Canada: OSC Releases Progress Report On Its Exempt Market Review

Last Updated: September 19 2013
Article by Lance Bredeson

Co-author: Cody Mann, student at law

In August 2013, the Ontario Securities Commission (the "OSC") published OSC Notice 45-712 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising (the "Progress Report"). The Progress Report provides an update on the OSC's review of the prospectus exempt market which was initiated in June 2012 (the "Review"), as well as identifies key themes of the Review. Perhaps most significantly, the Progress Report identifies the following four capital raising prospectus exemptions it will be considering going forward: (i) crowdfunding; (ii) friends, family and business associates; (iii) offering memorandum; and (iv) a streamlined rights offering exemption and possible exemption based on a reporting issuer's continuous disclosure and existing security holder base.

I. Update and key themes

The Progress Report provides an update of the work that has been completed to date in respect of the Review. The OSC reported that it has collected extensive data on exempt market activity and on the capital raising environment for small and medium sized enterprises ("SMEs"). In 2012, the amount of exempt market capital raised in Ontario was $104 billion, an increase of 20% from 2011. Notably, the accredited investor exemption accounted for 90% of the total exempt market capital in 2012. The OSC also found that the capital raising environment for SMEs is mainly composed of personal finances and credit from financial institutions. Venture capital investment in Canada, on the other hand, appears to be becoming more conservative, concentrating investment in later-stage deals as opposed to early-stage deals. The OSC has concluded that start-ups and innovative businesses are at risk of encountering financing constraints. Therefore, enhancing the capital raising options for these SMEs is warranted.

Between January and June 2013, the OSC conducted extensive consultation with stakeholders within the capital markets sector. Through this consultation the following four key themes emerged:

  • need to facilitate SMEs' capital raising through expanded prospectus exemptions while maintaining investor protection. Feedback to the OSC has indicated that SMEs face challenges in raising capital. Therefore, new or expanded prospectus exemptions should be considered to assist in raising capital at different stages of a SME's business cycle. However, investors must be made aware of the high risk of failure of the SMEs they are investing in.
  • importance of harmonizing capital raising prospectus exemptions across Canada. Feedback to the OSC has indicated that capital raising rules in the exempt market should be harmonized across Canada. The goals of such harmonization are to simplify the capital raising process, reduce administrative burdens for investors and reduce capital raising costs for SMEs.
  • emergence of crowdfunding as a new way for some start-ups and SMEs to raise capital. The OSC found there to be significant stakeholder support for introducing a crowdfunding exemption allowing issuers to use the internet to access large numbers of investors in a cost-effective manner. Supporters cautioned that inappropriate or excessive regulation could detract from the viability of crowdfunding as an efficient and cost-effective means of raising capital. Conversely, others were highly critical of adopting a crowdfunding exemption and expressed concern that such an exemption would result in too large a degree of informational asymmetry and too great a risk of fraud and potential for investor harm.
  • importance of regulatory monitoring and compliance oversight in the exempt market. As new and amended prospectus exemptions are considered, the OSC is considering methods to improve the monitoring and oversight of exempt market activity. For example, the experience of other members of the Canadian Securities Administrators (the "CSA") with the offering memorandum exemption (the "OM Exemption") has revealed a number of deficiencies principally relating to the adequacy of disclosure in offering memorandums. The OSC notes that these shortfalls confirm that educational outreach, monitoring, oversight and regulation in the exempt market must be addressed as new and expanded prospectus exemptions are developed.

II. Future work

Exemptions being considered

The OSC stated that it will continue to work on the following four new capital raising prospectus exemptions:

