Legal Updates

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Update

Tuesday, January 12, 2016

Introduction

The securities regulatory authorities in Alberta, New Brunswick, Nova Scotia, Ontario, Quebec and Saskatchewan (collectively, the “Participating Jurisdictions”) published Multilateral CSA Notice of Amendments to National Instrument 45-106 Prospectus Exemptions Relating to the Offering Memorandum Exemption(the “Amendments”) on October 29, 2015. While the Amendments will modify the offering memorandum exemption in section 2.9 (the “OM Exemption”) of National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”) in Alberta, New Brunswick, Nova Scotia, Quebec and Saskatchewan, the most significant development is that Ontario will be the final Canadian jurisdiction to adopt the OM Exemption. The introduction of the OM Exemption in Ontario is in line with a continuing effort by the Ontario Securities Commission (the “OSC”) to facilitate cost-effective means for issuers, particularly small and medium-sized enterprises, to raise capital while ensuring the necessary level of investor protection. The Amendments will come into force in Ontario on January 13, 2016 and in the other Participating Jurisdictions, subject to ministerial approval where required, on April 30, 2016. The final Amendments do not modify the OM Exemption that currently exists in any CSA jurisdiction other than the Participating Jurisdictions, notably British Columbia, where the offering memorandum exemption will remain different.

The OM Exemption is designed to facilitate capital raising by allowing issuers to solicit investments from a wider range of investors than they would be able to under other prospectus exemptions, provided certain conditions are met. Reliance on the OM Exemption requires, among other things, that an issuer prepare and deliver to investors an offering memorandum in the prescribed form which requires the disclosure of certain information about the issuer and audited financial statements. In addition to having a two business day right of withdrawal, the OM Exemption provides investors with a right of action for rescission or damages if there is a misrepresentation in the information contained in the offering memorandum. 

Given the potential for increased risk to investors who purchase securities under the OM Exemption, the Amendments add new measures intended to protect investors and to address concerns observed with the use of the existing OM Exemption outside Ontario, including limits on the amount that can be raised from certain individuals and new ongoing disclosure obligations. The key features of the Amendments are summarized below.

Key Amendments to the OM Exemption

Heightened Disclosure Requirements for Non-Reporting Issuers

Currently, the OM Exemption does not require non-reporting issuers to provide disclosure on an ongoing basis. Pursuant to the Amendments, non-reporting issuers will be required to provide audited annual financial statements to investors accompanied by a notice as to how the proceeds raised by such issuer have been used. In addition, Ontario, New Brunswick and Nova Scotia will require non-reporting issuers to provide notice to investors within 10 days of the issuer discontinuing its business, changing industries or if there is a change of control of the issuer.

In the Participating Jurisdictions, disclosure documents will be considered to have been made reasonably available to each securityholder who purchased securities under the OM Exemption if such documents are mailed to securityholders or, provided securityholders receive notice, made available on the issuer’s website or a website that all such securityholders can access. Issuers must ensure that they take reasonable steps to ensure the disclosure documents are received by securityholders promptly.

Investment Limits

The Amendments will modify the total investment that an individual in a Participating Jurisdiction can make within a 12-month period. These limits will apply as follows:

  • Eligible individual investors – Cost of all securities purchased under the OM Exemption cannot exceed $30,000 in the preceding 12 months; 

  • Eligible individual investors who have received advice from a portfolio manager, investment dealer or exempt market dealer that the investment is suitable – Cost of all securities purchased under the OM Exemption cannot exceed $100,000 in the preceding 12 months; and 

  • Non-eligible individual investors – Cost of all securities purchased under the OM Exemption cannot exceed $10,000 in the preceding 12 months. 

An eligible investor is defined under NI 45-106 and includes a person whose net income before taxes exceeds $75,000 (or $125,000 in the case of an individual and his or her spouse) in each of the two most recent calendar years and who reasonably expects to exceed that income level in the current calendar year or a person alone or with a spouse, in the case of an individual, whose net assets exceed $400,000. Those individuals who meet the accredited investor or family, friends and business associate exemptions under NI 45-106, and an investor that is not an individual, are not subject to the investment limits outlined above and can invest an unlimited amount.

Filing Requirement

Issuers must file the offering memorandum and any marketing materials used in connection with a distribution under the OM Exemption with the applicable securities regulatory authority. As such, these documents will be placed on the public record. However, the offering memorandum is not subject to regulatory review prior to the completion of the offering.

Marketing Materials

The Amendments will require issuers who use marketing materials as part of a distribution under the OM Exemption to incorporate by reference such materials in the offering memorandum filed in respect of that distribution. This inclusion will result in marketing materials being subject to the same statutory liability for misrepresentation as the offering memorandum.

Risk Acknowledgment Forms

All investors currently must complete form 45-106F4 Risk Acknowledgment which, among other things, requires an investor to acknowledge that the investor is aware that he or she could lose the full amount of his or her investment. Pursuant to the Amendments, individual investors must also complete two additional schedules which will confirm their investor status (i.e. eligible investor, non-eligible investor, accredited investor or qualification under the family, friends and business associates exemption) and confirm that the individual is complying with the investment limit to which he, she or it is subject.

Market Participant 

In Ontario and New Brunswick, non-reporting issuers that use the OM Exemption will be designated as a market participant and consequently be subject to record-keeping requirements and compliance reviews as required under the respective securities legislation of the two provinces.

Investment Funds

The OM exemption will not be available to investment funds in Ontario, New Brunswick and Quebec, while in the other Participating Jurisdictions, 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. Reliance on the OM exemption will be prohibited for distributions of specified derivatives or structured finance products.

Conclusion

The introduction of the OM Exemption in Ontario is part of a broader and continuing exempt market initiative by the OSC intended to greatly facilitate capital raising by businesses at different stages of development, including start-ups and small and medium-sized enterprises (SMEs), while maintaining an appropriate level of investor protection. 

While the OM Exemption provides a new means for raising money from a broad range of investors in Ontario, albeit with some enhanced investor protection measures attached, the actual adoption and acceptance of the OM Exemption remains to be seen.  In particular, the financial and personnel costs and time to prepare an offering memorandum in the prescribed form and produce annual audited financial statements, and the public availability of the offering memorandum and marketing materials filed with the OSC, may make the OM Exemption significantly less appealing to many early stage SMEs.  To its credit, the OSC has acknowledged in the Amendments the additional burden of audited annual financial statements on smaller issuers and the requests received for a more streamlined form of offering memorandum, but for now has not made any substantive changes to the form of offering memorandum currently used in other CSA jurisdictions and indicated this will be considered further during a future phase of the exempt market review.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.