as an accredited investor relates to the level
of sophistication? Do the criteria act as good proxies for sophistication?

The income requirements are currently $200,000 for single filers and $300,000 for
married filers. The wealth requirement is $1,000,000. While the requirements for
accredited investor status do not necessarily reflect “sophistication”, they appear to
create categories highly correlated with sophistication or the ability to hire
sophisticated advisers during the investment decision process.

18. What are the four conditions of a Reg D offering that are covered under Rule 502?

Rule 502 (§ 230.502) deals with four conditions of a Reg D offering: integration
(when multiple issues count as one), information (what you need to disclose when
you must formally disclose), solicitation (what you can’t do when promoting the
offering) and resale (serious restrictions).

19. What is integration as it applies to securities offerings and why does it matter?

Integrated offerings are those that may be treated as combined into one offering. For
integrated offerings it is the aggregated total dollar amount which must not exceed the
dollar limits of the Reg D exemption being sought.

20. What types of information need to be disclosed to offerees under Reg D?

When required, the type of information to be disclosed varies by the venture’s status
and size. Summarizing from the Reg D text:

The issuer shall furnish to the purchaser, to the extent material to an

understanding of the issuer, its business, and the securities being offered:

(A) non-financial statement information similar to that required in a Reg A (or

registered) offering.

(B) financial statement information depending on the size of the offering and
ranging from S-B and S-B2 type information up to the same financial
statements as required in a regular registration.

21. What is a restricted security? Why does this designation matter? What types of
buyers must the owner of restricted securities find?
 Chapter 8: Securities Law Considerations When Obtaining Venture Financing 139

Restricted securities cannot be freely resold. This is the typical status of securities
sold in a private placement. The resale of restricted securities typically requires
locating an accredited investor as a buyer.

22. Briefly describe the purpose of Rule 144 of Reg D.

To provide conditions under which restricted securities can be resold.

23. Briefly describe Rule 508 of Reg D.

Rule 508 allows for the possibility that an offering will be granted safe harbor when
the only deviations from Reg D’s requirements are deemed to be “insignificant.”

24. Briefly describe the types of exemptions from registration of securities covered under
Rules 701 and 1001.

Rule 701 is an exemption for certain types of employee compensation arrangements

involving the issue of the employer’s securities. Rule 1001 is a “qualified
purchaser” exemption for the State of California that assures certain California
issuers that their exemption under California law will receive concurrent exemption
from federal registration.

25. From the Headlines – Sustainable Northwest: Describe the organizational structure
of Sustainable Northwest Wood and its relationship to the 501(c)3 firm Sustainable
Northwest. Do you see any financing limitations under that structure that would not
arise if both were for-profit operations?

Answers will vary: Sustainable Northwest Wood is a for-profit lumber yard selling
wood products harvested in a sustainable fashion. Supporting such commercial
operations and fostering such industries is one of the goals of the 501(c)3 firm
Sustainable Northwest. Financiers could rightly be concerned that the 501(c)3
would exert too much influence on the profit-seeking behavior of the for-profit
lumber yard. This could cause them to be reluctant to offer financing. If both
entities were for-profit, there would most likely be less concern, but there would also
be no tax deductibility for donations to the 501(c)3 entity, cutting of some of the
support base for the wider aims of the 501(c)3.

INTERNET ACTIVITIES

1. Access the Securities and Exchange Commission Web site at http://www.sec.gov.

Identify recent developments and changes in Rule 504 of the SEC’s Regulation D.

Web-researched results vary due to constant updating of web sites.

140 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

2. Offroad Capital (now owned by NYPPE) was an early provider of online

technology for selling new issues. Summarize their regulation-related posting at
http://www.offroadcapital.com/Webpagesw/regulatory.aspx.

Web-researched results vary due to constant updating of web sites.

3. Access the Nolo Press Web site at http://www.nolo.com. Develop a list of legal
references relating to securities laws.

Web-researched results vary due to constant updating of web sites.

