Canada: CSA And OSC Broaden And Adopt New Prospectus Exemptions

On February 19, 2015, the Canadian Securities Administrators (CSA), the group that oversees provincial securities commissions, adopted amendments to three existing prospectus exemptions in National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45‑106):

  • Accredited Investor Exemption (AI Exemption);
  • Minimum Amount Investment Exemption (MA Exemption); and 
  • Short-Term Debt Exemption.

In addition, the CSA adopted a new prospectus exemption for short-term securitized products (Short-Term Securitized Products Exemption) in section 2.35.1 of NI 45-106. Read more about the original and the previous short-term securitized products proposals.

Also on February 19, 2015, the Ontario Securities Commission (OSC) adopted a new prospectus exemption: the family, friends and business associates prospectus exemption (FFBA Exemption). The FFBA Exemption will be substantially harmonized with the corresponding exemption that is currently available in other CSA jurisdictions. Although new crowdfunding and special offering memorandum exemptions were contemplated in the original proposals, neither were adopted and both remain under the OSC's review, planned for publication in final form or for a second comment period in the summer of 2015. Read more about the original proposals.

The amendments and the FFBA Exemption are being adopted to increase access to capital in the exempt marketplace and provide issuers with additional flexibility to raise capital without using a prospectus. The new Short-Term Securitized Products Exemption is intended to support improved practices in the asset-backed commercial paper market and its continued stability.

The amendments and the new prospectus exemption are expected to come into force on May 5, 2015, with certain disclosure requirements regarding the Short-Term Securitized Products Exemption becoming effective on November 5, 2015. The AI Exemption, the MA Exemption and the Short-Term Debt Exemption were first published for comment in 2014, and the Short-Term Securitized Products Exemption was first published for comment in 2011.

Key Features of the Amendments to the AI Exemption

The amendments introduce two keys changes to the AI Exemption: (i) a new risk management form – Form 45-106F9 (AI Risk Form); and (ii) expanded guidance on a seller's obligation to verify a purchaser's eligibility to rely on the prospectus exemption. The amendments were made as a result of marketplace commentary that certain accredited investors, notwithstanding their financial means, may not fully understand the risks of investing under the AI Exemption or how they qualify as an accredited investor.

AI Risk Form

The AI Risk Form identifies key risks associated with purchasing securities in the exempt market (risk of loss and liquidity, lack of information and advice) and is to be completed by an individual purchaser who purchases securities under the AI Exemption unless such investor qualifies under the highest threshold to be an individual investor, having $5 million worth of financial assets. The AI Risk Form does not change existing thresholds in the AI Exemption.

Guidance for Sellers on Purchasers' Status

In an attempt to raise market awareness of the importance of ensuring that the AI Exemption is properly used, the CSA provided expanded guidance that focuses on the responsibility of a seller of securities to confirm that a purchaser is eligible to purchase securities under the AI Exemption. It will not be considered sufficient for a seller to rely on the AI Risk Form to confirm the purchaser's eligibility to use the AI Exemption unless the seller takes "reasonable steps" to verify the accuracy of those representations. The companion policy indicates that reasonable steps include

  • reviewing how the seller identified the purchaser;
  • confirming the category of accredited investor or eligible investor that the purchaser claims to meet;
  • reviewing how much and what type of background information is known about the purchaser;
  • explaining the terms and conditions of the exemption to the purchaser;
  • establishing appropriate policies and procedures to confirm that all parties that act on behalf of the seller understand the conditions that must be satisfied to rely on the exemption;
  • verifying that the purchaser meets the criteria set out in the exemption (it is no longer sufficient to accept standard representations in a subscription agreement); and
  • keeping relevant and detailed documentation.

Key Feature of the Amendments to the Minimum Amount Investment

Significantly, the MA Exemption will no longer be available to individuals (i.e., natural persons). The definition of "individual" specifically excludes partnerships, unincorporated organizations and trusts, as well as natural persons acting as trustees, executors, administrators or other legal representatives. In adopting this amendment, the CSA indicated that the $150,000 threshold may not be not an adequate measure of an investor's sophistication or ability to withstand a financial loss and that the MA Exemption could be perceived as encouraging over-concentration in a single investment.

