Canada: Ontario's Proposed Prospectus Exemptions: Existing Security Holder Exemption

Of the new prospectus exemptions proposed to be adopted by the Ontario Securities Commission (OSC), the "existing security holder" exemption represents, in many ways, a significantly streamlined avenue for reporting issuers to raise funds from their existing securityholders. While similar in many ways to the corresponding exemption that recently came into force in other Canadian jurisdictions (the "Counterpart Exemption"), the "Ontario Exemption" as proposed includes certain additional requirements, which we examine in detail below.

As we previously discussed, on March 20, 2014, the OSC published for comment the Ontario Exemption along with three other proposed prospectus exemptions. These new exemptions flow from the key themes noted in OSC Notice 45-712 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising, including the need to facilitate capital raising for small and medium-sized enterprises, the importance of harmonizing exemptions across Canada and the importance of regulatory monitoring and oversight in the exempt market.

The proposed Ontario Exemption would allow issuers listed on the Toronto Stock Exchange, TSX Venture Exchange or Canadian Securities Exchange to raise capital from existing security holders.  The OSC lists two primary policy rationales for the exemption, namely (i) allowing existing security holders to invest in reliance on reporting issuer disclosure and (ii) enhancing retail security holder access to primary offerings.

The Ontario Exemption is largely based on the Counterpart Exemption adopted by securities regulatory authorities in all Canadian jurisdictions, other than Ontario and Newfoundland and Labrador, on March 13, 2014; however, there are some notable differences. Under both exemptions (as discussed in our March 14 post), issuers will have to satisfy the following requirements:

  • All of the issuer's periodic and timely disclosure filing obligations must be satisfied;
     
  • An offering news release must be issued and filed, containing reasonable details of the offering and the proposed use of proceeds including details with respect to the proposed allocation of the securities;
     
  • The offering may only consist of a listed security or a unit consisting of a listed security and a warrant;
     
  • The offering must be made available to all persons who reside in jurisdictions where the exemption or a similar exemption is available and who, as of the record date (which must be at least one day prior to the day the issuer issues its offering news release), held a listed security of the issuer of the same type as the listed security being offered; and
     
  • The subscription agreement must provide investors with a contractual right of action in the event of a misrepresentation in the issuer's continuous disclosure record.

Under the Ontario Exemption, the following additional conditions would apply:

  • The issuer must have been a reporting issuer for not less than 12 months, or have become a reporting issuer by filing and obtaining a receipt for a prospectus;
     
  • Subject to the investment limits described below, the issuer must allocate existing security holders a pro rata portion of the offering – any securities that are not taken up by existing security holders in accordance with the foregoing may then be allocated to other existing security holders at the discretion of the issuer;
     
  • The issuer must file a report of exempt distribution in proposed Form 45-106F11.

The OSC has proposed the first requirement above on the grounds of investor protection, to ensure that the issuer has a base disclosure record. As the OSC is concerned that the exemption could be used in a manner that results in security holders suffering significant dilution, the second requirement has been proposed to provide existing security holders with the right to avoid dilution and to ensure that the issuer does not unfairly "cherry pick" specific existing security holders for additional investment opportunities. We note, however, that issuers would not be bound by the pro rata requirement with respect to any securities not taken up under the original allocation.

With respect to the requirement to provide investors with a contractual right of action, issuers must represent to purchasers in the subscription agreement that the issuer's "core documents" and "documents" (as defined under Section 138.1 of the Securities Act (Ontario)) do not contain a misrepresentation and that there is no material fact or material change related to the issuer which has not generally been disclosed.  Further, the OSC is considering extending the application of the statutory secondary market civil liability provisions in the Act and those that apply to misrepresentations in prescribed offering memoranda, to an offering under the Ontario Exemption and any related offering documents.

Unlike the Counterpart Exemption, the Ontario Exemption is not available to investment fund issuers. The OSC has noted that the exclusion of investment funds is consistent with the objective of facilitating capital raising for start-ups and small and medium-sized enterprises.

Although there is no requirement for securities sold under the Ontario Exemption to be sold through a registrant, provided that the issuer does not carry on the business of trading in securities (and is therefore itself required to register), IIROC dealers and EMDs involved in any distribution under the Ontario Exemption will have to comply with "know your client" and "suitability" obligations. In addition, an existing security holder will be limited to investing no more than $15,000 per year in the issuer under the Ontario Exemption, unless the security holder has obtained suitability advice from a registered investment dealer. The $15,000 cap is higher than the cap for each of the proposed offering memorandum and crowdfunding exemptions on the grounds that the issuer will be a reporting issuer and existing security holders will already have made a decision to invest in the issuer's securities. This cap is harmonized with the cap under the Counterpart Exemption. The aggregate offering size would also be limited to 100% of the issuer's outstanding securities of the same class.

Issuers relying on the Ontario Exemption will not technically have to provide an offering document; however, as described above, issuers will have to extend a contractual right of action for misrepresentations.  Any offering materials (other than a subscription agreement) must also be filed on the same day that they are provided to existing security holders and the issuer will be required to file a material change report.  As well, the need for all material facts to be disclosed, may well require additional disclosure to prospective investors.

Similar to the "accredited investor" exemption, the issuer will be required to file a report of exempt distribution within 10 days of the offering. A report of exempt distribution in proposed Form 45-106F11 will need to be filed by issuers relying on the Ontario Exemption. The proposed new form is intended to provide increased information on exempt market activity and to assist in monitoring compliance. As is the case under the "accredited investor" and other capital raising exemptions, the first trade of a security acquired under the Ontario Exemption will be subject to a four month hold.

The Ontario Exemption would be given effect by amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions, along with amendments to National Instrument 45-106 Prospectus and Registration Exemptions. Comments are due by June 18, 2014. 

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
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
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