EXERCISES/PROBLEMS AND ANSWERS

1. [Accredited Investors] The NetCare Company, which operates living assistance

facilities, is planning to issue or sell shares of stock to “accredited investors.”
Briefly explain whether each of the following individuals would qualify as an
“accredited investor” under the SEC’s Regulation D. [Note: Materials in
Appendix B are useful in answering this exercise.]

A. Amy Smith is the chief executive officer (CE0) of the NetCare Company.

Yes. All officers and directors of the company are accredited.

B. Bruce Jones, who has a net worth of $750,000, is planning to purchase shares
of stock to be issued by the NetCare Company.

Not on the basis of net worth: a minimum net worth of $1 million is needed to
be accredited.

C. Jean Wu also is considering purchasing shares of stock that will be issued by

the NetCare Company. Jean’s annual income has been $250,000 in each of
the past two years and she expects to have a comparable amount of income
next year.

Yes. A minimum of $200,000 annually over the past two years and the
expectation of earning above the threshold next year is one criterion for being
accredited.

D. James Shastri is a software programmer for the NetCare Company.

Not on the basis of his employment status: employees are not automatically
accredited unless they are officers or directors.
 Chapter 8: Securities Law Considerations When Obtaining Venture Financing 141

E. Julie Kukoc recently inherited some financial assets and now has a net worth
of $2 million with an annual income of $35,000.

Yes. She has a net worth above the $1 million threshold

2. [Securities Law] The CareAssist Company, a web-based provider of information

for the elderly, is planning to sell $4 million in securities. Management is trying
to decide which, if any, securities laws must be complied with. For each of the
following situations, describe the securities laws that might apply.

A. A private placement

For the $4 million offering, CareAssist can consider a Rule 505, 506 or a
general Section 4(2) exemption or accredited investor exemption. Absent
securing an exemption, the firm will be subject to the full registration
requirements of U.S. securities law.

B. An interstate public offering

As the amount is over $1 million a Rule 504 offering to the general public is
out of the question. A Reg A offering allows up to $5 million and is a
possibility for CareAssist.

C. An intrastate public offering

If the offering were only to investors in the single state in which CareAssist
operates, it might be possible to consider an intrastate exemption. Ben &
Jerry’s Vermont offering is an example of an offering that used the intrastate
exemption.

3. [Regulation D Exemptions] Three Rules (504, 505, and 506) under Regulation D
relate to the (a) amount of offerings and (b) number of investors. Match Rules
504, 505, and/or 506 with each of the following:

A. $5 million offering limit (in a 12-month period)

B. $1 million offering limit (in a 12-month period)
C. No limit on the amount of offering (in a 12-month period)
D. No limit on the number of investors
E. No limit on number of accredited investors; limit of 35 unaccredited investors

Solutions:
A. $5 million offering limit (in a 12-month period) [Rule 505]
B. $1 million offering limit (in a 12-month period) [Rule 504]
C. No limit on the amount of offering (in a 12-month period) [Rule 506]
D. No limit on the number of investors [Rule 504]
E. No limit on number of accredited investors; limit of 35 unaccredited investors
142 Chapter 8: Securities Law Considerations When Obtaining Venture Financing

[Rules 505 and 506]

MINI CASE: THE VIRTUALSTREAM COMPANY

The VirtualStream Company has developed proprietary server and control software for
providing communication and media-on-demand services via the Internet. The company
is in the process of collecting prerecorded video and audio content from clients and then
digitally transferring and storing the content on network servers. The content then is
available for replay by customers via the Internet. VirtualStream’s mission is to provide
the most dependable and user-friendly multimedia streaming service worldwide.
The Internet technology service industry is characterized by rapid revenue growth
with industry revenues predicted to exceed $300 billion in three years. Market
participants include companies engaged in video and audio teleconferencing, corporate
training, computer-based training, and distance learning. VirtualStream is attempting to
focus on helping large companies to communicate more effectively, using both archived
and live communications content, via the Internet. Video and audio content is digitally
stored in a central location and is available on demand to clients. This approach will
save time and money required to duplicate and ship materials. The company also offers
a service that enables transmission of live broadcasts via the Internet.
VirtualStream raised $500,000 in the form of founder’s capital last year. The
firm is now seeking additional financial capital from investors by issuing or selling
“securities” in the form of stock in the firm. The firm is planning to obtain $750,000 as
soon as possible from private investors.

