On December 20, 2012, the Canadian Securities Administrators, excluding Ontario and British Columbia, announced that they would be publishing harmonized interim local orders to provide exemptions from certain disclosure requirements relating to the use of the "OM exemption" under NI 45-106 and the use of Form 45-106F2 Offering memorandum for non-qualifying issuers. This new "OM-form exemption" is intended to facilitate capital raising for early stage and other small and medium sized businesses. The harmonized interim local orders will not apply in Ontario or B.C. The OM exemption was never available in Ontario and neither the OSC nor the BCSC are party to the multilateral staff notice. Local orders have now been issued in most of the participating jurisdictions.
Among other limitations, the OM-form exemption will not be available to issuers who are reporting issuers (either in a jurisdiction of Canada or the equivalent in a foreign jurisdiction) or to investment funds, mortgage investment entities or those engaged in the real estate business.
Specifically, the orders will exempt certain types of private issuers, under certain circumstances, from the requirements to use Canadian GAAP applicable to publicly accountable enterprises and to provide audited financial statements in order to rely on the current OM exemption. To qualify for the new OM-form exemption, issuers will have to limit the aggregate amount raised under the exemption to $500,000 and the distributions to an individual in reliance of the exemption may not exceed $2,000 in a 12-month period. The issuer will also have to include prescribed language regarding the risk of such investments on the face page of each offering memorandum used in reliance of this exemption.
According to the staff notice, the exemption orders are not intended to address securities-based crowdfunding. That said, the staff notice states that the contemplated disclosure requirements under the U.S. JOBS Act crowdfunding exemption "seem similar" to those under the CSA's exemption. As we've discussed in the past, Ontario is currently engaged in its own review of potential prospectus exemptions, with a consultation paper on the subject currently out for comment.
Interesting to note in relation to this new "OM-form exemption" is the strict limitation imposed on participation to no greater than $2,000 per purchaser over a 12-month period, marking a clear departure from the approach of the existing OM exemption under NI 45-106. The existing OM exemption limits participation to no greater than $10,000 (in any one transaction rather than over any period) and provides an exemption from such monetary limitation entirely if the purchaser is an "eligible investor". In effect, it would appear that the applicable CSA members have implicitly valued the incremental risk to purchasers associated with the lack of audited financial statements and Canadian GAAP compliance. It remains to be seen if they have struck the right balance, which will be borne out by its usage. In light of the restrictive $2,000 subscription threshold, it will be interesting to see if issuers will find the new "OM-form exemption" a feasible capital-raising alternative, necessitating as it does a significantly broader participation than under the existing OM exemption and with no ability to look to one or two key investors to effectively backstop a capital raise.
The CSA have invited comment on the sufficiency of the OM-form exemption until February 20, 2013. The interim orders will be valid until December 20, 2014 and the participating CSA members intend to monitor the use of the orders to determine the scope of any further possible changes. For more information, see Multilateral CSA Notice 45-311.
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