On October 4, the Ontario Securities Commission (OSC) published Staff Notice 51-759 Corporate Finance Branch Report 2017-2018 Annual Report (Report). This month, we have focused on the Report’s discussion of Corporate Finance Branch (CFB) staff’s oversight of the exempt market.
CFB uses a risk-based program to oversee issuers and registrants who distribute securities under prospectus exemptions. In fiscal 2018, the Branch’s oversight activities in this area focused mainly on increasing coordination and joint reviews with the OSC’s Compliance and Registrant Regulation Branch (CRR) and on issuers’ use of the offering memorandum (OM) exemption. The Branch issued comment letters to issuers primarily for the following reasons:
- Repeated offerings to retail investors by issuers not using a registered dealer;
- Failure to comply with the OM’s disclosure requirements, including financial statement requirements;
- Failure to file marketing materials;
- Insufficient disclosure regarding the issuer’s business;
- Use of the OM exemption to distribute structured finance products; and
- Outdated disclosure.
With respect to (1) above, the CFB-CRR joint review found several areas of non-compliance with applicable exemptions including:
- Reliance on the family, friends and business associates (FFBA) exemption when the purchaser lacked the required relationship with a principal of the issuer;
- Reliance on the accredited investor (AI) exemption without taking reasonable steps to verify that the purchaser meets the AI definition and/or without maintaining adequate documentation;
- Non-compliance with investment limits under the OM exemption;
- Failure to provide or correctly complete the required risk acknowledgment forms under the AI, FFBA and OM exemptions; and
- Discrepancies between the reporting of trades under Form 45-106 F1 Report of Exempt Distribution and the issuer’s records of the securities actually issued.
The Report also reminds issuers that offer their own securities to continually assess whether they are trading in, or advising on, securities for a business purpose and therefore subject to the registration requirements in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103).
Our discussion below of the Valt.X case illustrates several of the non-compliance themes highlighted in the Report, including inappropriate reliance on the AI exemption and issuers whose fund-raising activities cross the line into trading in or advising on securities for a business purpose.
CFB staff will continue to focus on integrating their compliance reviews with CRR’s registrant reviews in the coming year. They also intend to prioritize reviews of distributions in the real estate and mortgage sector as they consider issues regarding updates to the regulatory framework for syndicated mortgage investments.