A. Discuss whether you would recommend “registering” these “securities” with the
Securities and Exchange Commission (SEC).

Paying all of the costs (present and future) of a full public registration would most
likely not be advantageous to VirtualStream. Consequently, they should initially seek
the less expensive and faster option of a private placement.

B. Some “securities” are exempt from the SEC registration requirement. Is it likely that
VirtualStream’s “stock” would qualify for such an exemption? Why, or why not?

Virtual Stream’s issue of stock is potentially covered by the transactions exemption

features of the 1933 Act and Regulation D.

C. Would you recommend that the initial $750,000 be obtained through an “intrastate”
offering? Explain.

Intrastate offerings present serious challenges to ventures seeking to acquire large

amounts of funding in stages. While it is possible that VirtualStream’s current
offering might be eligible for an intrastate exemption, it seems unlikely in their line of
business with their growth prospects.
 Chapter 8: Securities Law Considerations When Obtaining Venture Financing 143

D. Briefly describe the two basic types of “transaction” exemptions that may be
available to VirtualStream that would allow the firm not to have to register its
securities with the SEC.

The two more likely transaction exemptions for VirtualStream are the private
placement exemption (Section 4(2) broadly and its Regulation D extensions) and the
accredited investor exemption (Section 4(6)). Both would allow VirtualStream to
avoid full registration costs, at least at present. Note, however, that both require that
VirtualStream screen the types of investors they allow to purchase the securities.

E. The SEC’s Regulation D offers a “safe harbor” exemption to firms from having to
register their securities with the SEC. Describe how the VirtualStream Company
could use Reg D for issuing $750,000 in stock to private investors. In developing
your answer, describe the Reg D “rules” that would likely apply to this security issue.

Assuming that the previous round of funding falls outside the time interval where
integration is an issue, the $750,000 offering potentially falls under the guidelines of
Reg D’s 504, 505 and 506. The least restrictive of these (with respect to investor
qualification and solicitation restrictions) is Rule 504 with a limit of $1 million.

F. Now, assume VirtualStream also is planning to issue an additional $2 million in stock

towards the end of the year. Would this decision have an impact on the Reg D
“rules” which would govern the issuance of the firm’s securities? Describe. [Note:
The material in Appendix B may be helpful in developing an answer to this question.]

Since the future issue is for the same securities and could potentially be integrated
into the current offering (from the SEC’s viewpoint assuming that its “6-months-
either-side” safe harbor is not satisfied), VirtualStream needs to worry about
integration. Practically, this means that they should probably abandon a 504 offering
and consider the more restrictive conditions of a 505 or 506 offering.

G. The other alternative is to seek to raise the total $2,750,000 amount now by selling
securities to investors. Which Reg D “rules” and/or other securities laws would be
“triggered” by such a plan? Describe why and how.

