Ontario has introduced an offering memorandum (OM) prospectus exemption and five other provinces are modifying their existing OM exemptions to align with this revised model which incorporates additional investor protections.
The new or revised OM exemption will be available in Ontario, Québec, Alberta, Saskatchewan, New Brunswick and Nova Scotia. It will be available to all issuers but is expected to be particularly helpful to small and medium-sized issuers by providing greater access to capital from a broader range of investors, including retail investors.
Revised Offering Memorandum Prospectus Exemption
The OM exemption will exempt an issuer from filing a prospectus when issuing securities if certain requirements are met. To rely on the OM exemption, issuers must prepare and deliver an offering memorandum in required form to investors. The form of the offering memorandum will vary depending on whether an issuer is a reporting issuer or a non-reporting issuer but, except in limited cases, will need to include (or incorporate by reference) audited financial statements.
Key elements of the new or revised OM exemption are as follows:
- Investment limits: investment limits will be imposed on individuals investing under the OM exemption. If an individual does not meet specified income or asset thresholds, that individual will only be able to invest up to an aggregate of $10,000 in a 12-month period in reliance on the OM exemption. If the individual does meet the specified income or asset thresholds, the limit is raised to $30,000 in a 12-month period and, if that individual receives suitability advice from a registered dealer or registered adviser, the investment limit goes up to $100,000 in a 12-month period. These investment limits do not apply if the investor is an accredited investor or is a person described in the family, friends and business associates prospectus exemption.
- Ongoing disclosure: non-reporting issuers will be required to meet certain ongoing disclosure requirements, including delivery of audited annual financial statements, notices disclosing use of proceeds, and in New Brunswick, Nova Scotia and Ontario, notices of specified events such as discontinuance of the issuer’s business or a change of control.
- Marketing materials: marketing materials (other than basic term sheets) used by issuers in conjunction with a distribution under the OM exemption must be incorporated by reference into the offering memorandum and those marketing materials must be filed with the securities regulatory authorities.
- Liability for misrepresentations: investors will have rights for rescission or damages for any misrepresentation in an offering memorandum, including in any marketing materials incorporated by reference.
- Right of withdrawal: an investor will have a right to withdraw the investor’s offer to purchase securities within 2 days of signing a subscription agreement.
- Risk acknowledgement form: all investors will need to complete a prescribed risk acknowledgement form which highlights the key risks associated with investing in securities acquired under the OM exemption.
- Hold period: securities acquired in reliance upon the OM exemption will be subject to a four-month hold period if the issuer is a reporting issuer and to an indefinite hold period if the issuer is a non-reporting issuer.
- Derivatives, structured finance products and investment funds: issuers will be prohibited from relying on the OM exemption to distribute specified derivatives or structured finance products. The OM exemption will continue to be available to certain investment funds in Alberta, Nova Scotia and Saskatchewan but will not be available to investment funds in New Brunswick, Ontario and Québec.
Impact on Offering Memorandum Exemptions in other Canadian Jurisdictions
The existing offering memorandum exemptions which are currently in place in other Canadian jurisdictions will not change. British Columbia and Newfoundland and Labrador will continue to have no investment limits under their model. The offering memorandum exemption available in Manitoba, Prince Edward Island and the territories will continue to contain investment limits for persons who are not “eligible investors”.
Anticipated Timing for Implementation
In some jurisdictions, ministerial approvals are required for the implementation of these changes. Provided all necessary approvals are obtained, the OM exemption will come into force in Ontario on January 13, 2016 and the revised OM exemption will come into force in the remaining jurisdictions on April 30, 2016. This delayed implementation in provinces other than Ontario is intended to accommodate offerings currently in the market that expect to rely upon the existing offering memorandum exemptions.
The introduction of the OM exemption in Ontario will close a gap that existed in Canada’s capital raising regime and should increase financing options for all issuers, but in particular should benefit small and medium-sized issuers. While regulators have made some effort to streamline the OM exemptions across Canada, issuers that rely on the OM exemption should be aware of remaining local differences, including varied investment limits. With the addition of new investor protections, including the risk acknowledgement form and ongoing disclosure requirements, issuers and their advisors will need to be mindful of the further compliance obligations.