In November 2011, the Canadian Securities Administrators (the CSA) undertook to consult with stakeholders on the continuing utility and appropriateness of the C$150,000 minimum amount prospectus exemption and the accredited investor prospectus exemption contained in National Instrument 45-106 Prospectus and Registration Exemptions.

On June 7, 2012, the CSA published Staff Notice 45-310 (CSA Notice) which updates the state of the consultation undertaken by the CSA. Concurrent with the publication of the CSA Notice, the Ontario Securities Commission (OSC) published Staff Notice 45-707 (OSC Notice) which highlights the feedback the OSC received in connection with the CSA's review. The OSC Notice also sets out the OSC's intention to broaden the review undertaken by the CSA by continuing to assess whether the two exemptions remain appropriate, and to consider whether Ontario should introduce other prospectus exemptions to facilitate capital raising while still providing for an appropriate level of investor protection.

Feedback from Consultation

Below are some highlights of the CSA Notice and OSC Notice:

Comments on Accredited Investor Exemption

The CSA received comments which include raising, keeping, and lowering the current income and asset thresholds for an accredited investor. Some commenters noted that while the current income and asset thresholds are not perfect proxies for investor sophistication, they are administratively efficient and practical to apply. Others suggested adding new categories of accredited investor based on an investor's education, work experience or investing experience.

Comments on Minimum Amount Exemption

The CSA received many comments that investing in a minimum amount of C$150,000 is a flawed basis to measure investor sophistication or ability to withstand loss and operates to discourage diversification or appropriate investment strategies. Many recommended that the CSA repeal the exemption because of these concerns. Similarly, the OSC received many comments that questioned the rationale for this exemption and the effect of causing investors to invest C$150,000 in one investment when an investment in smaller amounts or a more diversified approach would be more appropriate.

Other Options

The OSC received a number of views on whether there should be prospectus exemptions based on the provision of disclosure to investors. Some stakeholders suggested that Ontario should adopt an offering memorandum prospectus exemption, which would allow a broader range of investors to participate in the exempt market on the condition that a minimum level of disclosure is provided to investors. Some stakeholders supported more rigorous risk disclosure to enhance investor protection.

Harmonization

Both the CSA and the OSC noted that commenters have encouraged CSA members to renew their efforts to harmonize the current prospectus exemptions.

Additionally, both the CSA Notice and OSC Notice indicated that many stakeholders expressed concern that any changes to the exempt market regime might restrict access to capital by businesses.

Next Steps

Before making any recommendations, the CSA have indicated that they intend to gather and analyze information from filed exempt distribution reports. The CSA intend to finalize their review and publicly report on the conclusions later this year.

In light of feedback received from stakeholders, the OSC announced that it is broadening the scope of its review to consider the exempt market regulatory regime more generally. Notably, in this fiscal year, the OSC will:

  • Publish a second consultation note which will seek further feedback on the exempt market regulatory regime;
  • Consider the experience of the other CSA jurisdictions with prospectus exemptions not currently available in Ontario, specifically the offering memorandum and the "friends and family" prospectus exemptions (both of which are available in some form in each of the provinces and territories of Canada, other than Ontario); and
  • Consider developments in other jurisdictions – in particular, the OSC will consider developments in the U.S. with respect to capital raising as set out in the Jumpstart Our Business Startups Act (or the JOBS Act).

While it remains to be seen what changes, if any, the CSA and the OSC may recommend with respect to the prospectus exemption regime, the CSA study of exempt distribution reports should provide additional insight into the appropriateness of changes. Market participants, investors and other stakeholders should also look for the forthcoming consultation note from the OSC which will explore whether the OSC should adopt any new prospectus exemptions and, if so, under what terms and conditions.

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