Reg D’s 505 and 506 apply, but much care needs to be taken as the 35 investor counts
could be binding. If the offering is not targeting accredited investors, VirtualStream
might seriously consider a Regulation A filing ($5 million maximum) or even an SB
registration (with significantly higher limits).
Another random document with
no related content on Scribd:
twenty-five hundred million bushels, which is more than three times
as much as the United States produces in a year. I do not say that
Canada will soon reach that figure, but her wheat yield will steadily
increase, and it will not be long before it will equal yours.
“We were producing grain near Winnipeg long before your
Western states existed. Wheat was raised in Manitoba by Lord
Selkirk’s colony as far back as 1812. The settlers came in through
Hudson Bay and worked their way down to the prairie. They were so
far from the markets that there was no demand outside their own
wants, and it was only when the United States had developed its
West that we began to farm in earnest. Even then we had to wait for
the railroads, which were first built through early in the 80’s.”
More than half the total wheat crop of the Dominion is raised in
Saskatchewan, and still only one fifth of the fifty-eight million acres of
arable land in that province is under cultivation. Indeed, wheat here
is what coals are to Newcastle or diamonds to Kimberley. This
applies to quality as well as quantity, for at a recent International
Grain and Hay Show held at Chicago a farmer from Saskatchewan
carried off the first prize for the best wheat grown on the North
American continent.
 Wheat is to Saskatchewan what coals are to
Newcastle. With only one fifth of its arable land being
farmed, the province raises more than half the total
crop of the Dominion.
 Farming is done on a largo scale on the great
wheat farms. Ploughs turning over twelve furrows at a
time are pulled by traction engines, and when the
wheat is ripe a dozen binders are started in one field.
The principal wheat area extends from the southeast corner of
the province northwesterly along the valley of the Saskatchewan
River to the Alberta boundary. This belt is five hundred miles long
and in some places two hundred miles wide. Many of its farms
contain thousands of acres, and the average holding is three
hundred and twenty acres, with one hundred and fifty acres in wheat.
When the land was first settled, wheat was the only crop raised, but
mixed farming is becoming more important each year and there are
now large crops of oats, hay, and alfalfa.
The dry climate and hot summer days of the prairies are just
right for producing a hard grain, with the high gluten content that
makes a big loaf of bread. In that quality Canadian wheat ranks
highest in the world. It is mixed with even the finest of the United
States product to produce the best flour.
The chief varieties grown are red fife and marquis. Red fife was
discovered by a Canadian farmer and is the older. Marquis was
originated by a scientist of the Dominion Agricultural Department by
crossing red fife with an early ripening Indian wheat known as hard
red Calcutta. It was distributed among the farmers for general use in
1909, and quickly became the most valuable wheat produced in
America.
During various trips to Canada I have seen the wheat belt in all
its aspects. As soon as the snow has melted and the frost is out of
the ground the ploughs are started. The ploughing may be done by
the farmers, each on his own land, or by contractors who make a
business of preparing fields for planting, and who, later on, do much
of the threshing. The ordinary farmer uses a gang plough and from
four to a half dozen horses. With four horses he is able to plough
more than two acres a day. Much of the work is done by tractors,
which pull gang ploughs that turn over a strip of sod as wide as the
average city sidewalk.
The next process is back-setting. This means going over the
field again and throwing the furrows in the opposite direction. Where
the land is new, some of the farmers plough it in the spring and back-
set it in the summer, seeding it during the following spring. Others,
who are anxious to get quick returns, sow wheat the same year that
they break up the soil. Sometimes flax is planted as the first crop and
wheat the next year.
The old picture of the farmer going over the ploughed ground
sowing the grain broadcast is something one never sees in Canada.
The wheat here is planted with drills, usually pulled by four horses,
although on the larger farms several drills, drawn by tractors,
sometimes follow one another over the fields.
The busiest time of the year comes with the harvest, which
usually begins about the middle of August. The farmers now go to
