Offering Memorandum Exemption Coming to Ontario in the Fall of 2015
Over a decade after the “offering memorandum” prospectus exemption (the OM exemption) was first introduced elsewhere in Canada, the OSC has confirmed that the OM exemption will be coming to Ontario in the fall of 2015.
The OM exemption, which is already available in other Canadian jurisdictions, albeit with different parameters depending on the jurisdiction, allows businesses to raise capital from investors, including retail investors (i.e., investors who are not “accredited investors” as defined in NI 45-106 Prospectus Exemptions (NI 45-106)), based on an “offering memorandum” rather than a prospectus. While the offering memorandum is required to contain certain prescribed disclosure, be in a prescribed form (Form 45-106F2 or F3) and is subject to statutory liability in the case of a misrepresentation, it is not required to contain prospectus-level disclosure and is not subject to review by the securities regulators prior to an offering being made in reliance on the exemption.
When the OM exemption was first introduced in other Canadian jurisdictions, the OSC indicated that it was not proposing to introduce the exemption in Ontario due to investor protection concerns.
However, as explained in a series of concept proposals and updates published since November 2011, the OSC, together with its counterparts in the other Canadian jurisdictions (collectively, the CSA), have been engaged in a comprehensive review of the regulatory regime applicable to the Canadian exempt market with a view to facilitating capital-raising by small- and medium-sized business while maintaining appropriate levels of investor protection.
(For a description of the OSC exempt market review, see OSC Staff Consultation Paper 45-710 Considerations for New Capital Raising Prospectus Exemptions dated December 14, 2012, and OSC Notice 45-712 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising dated August 28, 2013.)
In March 2014, the OSC and certain other participating jurisdictions published for comment a number of proposals relating to the exempt market, including the following:
- proposals in Ontario to introduce a version of the OM exemption to Ontario (see the Notice and Request for Comment relating to Proposed Amendments to NI 45-106 Prospectus and Registration Exemptions and related instruments dated March 20, 2014 (the March 2014 OSC Proposals))
- proposals in Alberta, Saskatchewan, Quebec and New Brunswick (see the Multilateral CSA Notice and Request for Comment re Proposed Amendments to National Instrument 45-106 Prospectus and Registration Exemptions Relating to the Offering Memorandum Exemption (the March 2014 CSA Proposals)), to amend the existing versions of the OM exemption in effect in these jurisdictions to address certain investor protection concerns these jurisdictions had identified with the existing model (for details of other jurisdictions’ experiences with the OM exemption, see Annex B: Background – Local Experience with OM Exemption to the March 2014 CSA Proposals)
The proposed version of the OM exemption contemplated by the March 2014 proposals would have resulted in a number of significant changes to the versions of the OM exemption in effect in these jurisdictions, including the introduction of a $30,000 investment limit for investors who were not “accredited investors”.
The comment period for these proposals ended in June 2014, with the participating CSA jurisdictions receiving more than 900 comment letters regarding the proposed amendments relating to the OM exemption.
On July 14, 2015, the OSC announced in its 2014–2015 Corporate Finance Annual Report (OSC Staff Notice 51-725 Corporate Finance Branch 2014–2015 Annual Report) that, following consultation with the other participating jurisdictions, advisory committees and other stakeholders, it plans to make changes to respond to the concerns raised in the comment letters and publish the OM exemption in final form in the fall of 2015.
As explained in the report, the OSC anticipates that the final Ontario version of the OM exemption will include the following elements:
- comprehensive disclosure document at point of sale
- no limit on the amount of capital an issuer can raise
- investment limits for investors, other than those who would qualify as accredited investors or investors who would qualify to invest under the family, friends and business associates exemption, substantially along the following:
- in the case of a purchaser that is not an eligible investor, $10,000 in a 12-month period
- in the case of a purchaser that is an eligible investor, $30,000 in a 12-month period
- in the case of a purchaser that is an eligible investor and that receives advice from a portfolio manager, investment dealer or exempt market dealer that an investment above $30,000 is suitable, up to $100,000 in a 12-month period
- risk acknowledgement form signed by investors
- ongoing disclosure made available to investors, including audited annual financial statements, annual notice regarding the use of the money raised and notice of a limited list of significant events.
