Canada: Ontario Proposes Four New Capital Raising Prospectus Exemptions

On March 20, 2014, the Ontario Securities Commission (OSC) published for comment proposed rules for four new exemptions to the prospectus requirement:

  1. an offering memorandum prospectus exemption (OM Exemption)
  2. a family, friends and business associates prospectus exemption (FFBA Exemption)
  3. an existing security holders prospectus exemption (Existing Holders Exemption)
  4. a crowdfunding prospectus exemption (Crowdfunding Exemption)

The proposed exemptions are intended to facilitate the ability of both reporting issuers (i.e. public entities) and non-reporting issuers (i.e. private entities) to raise capital from potential investors in Ontario without having to file a prospectus.

The new exemptions are the result of the OSC expanding the scope of an exempt market review initially focused on the accredited investor and minimum amount investment prospectus exemptions, to one focused on facilitating greater access to capital, particularly for start-ups and small and medium-sized businesses, at different stages in their growth and business cycles.

Comments on the proposed exemptions must be received by the OSC by June 18, 2014.

Key Features of the Proposed Exemptions

A summary of the OSC's proposed new exemptions, and a discussion of similar proposals in a number of other Canadian jurisdictions, follows. We should note, however, that due to the potential interest of these prospectus exemptions (and exempt market reform more generally) to issuers and their counsel, we anticipate that the OSC's invitation for comment on these latest proposals could result in substantive differences between the exemptions in their current proposed form, and the form of the exemptions that are ultimately implemented by the OSC. We look forward to providing you with an overview of the final exemptions once implemented.

OM Exemption

The OM Exemption would be available to reporting and non-reporting issuers and would allow businesses to raise capital based on an offering memorandum (rather than a prospectus) being made available to prospective investors. The OSC is currently proposing to harmonize the form of offering memorandum with that currently used in other Canadian jurisdictions.

The proposed rules place no limit on the amount of money an issuer can raise or the number of times an issuer can go to market, and place no limitations on the length of time an offering can remain open. However, notwithstanding an issuer's ability to raise an unlimited amount of money per offering pursuant to the OM Exemption, the OSC has proposed the following investment limits on investors who are individuals: (i) the amount an individual who does not meet the definition of "eligible investor" would be permitted to invest would be capped at $10,000 per year, and (ii) the amount an individual who does meet the definition of "eligible investor" would be permitted to invest would be capped at $30,000 per year. For those familiar with the existing criteria in certain other Canadian jurisdictions for determining whether an individual is, or is not, an "eligible investor," it is important to note that for purposes of the OM Exemption the calculation of the net asset test for individuals would exclude such individual's primary residence. However, the threshold amount of net assets would be reduced from $400,000 to $250,000. In addition, the OSC's proposal does not permit investment funds to rely on the exemption; certain specified derivatives and structured finance products cannot be distributed under the exemption; and investment dealers that are affiliates of the issuer are prohibited from participating in the distribution. The OSC is also proposing that marketing materials be incorporated by reference into the offering memorandum and be delivered to the OSC.

For non-reporting issuers, use of the OM Exemption would require the issuer to deliver to the OSC and make available to purchasers (for example, by placing them on a public website), audited annual financial statements within 120 days of the issuer's year-end, together with a notice disclosing the use of the aggregate proceeds raised by the issuer pursuant to the OM Exemption. In addition, non-reporting issuers would be required to notify their investors within 10 days of certain prescribed events, including significant changes to the issuer's business or capital structure, certain material transactions and changes in its directors and officers.

Other Jurisdictions

Provided the OM Exemption is implemented, Ontario would be the last of the Canadian jurisdictions to adopt an offering memorandum exemption. The OSC has based the OM Exemption on one of two existing prospectus exemptions in section 2.9 of National Instrument 45-106 – Prospectus Exemptions (NI 45-106), albeit with some key differences. In Alberta, for example, the current offering memorandum exemption is available for a distribution where the purchaser is an "eligible investor" or the acquisition cost does not exceed $10,000. In contrast to the Ontario proposal, the current regime in Alberta does not limit the amount an eligible investor can invest, does not require filing audited annual financial statements, does not prohibit the distribution of complex securities and does not require all marketing materials to form part of, and be incorporated by reference into, the offering memorandum.