work with a vim. In many instances the women and the girls join the
men and the boys in the fields. Nearly every man has his own
harvesting machinery and the girls sometimes drive the binders that
cut the grain. At the same time thousands of labourers are brought in
from the United States, eastern Canada, and even from England.
They are transported at reduced rates by the railroads and are sure
of work at good wages until the grain has been loaded upon the cars
that take it to the head of the Great Lakes.
Harvesting on the larger farms goes on from daybreak to dark,
and sometimes even by twilight and moonlight. After the wheat
reaches a certain point in ripening, it must be cut without delay. If it
becomes wet it will deteriorate, and if left too long it will hull during
the harvesting, or an untimely frost may ruin it. I have visited one
farm near Dundurn where sixteen hundred acres of grain all became
ripe overnight. The next morning the owner started a dozen
harvesters at work, keeping the machines going until every stalk was
cut. Horses were put on in relays every four hours and there was no
stopping to rest at the end of the field. In Alberta there is a farm five
times as large, where sixty binders, each pulled by a four-horse
team, are used to cut the crop.
Riding through the country in the fall, one is seldom away from
the sound of the threshing machine. Only a few farmers own these
machines, most of the threshing being done by contractors and their
crews who go from farm to farm.
Imagine yourself with me at threshing time, and let us see how
the work is done. The wheatfield we choose contains one thousand
acres and it is spotted with shocks, or stooks, as they are called
here. Each stook consists of a number of sheaves stood upon end
on the ground with others so arranged on top that it will shed rain. A
half dozen teams are moving over the field gathering up the stooks.
As soon as a wagon is loaded it is driven to the thresher, into whose
greedy mouth the sheaves are poured continuously from sunrise to
sunset. At the same time grain is flowing out of the thresher into the
wagons or motor trucks that carry it away.
In the United States wheat is often held by the farmers for a
favourable price. In Canada very few farms have their own
granaries. The wheat goes from the threshing machine to the local
elevator, or, if none is accessible, it is sent directly to the railroad and
shipped to Fort William and Port Arthur. There are now elevators at
fifteen hundred different places throughout the wheat region. Each of
these stations has from one to nine elevators standing out on the
landscape, indicating the productiveness of the surrounding country.
The elevators of Canada have a total capacity of two hundred and
thirty-eight million bushels. There are companies that have chains of
such granaries. They will either store the wheat for the farmer,
handle it on commission, or buy it from him directly at a price based
on the current market value of that in storage at Fort William.
The wheat begins to come to the elevators about the first of
September, and by the middle or latter part of October they are well
filled. Each has a license, and is inspected regularly by the
government. In order to maintain the high standard of western
Canadian wheat, every shipment must be weighed and tested by a
Dominion weigh-master.
Many of the country elevators are owned by milling companies.
The flour industry is centred in Ontario, the largest mill in the
Dominion being at Port Colborne at the western end of the Welland
Canal. Flour is manufactured in large quantities also at Fort William,
Toronto, Montreal, and Winnipeg. Smaller mills exist throughout
Canada, and for many years the Hudson’s Bay Company operated
one at Fort Vermilion, six hundred miles northwest of Winnipeg. Ten
million barrels of flour are annually exported, almost half of which is
taken by England.
 What Canada gets for her wheat depends not only on her own
crop and that of the United States, but on conditions all over the
world. Wheat is raised in every part of the globe, and is harvested in
one place or another each month of the year. Therefore, a drought in
Australia, a frost in Argentina, monsoons in India, new tariff laws in a
given country, or a host of other reasons, may cause a drop or a rise
in the prices here. In any event, though the price in Canada may be
no higher than that paid in the United States, it represents a larger
return on the original investment. The Canadian farmer has the
advantage of raising his wheat on land that has cost him perhaps
only a third of what has been paid by his neighbour across the
border.
 CHAPTER XXV
THE OPEN DOOR IN CANADA

