Canada: CSA Adopts Measures To Facilitate Access To Capital By Small Businesses

Highlights

  • The securities regulatory authorities in all Canadian provinces and territories except Ontario and British Columbia have issued or have announced their intention to issue harmonized interim local orders that provide exemptions from certain financial statement-related and audit requirements of Form 45-106F2 – Offering memorandum for non-qualifying issuers.
  • Under the OM-form exemption orders, certain issuers relying on the OM exemption are exempt from:
    • the requirement to obtain an audit on financial statements or other financial information
    • the requirement for financial statements to be prepared using Canadian GAAP applicable to publicly accountable enterprises
  • The participating jurisdictions are inviting comments on whether the OM-form exemption orders sufficiently address the financing needs of small businesses and SMEs.

On December 20, 2012, securities regulators in all Canadian provinces and territories except Ontario and British Columbia (the participating jurisdictions) issued Multilateral CSA Notice 45-311 – Exemptions from Certain Financial Statement-Related Requirements in the Offering Memorandum Exemption to Facilitate Access to Capital by Small Businesses (the Notice). In accordance with the Notice, harmonized interim local orders (the OM-form exemption orders) providing exemptions from certain financial statement-related and audit requirements of Form 45-106F2 – Offering memorandum for non-qualifying issuers (Form 45-106F2) have been issued by most of the participating jurisdictions, with the others expected to follow.

Background

In Canada, securities legislation requires that purchasers of securities be provided with a prospectus approved by the jurisdiction in which a purchaser is resident that contains full, true and plain disclosure of all material facts relating to the securities being offered. There are, however, broad exemptions from this prospectus requirement.

National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106) sets out most of the available exemptions from the prospectus requirement, including the offering memorandum (OM) prospectus exemption (the OM exemption). As described further below, the OM exemption, which is available in all Canadian jurisdictions other than Ontario, allows an issuer to raise money from investors by providing those investors with an OM in prescribed form that the issuer certifies to be accurate, but without entailing approval of the OM by securities regulators. While the OM exemption was intended to provide a variety of issuers with a cost-effective capital-raising option, according to the Notice, early-stage businesses and small and medium enterprises (SMEs) have indicated that the OM exemption is too costly to use, mainly due to the requirement to include audited financial statements in the OM.

The OM exemption is a separate exemption from the accredited investor exemption and the C$150,000 minimum amount exemption, each of which may involve the use of a so-called voluntary OM. A voluntary OM is different from the OM required in the OM exemption because a voluntary OM does not have prescribed content, although a description of rights of action is required in those jurisdictions where such rights of action exist.

The requirements of the OM exemption include the following:

  • In most provinces in which the OM exemption applies, including Quebec and Alberta, the purchaser must either be an "eligible investor" or have an acquisition cost that does not exceed C$10,000. Eligible investors include individuals meeting certain tests relative to net assets or net income, which are generally not as stringent as those for accredited investors. In British Columbia and certain Atlantic provinces, however, there is no restriction on the eligibility of the purchaser or the investment size.
  • As mentioned, an OM having certain prescribed content, including financial statements which are audited and prepared using Canadian GAAP applicable to publicly accountable enterprises must be used.
  • While an issuer may conduct an offering directly, if it uses an intermediary, the intermediary must be a registered dealer.
  • Purchasers must sign a prescribed form of risk acknowledgement statement.
  • Withdrawal rights as well as statutory rights of action must be provided to purchasers.
  • Unlike a voluntary OM, the OM required under the OM exemption must contain a certificate certifying that it does not contain a misrepresentation.
  • If the information contained in the OM is outdated, the OM must be refreshed in order for the issuer to be able to sell securities.
  • Although not subject to approval by securities regulators, the OM must nonetheless be filed with securities regulators in which the distribution takes place.
  • Unlike a voluntary OM, the OM required under the OM exemption must be translated into French if the offering is conducted in Quebec.

OM-Form Exemption

The OM-form exemption orders are designed to provide a harmonized alternative for small scale financings by early stage businesses and SMEs. To achieve this, the orders provide exemptions from the following requirements of Form 45-106F2, the required form for early-stage businesses and SMEs using the OM exemption:

  • the requirement to obtain an audit of financial statements or other financial information
  • the requirement for financial statements to be prepared using Canadian GAAP applicable to publicly accountable enterprises.

An issuer can rely on the OM-form exemption orders subject to certain conditions, including the following:

  • the issuer is not a reporting issuer, investment fund, mortgage investment entity or an issuer engaged in the real estate business
  • the issuer is not distributing complex securities, such as mortgage-backed securities or derivatives
  • the amount raised by an issuer group (the issuer and certain related issuers) under the OM-form exemption orders must never exceed C$500,000
  • the aggregate acquisition cost of all securities distributed under the OM-form exemption orders by an issuer group to a purchaser in a distribution and in the 12 months preceding the date of such distribution must not exceed C$2,000.

The OM-form exemption orders are in effect until December 20, 2014. Note that British Columbia, despite having the OM exemption, chose not to participate in the Notice and thus no OM-form exemption order is in effect in such jurisdiction.

Relationship to Crowdfunding

According to the Notice, the OM-form exemption is not intended to address or be a response to crowdfunding, a type of capital raising which is currently permitted in a few international jurisdictions that involves raising small amounts of money from a large number of investors over the Internet via a website, generally referred to as a funding portal.

However, the Notice indicates that the participating jurisdictions have been and will continue to monitor initiatives that develop in other jurisdictions related to financing of early-stage businesses and SMEs, including crowdfunding. In particular, the Notice points out that although crowdfunding is not yet permitted in the U.S. and will not be until the Securities and Exchange Commission and other regulators make the necessary rules to provide a regulatory framework, the contemplated disclosure requirements for issuers using the crowdfunding exemption under the U.S. Jumpstart our Business Startups Act seem similar to those under the OM exemption.

The Notice notes that another important aspect of securities-based crowdfunding is the regulation applicable to the funding portals (the entities proposing to operate websites through which issuers may offer their securities to potential purchasers). According to the participating jurisdictions, the operation of a funding portal to intermediate trades would trigger the dealer registration requirement under National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations. The Notice further notes that the regulation of funding portals is developing in various ways in different international jurisdictions. At this time, the participating jurisdictions are not proposing a particular regulatory model for funding portals and are prepared to consider applications for registration on a case-by-case basis.

Comments

The participating jurisdictions are inviting market participants to comment on whether the conditions in the OM-form exemption orders sufficiently address the financing needs of early-stage businesses and SMEs while still providing appropriate investor protection, and whether they should consider other modifications to the OM exemption. In addition, the participating jurisdictions encourage market participants to review and comment on the questions raised in Ontario Securities Commission Staff Consultation Paper 45-710 – Considerations For New Capital Raising Prospectus Exemptions which was recently published. See our January 2013 Blakes Bulletin on Securities Regulation: OSC Explores New Capital Raising Prospectus Exemptions. Written comments may be submitted by February 20, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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