Effective January 13, 2016, issuers in Ontario will be able to take advantage of a new prospectus exemption permitting for investments from a wider range of investors through the use of an offering memorandum (the OM Exemption). This new OM Exemption is designed to facilitate capital-raising by allowing for investments from a wider range of investors than under other exemptions such as the existing accredited investor or the family, friends and business associates exemptions.

Securities administrators in Alberta, New Brunswick, Nova Scotia, Quebec and Saskatchewan have also agreed to implement amendments to their existing offering memorandum exemption under section 2.9 of National Instrument 45-106 Prospectus Exemptions such that the new OM Exemption will be substantially harmonized across Ontario and each of these provinces. The necessary amendments in these other provinces are scheduled to come into force on April 30, 2016. 

 As mentioned in a previous post, following implementation of the OM Exemption in Ontario, an offering memorandum exemption will be available in every jurisdiction in Canada, with some variation between certain jurisdictions (see s. 2.9 of National Instrument 45-106).

Key Features of the OM Exemption

The key features of the OM Exemption include the following:

  • Offering Memorandum. Issuers must prepare and deliver to investors an offering memorandum in the prescribed form. The offering memorandum must disclose certain information about the issuer and include audited financial statements, but does not require the same level of disclosure as a prospectus. An investor has certain rights in connection with such an investment, including a two-business-day withdrawal right and a right of action for rescission or damages if the offering memorandum contains a misrepresentation.
  • Investment Limits. The OM Exemption is subject to investment limits for certain investors, as follows:
    • non-eligible investors (i.e., investors who do not meet certain income or asset thresholds) – a maximum of $10,000, cumulatively for all investments made in reliance upon the OM Exemption inany 12-month period;
    • eligible investors – a maximum of $30,000, cumulatively, for all investments made in reliance upon the OM Exemption in any 12-month period unless they receive suitability advice from a portfolio manager, investment dealer or exempt market dealer, in which case this limit is increased to $100,000;
    • investors who qualify as accredited investors or family, friends and business associates – no limit; and
    • non-individual investors, whether eligible or non-eligible – no limit.
  • Risk Acknowledgement Form and Schedules. All investors are required to complete and sign a form highlighting the key risks associated with investing in securities acquired under the OM Exemption. Individual investors will also be required to complete two new schedules to the offering memorandum which ask investors to confirm their status (as an eligible investor, non-eligible investor, accredited investor or an investor who would qualify to purchase securities under the family, friends and business associates exemption) and that the investor is within the investment limits, where applicable. Investors that are not individuals do not have to complete these schedules.
  • Continuous Disclosure. Non-reporting issuers that rely on the OM Exemption will generally be required to provide audited annual financial statements, as well as a notice, in prescribed form, accompanying such financial statements describing how the money raised under the OM Exemption has been used, to the securities regulatory authority, as well as make such financial statements and notice reasonably available to investors, within 120 days of each financial year end.In New Brunswick, Nova Scotia and Ontario, non-reporting issuers will also be required to make reasonably available to investors a notice, in a prescribed form, of the following events within 10 days of the event occurring: (i) a discontinuance of the issuer’s business; (ii) a change in the issuer’s industry; or (iii) a change of control of the issuer.
  • Marketing Materials. Marketing materials used by issuers in distributions under the OM Exemption must be incorporated by reference into the offering memorandum and filed with the securities regulatory authority. As a result, the marketing materials will be subject to the same liability for a misrepresentation as the disclosure provided in the offering memorandum itself. Marketing materials are defined as any written communication, other than an “OM standard term sheet” (i.e., a standard document containing only prescribed information regarding the issuer, the securities and the offering), intended for prospective purchasers regarding a distribution of securities under an offering memorandum that contains material facts relating to an issuer, securities or an offering.
  • Public Filing. The offering memorandum and marketing materials must be filed with the securities regulatory authority, but will not be subject to prior review by the securities regulatory authority.
  • Market Participant. In Ontario and New Brunswick, non-reporting issuers that use the OM Exemption will be designated as market participants and become subject to record-keeping requirements and compliance reviews under applicable securities legislation.
  • Exclusions. Issuers will be prohibited from relying on the OM Exemption to distribute specified derivatives or structured finance products. In Alberta, Nova Scotia and Saskatchewan, the OM Exemption will continue to be available to investment funds only if they are non-redeemable investment funds or mutual funds that are reporting issuers. In New Brunswick, Ontario and Quebec, the OM Exemption will not be available to investment funds.

Takeaways

The OM Exemption is an attempt to balance the interests of issuers and investors by providing issuers with access to capital from a broad range of investors without the burden (i.e., costs and regulatory review) of preparing a prospectus, while protecting investors through the use of an offering memorandum.

For reporting issuers, the OM Exemption may provide an efficient and cost effective alternative to a prospectus offering. For some non-reporting issuers, the costs associated with preparing an offering memorandum and providing investors with audited annual financial statements may prove to be prohibitive. In addition, for non-reporting issuers in Ontario and New Brunswick, the record-keeping requirements and compliance reviews associated with becoming a market participant may limit the attractiveness of the exemption.

Reliance on the OM Exemption does not prevent an issuer for using other prospectus exemptions, such as the accredited investor or minimum amount investment exemptions.

The OM Exemption is available in Ontario as of January 13, 2016 and the harmonized OM Exemption in the provinces of Alberta, New Brunswick, Nova Scotia, Quebec and Saskatchewan will be available as of April 30, 2016.  For full details, please consult the Multilateral CSA Notice of Amendments to NI 45-106.