Wherever I go in Canada I find the people on tiptoe with

eagerness for the growth of their country. I do not mean that they are
hungry for territory; they already have more than they can use for a
century or two. The increases they are praying for are in population,
in the size of their towns, in the area of land under cultivation, and in
the number of families settling new farms.
For seventy-five years Canada has given a cordial welcome to
immigrants and during the last quarter of a century she has been
conducting recruiting campaigns to get settlers. But where formerly
immigration was only something to be desired, the situation to-day
makes the coming of new people an imperative necessity. They are
needed not merely to open up rich virgin lands, but to share the
burden of carrying the national overhead.
A single fact will make clear this situation. The interest on the
Canadian national debt is five times what the total revenues of the
government were before the World War. The people are faced with
the alternative of having less to live on after their increased taxes are
paid, or of dividing their heavier expenses among a larger number of
producers. Naturally they prefer the latter.
Canada’s per capita debt mounted from seventy-two dollars in
1914 to three hundred and twenty-two dollars three years after the
war, and the total stands to-day at just under three billion dollars.
The war has not only multiplied the public debt, but it has also
greatly reduced immigration. The population of Canada is now nearly
nine million, and if the high rate of increase that prevailed for the five
years preceding 1914 is regained it will soon be ten million and
more. The national production and revenues in that case will grow
proportionately, and the individual share of the burden of taxes and
debt will be considerably less.
The prediction of James J. Hill, many years ago, that Canada
would have fifty million people by 1950 seems unlikely to be fulfilled,
but every Canadian expects the population of his country eventually
to reach that figure. The Dominion has four hundred and forty million
acres of land suitable for cultivation. Only one fourth of this area is
even occupied, and but thirteen per cent. is being tilled. To get men
and women on the unoccupied lands is a national policy of the
government that enjoys the support of all the people.
Canada’s banner year was 1913, when more than four hundred
thousand immigrants settled in the Dominion. During the war not one
eighth of this number came in. The annual inflow is now only one
fourth what it was the year before the World War, and about as many
more are added by natural increase. If there is no radical change in
conditions Canada should gain at least a million about every five
years. On the other hand, she has lost population by emigration,
especially to the United States.
Two racial stocks—British and French—make up eighty-three
per cent. of the population. With our “melting pot” example next door,
Canada is determined to preserve her race character, and she
controls immigration accordingly. She tries to get settlers chiefly from
the British Isles, the northern countries of Europe, and the United
States. Labourers from Japan and China are no longer admitted,
though for many years the head taxes of five hundred dollars on
each Chinese who came in paid most of the expenses of promoting
general immigration.
We might profit by the way Canada regulates her immigration. In
the first place, the government has wide discretion as to what kinds
of people shall come in. It can partially close the gates during dull
times, and open them wide when times are good. Immigrants are
admitted only as the authorities are satisfied that they are fitted to
work on the land and that they can become self-supporting.
Government agents in foreign countries start immigrants on their
way, and others meet them on their arrival. Canada does not allow
hordes of foreigners to be thrown into her cities. She guides them
out to the land, and helps them to establish themselves there. She
has no fixed quota law such as ours, but she is vastly more particular
as to whom she admits.
Besides the government, both the Canadian National and the
Canadian Pacific railways maintain immigration offices abroad. The
C. P. R. at one time had practically all Europe covered with agents
engaged in drumming for immigrants, whom it brought across the
Atlantic in its own steamers, carried through Canada on its own
trains, and located on farms along its own lines. When that road was
built the company received a grant of twenty-five million acres of
government land. Four fifths of these have been sold, but the
company still has five million acres for settlers. At the present time, it
is selling land for a cash payment of only one seventh of the
purchase price, the balance to be paid within thirty-five years.
 Canada feels acutely the need of more
population. She not only welcomes settlers from the
British Isles, northern Europe, and the United States,
but gives them every assistance in establishing
themselves on the land.
 It is still possible for the immigrant to take up good
land in Canada with the reasonable hope of making it
into such a ranch as this. Many of the richest farmers
of to-day came from the United States.
The government and the railroads spend large sums in