Several other Canadian jurisdictions have published for comment proposed amendments to their offering memorandum exemptions, including New Brunswick, which has proposed to conform its existing offering memorandum exemption with the one proposed by the OSC. In addition, the securities administrators in Alberta, Quebec and Saskatchewan have recently proposed exemptions to their existing proposals, which differ somewhat from what the OSC is proposing. For example, these proposals do not contemplate changing the definition of "eligible investor," nor do they propose to prohibit the use of the offering memorandum exemption by issuers that are non-redeemable investment funds, mutual funds that are reporting issuers or investment dealers that are affiliates of the issuer.

FFBA Exemption

The FFBA Exemption would be available to reporting and non-reporting issuers and would allow businesses to raise capital by tapping into their network of family, close personal friends and close business associates, without having to file a prospectus. The FFBA Exemption would also be available to a selling security holder if the conditions to the exception are met.

The proposed rules place no limit on the amount of money an issuer can raise or the number of times an issuer can go to market, and the proposed rules place no caps on the amount that any individual investor can invest. In addition, unlike the OM Exemption, which also applies to non-reporting issuers, it would not be a requirement for non-reporting issuers to provide ongoing disclosure to investors.

In connection with the proposal, the OSC proposes to provide expanded guidance on the meaning of close personal friend and close business associate; however, the onus to establish that a close relationship exists will be on the issuer. Interestingly, the OSC has noted that it will not generally consider an individual with whom a friendship is primarily founded on participation in an Internet forum or social media to be a close personal friend or close business associate.

The FFBA Exemption would not be available to investment funds or for distributions of novel or complex securities. Furthermore, under the FFBA Exemption, advertising to solicit investors would be prohibited, as would the payment of any commission, finder's fee or similar fee.

Other Jurisdictions

The FFBA Exemption is intended to provide start-ups and other early-stage issuers with better access to capital from their networks than is currently permitted under the existing founder, control person and family exemption in section 2.7 of NI 45-106. Implementation of the FFBA Exemption would repeal section 2.7 of NI 45-106 and would harmonize the FFBA Exemption with the existing friends, family and business associates exemption in section 2.5 of NI 45-106 already adopted by all other Canadian jurisdictions (except Saskatchewan).

Existing Holders Exemption

The Existing Holders Exemption would only be available to reporting issuers (other than investment funds) whose securities are listed on the Toronto Stock Exchange, the TSX Venture Exchange or the Canadian Securities Exchange. The exemption would allow a reporting issuer to raise capital from its existing security holders without a prospectus, provided the securities to be distributed pursuant to the exemption are either listed on one of the foregoing exchanges (or are units consisting of the listed security and a warrant to acquire the listed security), and the issuer has been a reporting issuer for at least a year. Pursuant to this exemption, the securities offered pursuant to the offering must be allocated among existing security holders on a pro rata basis, after which any securities not taken up by existing security holders can be allocated by the issuer, at its discretion, to its other existing security holders. It will be interesting to see how issuers will structure an offering in reliance on the Existing Holders Exemption, especially issuers that are relatively widely held.

The proposed rules place no limit on the number of times an issuer can go to market, however, the amount of money an issuer would be able to raise is limited by the fact that an offering cannot result in an increase of more than 100% of the outstanding securities of the same class being offered. Furthermore, unless an investor has obtained advice from an investment dealer (and if the investor is a Canadian resident, the investment dealer is registered as such in the applicable jurisdiction), the amount that an investor would be able to invest would be capped at $15,000 per year.

Other Jurisdictions

On March 13, 2014, each of the other Canadian securities regulators (except Newfoundland and Labrador) provided notice that they either have, or will adopt, an exemption similar to the Existing Holders Exemption. The exemption adopted by the other jurisdictions is similar to the one proposed by the OSC, except that it does not contain the obligation that an issuer has been a reporting issuer for at least a year; it is available to reporting issuers that are investment funds; and it does not contain the pro rata allocation requirement.

For a further discussion of the Existing Holders Exemption, please see our recent blog post, Prospectus Exemption for Distributions to Existing Security Holders – A New Tool for Reporting Issuers to Raise Equity.

Crowdfunding Exemption

The Crowdfunding Exemption would be available to reporting and non-reporting issuers and would allow issuers incorporated or organized and with head offices located in Canada and a majority of directors resident in Canada to raise capital pursuant to a proposed disclosure document called a "crowdfunding offering document," rather than a prospectus. The exemption would not be available to investment funds, to non-reporting real estate issuers or for distributions of novel or complex securities.

