OSC consults on possible new prospectus exemptions to broaden access to the exempt market
Four "concept ideas" considered: crowdfunding, an offering memorandum exemption for Ontario, and two exemptions based on investor sophistication or advice
Dealer or adviser registration considered for funding portals
The Ontario Securities Commission has released a broad consultation paper, OSC Staff Consultation Paper 45-710 Considerations for New Capital Raising Prospectus Exemptions, which explores four "concept ideas" relating to new prospectus exemptions in Canada. This includes the OSC's preliminary thoughts about crowdfunding.
The Canadian Securities Administrators (CSA) have been engaged for some time in a review of the most commonly used prospectus exemptions for private placements in Canada (see Blakes Bulletin on Securities Regulation: Private Placement Exemption Criteria To Be Reviewed, November 2011). This latest paper from the OSC represents a broadening of consultation in this area, showing that the Canadian regulators are thoroughly examining how to foster greater access by start-ups and small and medium-sized enterprises (SMEs) to capital markets, as well as possibilities to provide investors with more access to investment opportunities through the increasingly important exempt market. It is notable that this consultation is an OSC initiative rather than a broader CSA effort, so results may not be harmonized.
The OSC Staff paper looks at the development of the exempt market in Ontario and considers both benefits and challenges of several possible new or adjusted prospectus exemptions. The OSC examines how other jurisdictions, including the U.S., the U.K. and Australia, have addressed similar or other prospectus exemptions. The OSC explores in detail four main concept ideas, "solely for discussion purposes." It is careful to note it may not introduce exemptions in this or any other form.
Crowdfunding involves funding a project by raising small amounts of money from a large number of people over the Internet. The crowdfunding concept idea would be available for both reporting and non-reporting issuers but not for investment funds or selling securityholders.
Issuers would be subject to restrictions. Since the objective is to facilitate capital raising for SMEs in Canada, the issuer, its parent and its principal operating subsidiary must be incorporated or organized, and have its head office, in Canada. The issuer would be limited to raising up to C$1.5-million in a 12-month period, through distributions of common shares, non-convertible preferred shares, non-convertible debt securities that are linked to a fixed or floating interest rate, and securities convertible into common shares or non-convertible preferred shares. The issuer would not be permitted to advertise an investment except through the funding portal or on the issuer's website.
This exemption could be used to sell securities to any investor, but investment limits would be imposed for each investor of C$2,500 in a single issuer and C$10,000 during any calendar year. A streamlined information statement would be provided at the point of sale, describing risks and providing information about the offering, the issuer, the funding portal and any other registrant involved. One year of financial statements (either audited or certified by management depending on the proceeds of the distribution) would also be provided. Investors would sign a risk acknowledgment form and would be provided with statutory rights in the event of a misrepresentation as well as a two-business-day "cooling off" period. Issuers would provide investors with annual financial statements and keep prescribed records.
All investments would be made through a funding portal registered as a dealer or adviser. The OSC would consider exempting funding portals from certain dealer or adviser registration requirements. The funding portal would be prohibited from offering investment advice or recommendations, soliciting, and compensating employees and others for solicitations or based on the sale of securities. Given its "gatekeeper" role, the funding portal would be required to take reasonable measures to reduce the risk of fraud.
Offering Memorandum Exemption
Ontario currently does not have the offering memorandum (OM) prospectus exemption available in all other Canadian jurisdictions under section 2.9 of National Instrument 45-106 Prospectus and Registration Exemptions. The OSC's concept idea for an OM exemption would be similar to the crowdfunding exemption. Distribution of securities would be based on a limited disclosure document. Two notable differences from the crowdfunding exemption would be that (i) an investment under the OM exemption would not need to be conducted through a funding portal, and (ii) there would be no requirement for the involvement of a registrant (unless the issuer or any intermediaries are in the business of trading in securities).
Sophistication from Industry Experience
The third concept idea would exempt distributions to "sophisticated" investors, without restrictions on the type of security, the size of the investment or the offering. However, the investor must have worked in the investment industry for at least one year in a position that requires knowledge of securities investments and must have a chartered financial analyst (CFA) designation, a chartered investment manager designation or an M.B.A. The investor would be provided with basic information about the offering (such as a term sheet) and would execute a risk acknowledgment.
Advice from Investment Dealer
The fourth concept idea would apply where an investor has received appropriate advice from a registered investment dealer. The investor would not need to satisfy any sophistication, income or net worth criteria. This exemption would require that an investment dealer (i) is providing advice to the investor in connection with the distribution, (ii) has an ongoing relationship with the investor, (iii) has contractually agreed that it has a fiduciary duty to act in the best interests of the investor, and (iv) is not providing advice in connection with the distribution of a "related issuer" or a "connected issuer." This concept idea would not apply to other types of registrants, such as exempt market dealers, but existing prospectus exemptions would continue for distributions to portfolio managers acting on behalf of fully managed accounts.
Private Placement Reporting
To address the need for better data on exempt market activity, consultation questions are included about mandating electronic filing of Form 45-106F1 Report of Exempt Distribution and significantly expanding that report to require additional information.
Requests for Comments
To facilitate discussion and feedback, consultation questions are provided pertaining to each concept idea. A broad range of consultation questions also include ones relating to the private issuer exemption, a closely held issuer exemption and a family exemption. The consultation period is open until February 12, 2013.
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