advertising Canada as the Land of Great Opportunity. Ottawa and
each of the provincial capitals produce literature by the ton.
Information bureaus are maintained that answer every conceivable
question about the resources and farming conditions in all parts of
the Dominion. The government regularly exhibits at fairs in the
United States and also in the United Kingdom. It distributes
photographs and “movie” films, and sends out lecturers to tell of the
glories of Canadian life. It advertises in our American farm journals
and plasters the countries of northern Europe with posters. The
Canadian Pacific conducts publicity campaigns for the purpose of
attracting both tourists and settlers, and for forty years it has been a
great force for the settlement and upbuilding of the Dominion.
For many years the bulk of the immigration from overseas has
come from the British Isles. During the periods of unemployment in
England thousands of jobless men have made a new start on this
side of the Atlantic. In one single summer, more than eleven
thousand British young men came here to help in the harvest, and all
but four hundred decided to stay. Relief societies in England have
sent over several thousand destitute boys and girls, who work with
farmers for their board, lodging, and schooling. In southern Alberta
small parcels of land of from five to ten acres are being reserved for
farm labourers who, though putting in most of their time working for
others, may thus get a start toward having farms of their own.
The government extended to all British soldiers who served in
the World War the same offer she made to her own men to set them
up as farmers, and within a few years thirty thousand of them were
placed on the land. It also loaned the former soldiers up to seventy-
five hundred dollars each, and employed farm experts to train them
and to help them get started. Eighty per cent. of them are regarded
as making good.
As in the United States, domestic servants are at a premium.
Consequently, young unmarried women are urged to come to the
country. While in Toronto the other day I saw a party of fifty girls,
Scotch, Irish, and English, who had just arrived from overseas under
the wing of the Salvation Army. They were bright-eyed and rosy-
cheeked. Their average age was eighteen. As soon as it was
announced that the girls had arrived, the Salvation Army
headquarters were surrounded by fashionable motor cars and
overrun with Toronto women seeking cooks, maids, and
governesses. Like the real bargains at a department store, this
supply disappeared within a few hours. Some of the girls admitted
privately that they were taking domestic employment only
temporarily. They hoped soon to get places in factories or stores, or
perhaps to find husbands.
Out in the farming country of Saskatchewan, girls are in as great
demand as in Toronto. A record was kept during a period of three
years of five hundred and twenty-six girls who were advanced their
expenses to Canada. All immediately found household positions,
and only six gave up and went home.
Canada estimates that each immigrant settler represents the
addition of one thousand dollars to her national wealth. The railroads
consider every man who takes up land along their lines worth seven
hundred dollars as a producer of traffic. An even higher valuation is
placed upon immigrants from the United States, because they
usually bring in more cash, farm equipment, and household goods
than the Europeans. During the height of the American invasion of
Canada, from 1910 to 1914, more than six hundred thousand
citizens of the United States, most of them farm folk, came to this
country. Many of them had several thousand dollars in cash, realized
from the sale of their high-priced farms in the States. They used it to
buy the cheap rich new lands of the wheat belt. Allowing a minimum
of only one thousand dollars for each American, this immigration
from over the border gave Canada more than six hundred million
dollars of new money for development. As a distinguished citizen
here once observed, this is the cheapest new capital ever
discovered; it carries no interest charge and is backed by muscle
and brains.
Within the last twenty-five years more than a million Americans
have come into Canada, and in the prairie provinces they form a
large part of the population. At one time, the government conducted
campaigns to persuade the agricultural population of our middle
western states to come in. Its land agents had groups of our farmers
name committees of their own number to visit Canada at
government expense and see for themselves that everything was as
they represented. In those days, western Canada enjoyed an old-
fashioned land boom such as we had in the States a generation
earlier. Fortunes were made by individuals and syndicates in dealing
in Canadian lands.
Boom conditions no longer prevail, and the best lands now
command a good price, though still much less than equally fertile
tracts in the United States. Free lands are still to be had, but only on
condition that the settler become a naturalized Canadian citizen. If
an immigrant is not suited with the available free land, or if he
chooses to retain his nationality, he is given every assistance in the
selection and purchase of privately owned lands at a fair price.
Canada has had some curious experiences with colonization,
