The term "offering memorandum" has two meanings under securities laws in Canada. In Canadian jurisdictions other than Ontario, an offering memorandum is a document prepared in the prescribed form under National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106 OM) to enable an issuer to rely on the offering memorandum exemption set out in section 2.9 of NI 45-106 (the OM exemption). This OM exemption is available in every province and territory in Canada except for Ontario. In Ontario, an offering memorandum is defined under section 1(1) of the Ontario Securities Act as:
"a document, together with any amendments to that document, purporting to describe the business and affairs of an issuer that has been prepared primarily for delivery to and review by a prospective purchaser so as to assist the prospective purchaser to make an investment decision in respect of securities being sold in a distribution to which section 53 [of the Act] would apply but for the availability of one or more of the exemptions contained in Ontario securities law, but does not include a document setting out current information about an issuer for the benefit of a prospective purchaser familiar with the issuer through prior investment or business contacts." (emphasis added)
There is no prescribed form for an offering memorandum in Ontario (the Ontario OM). There is also no private placement exemption associated with an Ontario OM unlike a NI 45-106 OM.
People often confuse using an "offering memorandum" when raising capital in Ontario with the OM exemption under NI 45-106. An Ontario OM and NI 45-106 OM are very different in form and purpose. This article explores what is an Ontario OM, Ontario OM regulatory requirements and how the Ontario OM relates to the OM exemption.
What is an Ontario OM?
As defined above, an Ontario OM captures a wide variety of written offering materials that may not immediately be considered an offering memorandum by the average person.
For something to be considered an Ontario OM, it must have the following three elements:
- It must be a document – Only documents are considered offering memorandums in Ontario. An Ontario OM may be a print or electronic document, and include a power-point presentation, on-line web material, an email or a document in any other written form. Note: Oral statements are not considered an Ontario OM, however, a written transcript of an oral statement or video could be construed as an OM.
- It must describe the business and affairs of the issuer – Any document that describes the business and affairs of the issuer may be considered on Ontario OM
- It must have been "primarily prepared" for the purpose to sell the issuer's securities – Only documents "primarily prepared" in contemplation of soliciting an investment from a prospective investor will be considered an Ontario OM. Documents such as green sheets, term sheets (see exception below), investor presentations, investment summaries and private placement or offering memoranda, including NI 45-106 OMs (if provided to Ontario investors in reliance on another prospectus exemption), are considered Ontario OMs. What the document is called is irrelevant. Note: Product sales brochures, technical reports, internal reports etc., if primarily prepared for other purposes, are generally not considered an Ontario OM as these materials are primarily prepared to sell product or advance the business of the company.
Documents not considered an Ontario OM
The following documents are not considered an Ontario OM:
1. documents prepared for the benefit of:
- existing investors of an issuer such as quarterly or annual reports; or
- a prospective investor familiar with the issuer through prior business contacts. Arguably, this means an individual who has had sufficient prior business dealings with a director, executive officer, founder or control person of an issuer to be in a position to assess their capabilities and trustworthiness, and
2. a term sheet. The Companion Policy to NI 45-106 defines a term sheet as a document that "represents a skeletal outline of the features of a distribution without dealing extensively with the business or affairs of the issuer of the securities being distributed." Issuers are reminded that just because a document is called a 'term sheet' does not mean it is. It could in fact be an Ontario OM as a matter of law in circumstances where the document goes beyond a skeletal outline and describes the business and affairs of an issuer.1
Ontario OM regulatory requirements
Other than for government incentive securities, there is no legal obligation to prepare an Ontario OM for distributing securities under a prospectus exemption in Ontario. Issuers cannot sell securities to an Ontario investor using an Ontario OM if a prospectus exemption does not exist to sell to that investor. Prospectus exemptions that issuers may rely on in Ontario include the private issuer exemption under section 2.4 of NI 45-106, the accredited investor exemption under section 2.3 of NI 45-106 and the minimum amount or $150,000 exemption under section 2.10 of NI 45-106, among other available exemptions.
As previously mentioned, there is no prescribed form for an Ontario OM. If an issuer elects to voluntarily deliver an Ontario OM to potential investors in Ontario, it must include a statutory right of action that provides an investor with a right of rescission or right to sue for damages, as set out in subsection 130.1(1) of the Ontario Securities Act.
If an Ontario OM includes forward-looking information (FLI), issuers are well advised to include reasonable cautionary language identifying FLI as such, the material factors and assumptions they relied upon in preparing the FLI and ensure that it had a reasonable basis for making the FLI (See OSC Staff Notice 51-721 Forward-Looking Information Disclosure). These steps will provide the issuer with a defence under section 132.1 of the Ontario em>Securities Act from liability for misrepresentation of FLI in the Ontario OM.
If an Ontario OM is used by an issuer to sell securities, it must be filed with the Ontario Securities Commission (the OSC), with any amendments, within ten days of the sale of the issuer's securities unless the document is otherwise filed.
The OM exemption, the NI 45-106 OM and the Ontario OM
The OM Exemption is currently not available in Ontario. The OSC recently announced on December 4, 2013 that it intends to publish new capital raising prospectus exemptions for a 90-day public comment period in the first quarter of 2014. One of these proposed exemptions is the OM exemption albeit likely modified by Ontario. The earliest effective date, if these proposed exemptions are adopted, would be sometime in the second quarter of 2014. In the meantime, issuers inside and outside of Ontario planning to sell securities to Ontario residents must rely on another available exemption from the prospectus requirement of the Ontario Securities Act .
NI 45-106 OMs used in Ontario are considered to be an Ontario OM in the Province. It must include the same statutory right of action required in all Ontario OMs. Issuers are also well advised to follow the FLI guidance discussed above.
Ontario OMs, unless they meet the form requirements of NI 45-106 OMs, may not be used outside of Ontario to rely on the OM exemption. Ontario OMs, however, may be used in other provinces and territories outside of Ontario when relying on prospectus exemptions other than the OM exemption.
For additional guidance on what is a term sheet, see the definition of "standardized term sheet" as defined under subsection 13.5(1) of National Instrument 41-101 General Prospectus Requirements (NI 41-101). A term sheet in this instance is not being provided in connection with securities being sold in a distribution pursuant to a prospectus exemption, but for a registered prospectus offering. A standardized term sheet delivered in connection with a preliminary prospectus is not considered an Ontario OM under subsection 13.5(1) of NI 41-101.
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.