The proposed rules limit the amount of money that an issuer can raise to $1.5 million per year and place a limit on the length of time an offering can remain open to 90 days. In addition, the completion of an offering would be subject to a subscription for a minimum offering amount that must be disclosed in the offering document, and the issuer having sufficient financial resources to achieve the next milestone or activity set out in its business plan. The OSC has also proposed restrictions on solicitation and advertising, including how offering materials can be made available to potential investors through a "portal website." In addition, the OSC has proposed that the amount an investor would be able to invest is capped at $2,500 per offering and $10,000 per year.

For non-reporting issuers, use of the Crowdfunding Exemption would result in the issuer having to deliver to the OSC and make available to purchasers (for example, by placing them on a public website), audited annual financial statements within 120 days of the issuer's year-end, together with a notice disclosing the use of the aggregate proceeds raised by the issuer pursuant to the Crowdfunding Exemption. Disclosure of certain specified fundamental events would also be required.

A key aspect of the proposed regulatory framework regarding the Crowdfunding Exemption is the concept of a "crowdfunding portal" through which investments under the exemption must be made. The portals would have to comply with general registrant requirements applicable to exempt market dealers, with certain exemptions and would be prohibited from certain activities.

Other Jurisdictions

The Crowdfunding Exemption is substantially similar to the crowdfunding prospectus exemption proposed by the securities administrators in Quebec, Saskatchewan, Manitoba, New Brunswick and Nova Scotia. In addition, the securities administrators in these jurisdictions, together with British Columbia have also proposed a start-up crowdfunding prospectus exemption.

The proposed start-up crowdfunding exemption is aimed at earlier stage issuers and differs from the Crowdfunding Exemption in several key ways, including the following: (i) it is only available to non-reporting issuers; (ii) it has a lower maximum allowable investment of $1,500 per investor; (iii) it has a lower maximum offering of $150,000, and an issuer can only complete up to two offerings under this exemption per year; (iv) the issuer must provide a basic offering document to investors, but it is not required to include financial statements, and will not be subject to ongoing continuous disclosure requirements following the offering; (v) the online funding portal through which all investments must be made is not required to be registered as a dealer and is not subject to dealer qualification requirements; and (vi) the funding portal cannot hold or have access to investor funds.

The securities administrators in Quebec, Saskatchewan, Manitoba, New Brunswick and Nova Scotia have indicated that their proposed crowdfunding and start-up crowdfunding exemptions are intended to be complementary and to offer issuers at various stages of development the opportunity to raise financing. The securities commission in British Columbia has only proposed the start-up crowdfunding exemption, but has indicated that it will monitor the developments with respect to the more general crowdfunding exemption in other jurisdictions. The Alberta Securities Commission has not proposed either type of crowdfunding exemption, but will consider the public comments provided in the other jurisdictions.

For further information on the Crowdfunding Exemption, please see our recent blog post, OSC Publishes Progress Report on Exempt Market Review and Crowdfunding.

Implications of the Proposed Exemptions to Issuers

The Existing Holders Exemption and the Crowdfunding Exemption have been designed to further the OSC's objective of facilitating capital raising by start-ups and small to medium -sized businesses. In addition, the Crowdfunding Exemption will enable smaller investors to obtain equity stakes in start-ups rather than simply receiving rewards of products or services. It is the OM Exemption and the FFBA Exemption that will likely be most appealing to more seasoned issuers. In particular, the OM Exemption will be useful to reporting and non-reporting issuers looking to raise an unlimited amount of capital, over any length of time, from an undefined investor base, with the added benefit of higher caps on how much any one investor is able to invest than the amounts available under the Existing Holders Exemption and the Crowdfunding Exemption. The FFBA Exemption will be useful to reporting and non-reporting issuers looking to raise an unlimited amount of capital, over any length of time, from their internal networks, with the added benefit of there being no cap on the amount any one investor is able to invest.

From an administrative perspective it is worth noting that, together with the proposed exemptions, securities regulators (including the OSC) have also proposed changes to the post-offering reporting obligations, which would impose more cumbersome reporting obligations on issuers. In addition, in connection with offerings pursuant to the OM Exemption, the FFBA Exemption and the Crowdfunding Exemption, the OSC has proposed that issuers will be required to obtain a risk acknowledgment form from all investors who participate in an offering.

To view original article, please click here.

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.

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

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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