especially with certain European religious sects. Among these were
the Mennonites and the Doukhobors from Russia. The latter claimed
to be descendants of Shadrach, Meshac, and Abednego, whom
Nebuchadnezzar threw into the fiery furnace. They were an offshoot
of the Greek Orthodox Church and lived by themselves beyond the
Caucasus Mountains. In the early years of this century, when they
were having trouble with the Czar’s government, Quakers in the
United States and England helped them to emigrate. A grant of two
hundred and seventy-five thousand acres of land was secured from
the Canadian government, and some seven or eight thousand of
these people were transported to Canada. They were located near
Yorkton, northwest of Winnipeg, where they established communistic
villages and patterned their existence on the life they had led in far-
away Russia.
 Corn is now grown successfully far north of the
United States. Once thought to be suitable only for
wheat growing and cattle raising, the prairies of
Alberta have become the centre of mixed farming in
the West.
 The part played by Canada’s railroads in
colonizing her prairie provinces can hardly be
overestimated. They maintain immigration agents
abroad, and spend large sums in advertising the
Dominion’s attractions.
 In helping a settler get started, the Canadian
Pacific Railway may provide him with a house and
barn built on some of the land still available out of its
grant of twenty-five million acres.
All went well for a time, but the Canadians soon discovered that
the Doukhobors were subject to periodic outbreaks of religious
fanaticism that had many intolerable features. At times, they were
seized with the notion that it was a sin to utilize the labour of
animals, and so they turned off all their live stock. At other times,
they had the idea that it was wrong to use machinery, and they
scrapped their farm tools. But what brought them into most serious
conflict with the authorities were the pilgrimages they made to meet
Christ on the prairie. It was their notion that they must not appear
before Him on his second coming except in their natural condition of
complete nakedness. At one time seventeen hundred men, women,
and children marched into Yorkton stark naked. At another, six
hundred Doukhobors wandered off naked in midwinter. On each
occasion of this sort, the police had to round them up and confine
them until they became sane enough to put on clothes and conduct
themselves normally. Later they moved some of their colonies into
British Columbia and many of them returned to Russia.
 There are now more than thirty thousand Mennonites in Canada.
They were originally Lutherans from Poland and Prussia, who about
1787 accepted refuge in Russia from religious persecution at home.
They were favoured for a time by the Russian government, and
became prosperous farmers and stock raisers, and also
manufacturers. Just before the Canadian Pacific Railway was built, a
number of them emigrated to Canada, settling along the Red River
Valley in Manitoba. Their migration was financed to the extent of a
million dollars by the Canadian government. This the Mennonites
later repaid, and their communities thrived and prospered.
After the World War, the Mennonites in Russia suffered severely
at the hands of the Soviet government. Their lands, factories, and
other possessions were confiscated. Thereupon, with the aid of
wealthy Mennonites in Pennsylvania, a fresh emigration to Canada
was financed. These Mennonites were taken to southern Manitoba
and Saskatchewan, where they were located on desirable lands.
Among them were some who before the revolution in Russia owned
farms of from ten to fifteen thousand acres. One man had been
worth a half million dollars, and was one of the largest horse
breeders in Russia. Of the Mennonites who first came to Canada,
some have since gone to Mexico, where they have formed colonies
similar to those established in the Dominion.
The immigration offices of Canada are filled with stories of
settlers who have made good. Many of these stories are in the form
of letters written by the men and the women who have fought and
won their battles with the land, some of whom are now wealthy and
nationally prominent. Canada is perhaps a generation nearer the
pioneer stage than we are, and on her farms of the frontier
thousands are to-day laying the foundations of fortunes, as our
farmers did when they settled the West. From the human documents
I have examined I quote the advice to prospective settlers given by a
man who, twelve years after landing from England with one dollar in
his pocket, sold out his farm for thirty-five thousand dollars. These,
says he, are the secrets of success in Canada:

1. Get a farm if it takes your last ten dollars.

 2. If you are not married, get married, for successful
bachelor farmers are not plentiful.
3. Give your hired help, and the members of your own family,
an interest in the farm; whether it be a quarter section of land or
a setting of eggs. Get them interested.
4. Work with and for your neighbours. Coöperation is the A B
C of success. Always lend a hand to those in need, especially
newcomers, and you will be repaid a hundredfold. Above all,
value the good-will of your neighbours.
5. Lastly, be a true Canadian all the time, for no other
country on earth will appreciate it so much or give so much in
return.