Like a wedding guest scrambling to meet the customary, one-year deadline for tardy gift-givers, on November 29 staff of the Ontario Securities Commission (OSC) staff published their Exempt Market Report for 2017. Using information derived from regulatory filings including revised Form 45-106F1 Report of Exempt Distribution, the Exempt Market Report complements analysis included in the Corporate Finance Branch’s annual report for 2017-18 (Annual Report), which we discussed in last month’s bulletin.
Some of the more interesting findings in the Exempt Market Report include the following:
- How Much? Capital raised through the exempt market from Ontario investors in 2017 ($91.6 billion from 2,970 issuers) represents a 27% increase in proceeds and 17% increase in the number of issuers, compared to 2016.
- Individual vs Institutional Investors: Of that $91.6 billion, 22,000 individuals allocated $2.2 billion across 1,700 issuers and 6,500 institutional investors allocated $89.4 billion to 2,500 issuers. Individual investors now represent 77% of the investors in the exempt market.
- Who Invested in Ontario-Based Issuers? Approximately three out of four investors allocated capital to Ontario-based issuers, who received 66% of the $2.2 billion allocated by individual investors. By contrast, Ontario-based issuers received only 24% of the $89.4 billion allocated by institutional investors, with foreign-based issuers received 60% of the institutional investors’ funds.
- Individuals Like Real Estate. Of the $2.2 billion invested by individual investors, 39% went to issuers that primarily held real estate or mortgage-related assets. By contrast, only 10% of the $89.4 billion invested by institutions went to issuers in this sector. Institutional investors allocated most of their capital (53% of total invested capital) to financial issuers.
- How Attractive Are the New Prospectus Exemptions? The prospectus exemptions introduced since 2015 continued to gain traction with investors and issuers in 2017.
- Total capital raised under the friends, family and business associates (FFBA) and offering memorandum (OM) exemptions doubled to $327 million since 2016.
- Just under 600 issuers used the FFBA and OM exemptions in 2017. However, most issuers that relied on these exemptions raised most of their capital under the accredited investor (AI) exemption.
- Real estate and mortgage investment entities received approximately 70% of the capital invested under the OM exemption and 57% of the capital raised under the FFBA exemption.
- Crop production (primarily cannabis) issuers received approximately 18% of the capital raised under the FFBA.
- Only 30 issuers used the existing security holder exemption to raise just under $2 million.
- There was no reported use of the crowdfunding exemption in 2017, but several exempt market dealers and other registered firms facilitated a crowdfunding-like model to raise just under $100 million, mainly from accredited investors.
Extrapolating from the Exempt Market Report and other recent activity reports from the OSC, we expect to see OSC staff focus on issuers and firms that are participating in areas of the exempt market that either are growing in significance and/or that present greater risk for investors, especially individual investors. For example, we expect to see staff pay close attention to how the FFBA and OM exemptions are used, especially by issuers that hold real estate, mortgage, or cannabis-related assets, due to the popularity of these sectors with individual investors participating in the exempt market.