  • crowdfunding exemption – the OSC recognizes that for crowdfunding to be a viable method of raising capital for SMEs its staff must continue to work on developing an appropriate regulatory framework. The OSC lists the following as appropriate crowdfunding measures: (i) limits of $2,500 on a single investment and $10,000 in a 12 month period; (ii) mandatory risk acknowledgement; and (iii) a two business day cooling off period. The OSC stated that it aims to further refine issuer restrictions and investor protection measures such as: (i) the appropriate limit for the amount that can be raised in a 12 month period; and (ii) the specific documentation that must be disclosed at the point of sale.
  • family, friends, and business associates exemption – the OSC recognizes it would be beneficial for Ontario's SMEs to have greater access to capital from their network of family, friends and business associates. The OSC staff will consider adopting a broader family, friends and business associates exemption, based on Section 2.5 of NI 45-106, with the aim of substantially harmonizing the exemption across Canada. The OSC restated its concern that the exemption allows securities to be issued to an unlimited number of undefined "close personal friends" and "close business associates". To mitigate this concern, the OSC will consider if additional conditions, such as: (i) requiring relevant officers, directors and founders to certify the nature of their relationship with the issuer; and (ii) requiring the investor to sign a risk acknowledgment, could be added to the exemption.
  • offering memorandum exemption – the OSC recognizes that as issuers develop and their need for capital increases, there is a concurrent need to access investors who can invest larger amounts of money. Such amounts are generally not available through crowdfunding or other early-stage prospectus exemptions. The OSC intends to propose an OM Exemption in Ontario that is substantially harmonized with the existing Alberta offering memorandum model.
  • streamlined rights offering exemption and possible exemption based on a reporting issuer's continuous disclosure and existing security holder base – the OSC is currently considering the following two proposals.

Amendments to streamline the rights offering prospectus exemption

Section 2.1 of NI 45-106 allows an issuer to distribute rights to acquire its securities to the issuer's existing security holders subject to the following conditions: (i) the issuer must send to its security holders a rights offering circular; (ii) the issuer cannot issue more than 25% of the number of outstanding securities in the class of securities to be issued under the offering; and (iii) restrictions on the time period for the exercise of rights prescribed. The TMX recommended the following amendments to the rights offering exemptions: (i) reducing the CSA review period for a rights offering circular from ten days to three business days; (ii) removing the 25% dilution ceiling for rights offering on the basis that prospectus-level disclosure is not necessary for existing security holders who are already familiar with the issuer and can access the issuer's continuous disclosure on SEDAR; (iii) reducing the minimum period during which rights must be exercisable from 21 days to 10 business days on the basis that existing security holders do not need 21 days to make an informed investment decision as they are also familiar with the issuer and the investment decision of a secondary market purchaser is not primarily based on receipt of a disclosure document; and (iv) allow for electronic delivery of documents to reduce time and cost. The OSC stated that it will work with other CSA members to determine if the efficiency and effectiveness of the existing rights offering exemption can be improved.

Prospectus exemption for existing security holders of a listed issuer

The OSC is currently considering an existing security holder exemption. The key elements of this exemption are: (i) an issuer listed on a recognized stock exchange would be permitted to issue its securities to its current security holders on a private placement basis subject to certain terms and conditions; (ii) a security holder would have to have held the issuer's listed securities for at least 60 days prior to execution of a subscription; (iii) a security holder could purchase up to $10,000 of the issuer's securities in a 12 month period; (iv) eligible securities would include those of the class that were listed, securities that were convertible into listed securities, preferred shares and non-convertible debt securities; (v) dilution would be limited as contemplated by the current exchange rules for private placements, which differ depending on whether the issuer is listed on the TSX or TSX Venture Exchange; and (vi) a listed issuer would have to be in good standing under securities laws. The OSC stated they will consult with other CSA members to determine whether there is a need to develop a separate exemption for distributions to an issuer's existing security holders.

Exemptions no longer being considered

The Progress Report identifies the following exemptions that will not be considered by the OSC going forward:

  • investor sophistication exemption - an exemption proposed for investors who have investment knowledge but do not qualify for the accredited investors exemption.
  • registrant advice exemption - an exemption proposed for investors that have an ongoing relationship with the investment dealer or advice from the investment dealer in respect of the distribution.
  • changes to the existing private issuer exemption – a proposal to re-consider the 50 security holder limit of the private issuer exemption and amend the exemption accordingly.
  • re-introduction of the closely-held issuer exemption – a proposal to re-introduce an exemption, previously in force from 2001 to 2005, which allowed issuers to raise a specified amount of money from a specified number of investors, without requiring the investors to meet certain qualifications that would be required under the private issuer exemption.

The OSC is not going forward with these exemptions because it has only observed limited support for them in the feedback that it has received.


The OSC is in the process of completing a broad review of the exempt market, specifically to consider whether any new prospectus exemptions should be implemented in response to recent market changes. So far, the OSC has confirmed that there is a need to facilitate capital raising for SMEs through expanded prospectus exemptions. In the Progress Report the OSC lists the following four prospectus exemptions as exemptions they are going to consider implementing: (i) crowdfunding; (ii) family, friends and business associates; (iii) offering memorandum; and (iv) streamlined rights offering exemption.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2013 McMillan LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Thompson Dorfman Sweatman LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions