Canada: Recent Proposals For More Flexible Capital Raising In The Exempt Market

As part of their ongoing efforts to update and modernize the exempt market regime, members of the Canadian Securities Administrators (CSA) have been consulting broadly with market participants.   A number of recent changes that have come into effect and other proposed amendments, when grouped together, point out a positive trend towards a more flexible environment for raising capital in Canada.   These include:

  • a prospectus exemption permitting listed issuers to raise money by distributing securities to their existing security holders;
  • the proposed adoption in Ontario of the offering memorandum exemption and the friends, family and business associate exemption that have been in place in all other jurisdictions in Canada for many years;
  • a proposed new crowdfunding regime; and
  • proposals to clarify the accredited investor exemption and the minimum amount investment exemption.

These are generally welcome changes for smaller and growing issuers and their investors.  Most of the proposals, if implemented in large measure in the manner they are proposed, should allow greater flexibility for issuers to raise funds.

Many of the changes discussed below are included in an Ontario Securities Commission (OSC) proposal published for comment on March 20, 2014.  The comment period for these Ontario proposals each expire on June 18, 2014.

Existing Security Holder Exemption

On March 13, 2014 the securities regulatory authorities in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut adopted a new prospectus exemption permitting listed issuers to raise money by distributing securities to their existing security holders.  This exemption will provide listed issuers with greater flexibility and lower transaction costs when raising capital from existing security holders.  The new exemption will particularly assist small and medium sized reporting issuers who face capital raising challenges after becoming listed on an exchange.

Under this new exemption a number of key conditions must be met, including:

(i) the offering can consist only of a class of equity securities listed on the Toronto Stock Exchange, TSX Venture Exchange or the Canadian Securities Exchange, or units consisting of the listed security and a warrant to acquire the listed security;

(ii) the issuer must make the offering available to all existing security holders that hold the same type of listed security;

(iii) unless the investor has obtained suitability advice from a registered investment dealer, the investor can only invest a maximum of $15,000 under the exemption in a 12-month period; and

(iv) investors must represent in writing that they held the type of listed security as of the record date of the offering and continue to hold such securities.

Very shortly after this exemption came into effect in other parts of Canada, the OSC published for comment a similar prospectus exemption for distributions of securities by reporting issuers (other than investment funds) to their existing security holders.  The Ontario proposal is based on the same requirements discussed above. 

Offering Memorandum Exemption

The OSC proposals published for comment include a new prospectus exemption enabling reporting and non-reporting issuers to raise money by preparing and delivering an offering memorandum to prospective investors.  This proposed new exemption is meant to provide issuers with additional flexibility in raising capital in Ontario.  It is also intended to facilitate the harmonization of this exemption with other Canadian jurisdictions where similar offering memorandum exemptions have been in place for many years.  The proposed new Ontario exemption will also provide exempt market dealers with more opportunities to be involved in financings for smaller and medium sized issuers.    

There are some limitations that apply to this proposed new Ontario offering memorandum exemption including the following:

  • the proposed exemption is not available to investment funds and does not apply to the distribution of novel or complex securities such as derivatives or structured finance products;
  • non-eligible individual investors can invest no more than $10,000 per calendar year and individual eligible investors (who are not accredited investors) are limited to an investment ceiling of $30,000 per calendar year;
  • non-reporting issuers relying on the exemption will be subject to certain ongoing disclosure obligations such as the delivery of audited financial statements; and 
  • individual investors will be required to sign a risk acknowledgement form when purchasing securities under the offering memorandum exemption. 

The securities regulatory authorities in Alberta, Saskatchewan and Quebec have published for comment amendments to their offering memorandum exemption with a view to harmonizing certain elements with the proposed requirements in Ontario such as caps on investment amounts and ongoing disclosure obligations for non-reporting issuers.  The securities regulatory authority in New Brunswick has published for comment amendments to make its exemption mirror the Ontario proposal.

Family, Friends and Business Associates Exemption

The OSC proposals published for comment include a prospectus exemption to provide early stage issuers with greater flexibility to access capital from their close personal networks, namely from family, friends and business associates.  As with the offering memorandum exemption, similar exemptions have been available in all other Canadian jurisdictions for many years.  The proposed new exemption will be particularly beneficial to non-reporting issuers who wish to raise capital without being restricted to the requirements under the private issuer exemption, such as a limit of 50 security holders.  We anticipate early stage reporting issuers will find this proposed exemption to be a straight-forward and inexpensive route for raising capital. 

There are a few notable features to the proposed exemption:

  • it is available to both reporting and non-reporting issuers as well as to selling security holders, but is not available to investment funds;
  • only certain prescribed securities which are not novel or complex, such as common shares and non-convertible preference shares, may be distributed under the proposed exemption;
  • there are no proposed limits on the size of the offering or on the investment amount made by investors; and
  • a risk acknowledgement form will be required to be signed by the investor, the issuer and the individual with whom the investor has asserted the relationship with the issuer. 

Crowdfunding Exemption

Recent developments relating to the adoption and proposed adoption of crowdfunding prospectus exemptions in certain Canadian jurisdictions are summarized in our recent MarketCaps titled Growing Momentum and Clarity for Equity Crowdfunding in Canada".

Amendments to the Accredited Investor and Minimum Amount Investment Exemptions

On February 27, 2014 the CSA published for comment proposed amendments to the accredited investor and minimum amount investment prospectus exemptions.  Unlike the other changes discussed above, proposed revisions to the accredited investor and minimum amount investment exemptions are principally intended to enhance individual investor protection. 

Accredited Investor Exemption

Currently, the definition of accredited investor includes categories of high net worth individuals who earn in excess of a certain level of income or own more than a prescribed value of assets.1  The proposed amendments would require individual accredited investors2 to complete and sign a risk acknowledgement form prior to, or concurrent to, the purchase of securities.  The risk acknowledgement form would also apply to all salespersons or finders involved in the trade.  The risk acknowledgement form is to set out the categories of individual accredited investors and a description of the protections the investor is renouncing by purchasing under the exemption. 

The proposed amendments would also broaden the definition of accredited investor to include certain family trusts established by an accredited investor for his or her family.  Also, the OSC is further proposing that the definition of accredited investor be amended to allow fully managed accounts to purchase investment fund securities using the managed account category of the exemption, as is permitted in other Canadian jurisdictions.

Minimum Amount Investment Exemption

The minimum amount investment exemption currently states that a person purchasing securities as a principal from a single issuer with an initial acquisition cost of not less than $150,000 is exempt from the prospectus requirements.  The proposed amendments by the CSA would limit the availability of this exemption to non-individuals in order to avoid over-concentration in one investment for an individual investor.

Footnotes 

1These categories include: (i) an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000; (ii) an individual whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year; and (iii) an individual who, either alone or with a spouse, has net assets of at least $5,000,000.

2 Other than those individuals who satisfy the "permitted client" test under National Instrument 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations.

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