While the overall proposal is generally consistent with the March 2014 proposals published for comment, the ability of an investor who is not an accredited investor to exceed the $30,000 investment limit and make investments of up to $100,000 in a 12-month period based on suitability “advice” from a registered firm does appear to be a significant new element to the proposal. In view of the increased focus by the CSA on registered firms’ compliance with suitability obligations (e.g., see CSA Staff Notice 31-336 Guidance for Portfolio Managers, Exempt Market Dealers and Other Registrants on the Know-YourClient, Know-Your-Product and Suitability Obligations), any registered firm that provides suitability advice to allow a non-accredited investor to exceed the $30,000 investment limit will need to carefully ensure that an appropriate suitability review is conducted and fully documented.
It is not clear from the OSC Report whether the other participating CSA jurisdictions intend to proceed with corresponding changes to their versions of the OM exemption.
AUM Law will provide a full update when further developments are announced and the final version of the amendments are published.
Update on NI 45-108 Crowdfunding Regime
The OSC 2014–2015 Corporate Finance Annual Report also contained an update on the CSA proposals to introduce a new prospectus exemption and a regulatory framework for crowdfunding portals to facilitate retail crowdfunding as outlined in proposed Multilateral Instrument 45-108 Crowdfunding (Proposed MI 45-108). (In Ontario, see the OSC Notice and Request for Comment relating to Proposed Amendments to NI 45-106 Prospectus and Registration Exemptions and related instruments (including proposed MI 45-108 Crowdfunding and proposed Multilateral Policy 45-108CP Crowdfunding dated March 20, 2014 (the March 2014 OSC Proposals)). In the other CSA jurisdictions that published proposed MI 45-108 for comment, see the Multilateral CSA Notice of Publication and Request for Comment re Draft Regulation 45-108 respecting Crowdfunding (the March 2014 Multilateral CSA Crowdfunding Notice).
As explained in our nutshell on Equity Crowdfunding Portals, in March 2014, the OSC and its counterparts in Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia published for comment Proposed MI 45-108.
This proposed rule sets out a proposed prospectus exemption to facilitate capital raising by reporting and non-reporting issuers, other than investment funds, through online portals and a proposed regulatory framework for a new type of registrant, the "registered funding portal".
As with the OM exemption, the Corporate Finance Annual Report indicates that the OSC intends to publish a crowdfunding regime in final form and deliver the rules to the Minister of Finance for approval in fall 2015.
The OSC anticipates that the final version of MI 45-108 will include the following key elements:
- streamlined offering document at point of sale
- limit of $1.5 million on amount an issuer group can raise in a 12-month period
- all investments must be made through a funding portal that is registered with securities regulators
- low investment limits for investors who do not qualify as accredited investors ($2,500 in a single investment and $10,000 under the exemption in a calendar year) with higher investment limits for accredited investors and no investment limits for permitted clients
- risk acknowledgement form signed by investors
- ongoing disclosure made available to investors, including annual financial statements, annual notice regarding the use of the money raised and notice of a limited list of significant events
It is unclear based on the Annual Report what the “higher investment limits for accredited investors” will be or how they will be determined. For example, the participating CSA jurisdictions may be contemplating a higher investment limit calculated as a percentage of the accredited investor’s net income or net worth (which is generally the US approach under the JOBS Act crowdfunding regime) or alternatively may be contemplating higher numerical limits of, for example, $25,000 per investment and $100,000 per annum.
We look forward to reviewing the final version of the MI 45-108 crowdfunding regime in the fall and providing an update at that time.
Rights Offering Prospectus Exemption
Finally, the OSC 2014–2015 Corporate Finance Annual Report also contained an update on the CSA proposals to modernize and streamline the rights offering prospectus exemption. The Report indicates that currently, issuers do not appear to be using the existing rights offering process as a result of time and cost impediments. The OSC previously published for comment amendments to the prospectusexempt rights offering regime intended to address these issues. The OSC is currently working with the CSA to develop final amendments to the existing exemption and the goal is to publish the amendments in the fall of 2015.