Key Feature of the Amendments to the Short-Term Debt Exemption

The key change to the Short-Term Debt Exemption is a modification of the prescribed ratings. For a distribution under this exemption, an issuer is now required to have only one of its credit ratings in the highest rating category; any additional credit ratings may be lower than the highest rating category, but cannot be lower than certain minimum rating categories.

Key Features of the New Short-Term Securitized Products Exemption

An issuer wishing to distribute short-term securitized products, commonly referred to as asset-backed commercial paper, may now do so under the new Short-Term Securitized Products Exemption, so long as certain criteria are met as described below. In addition, an issuer may distribute short-term securitized products pursuant to the AI Exemption and the MA Exemption. Issuers may no longer distribute short-term securitized products pursuant to the Short-Term Debt Exemption.

In order to make a distribution under the new Short-Term Securitized Products Exemption, an issuer must satisfy a number of conditions. Among other things, an issuer must have: (i) prescribed ratings from two designated rating organizations; (ii) prescribed "global style" liquidity arrangements with appropriate financial institutions; and (iii) asset pools that consist only of prescribed assets, none of which provide synthetic exposure to financial assets. The Short-Term Securitized Products Exemption requires that an issuer provide investors with an information memorandum disclosing information on the issuer's structure, business and operations, eligible assets and asset transactions, program-wide liquidity support and credit enhancement and the short-term securitized product being offered. The issuer is also required to provide ongoing disclosure in the form of (i) monthly disclosure reports concerning the performance of the assets in the issuer's asset pools and certain events reasonably expected to affect the payment of interest or principal on the issuer's offerings; and (ii) timely disclosure reports with respect to any downgrades in an issuer's ratings, failure to make required payments on short-term securitized products and the occurrence of an event reasonably expected to have a significant adverse effect on the payment of principal or interest on the short-term securitized product. Issuers have until November 5, 2015 to comply with the new information memorandum and monthly disclosure report forms.

Key Differences from the Proposed Amendments of January 23, 2014

  • The prescribed ratings under the final Short-Term Securitized Products Exemption have been modified in that an issuer is no longer required to have two credit ratings in the highest rating category. Although an issuer is still required to have two credit ratings, only one of those ratings needs to be in the highest rating category; the second credit rating and any additional credit ratings may be lower than the highest rating category, but cannot be lower than certain minimum rating categories.
  • The disclosure requirements under the information memorandum and monthly disclosure reports have been clarified and refined from previous iterations of the proposed amendments. Certain transaction-level disclosure items have been moved from the information memorandum to the monthly disclosure report. Certain items have been eliminated from the monthly disclosure report to focus on information that the CSA considers necessary for investors to understand the credit quality and performance of an issuer's asset transactions and asset pools. Notably, an issuer is no longer required to disclose the identities of principal obligors and originators.
  • The deadline for providing monthly disclosure reports to investors has been extended to 50 days, from 30 days previously, following the relevant month end. Similarly, the list of events that trigger a timely disclosure report has been narrowed to a failure by the issuer to make any required payment of interest or principal on the short-term securitized product, a downgrade in the issuer's credit ratings or the occurrence of an event reasonably expected to have a significant adverse effect on the payment of principal or interest on the short-term securitized product.

Family, Friends and Business Associates Prospectus Exemption Adopted by the OSC

The FFBA Exemption replaces the OSC's existing founder, control person and family prospectus exemption and allows for the sale of securities by a selling security holder, reporting issuer or non-reporting issuer to principals (i.e., directors, officers and control persons), certain family members, close personal friends and close business associates of most issuers other than investment funds. These types of investors are perceived as having a sufficiently close relationship to principals of the issuer to access and assess information. In addition, the changes reflect the recognition by the OSC that early-stage issuers could benefit from greater access to capital from their close network of family, friends and business associates at a reduced transaction cost by not having to prepare a prospectus. It is worthy to note that the exemption is not available to investment funds, unlike the corresponding exemption in other CSA jurisdictions.

Key Differences from the Proposed Amendments of March 20, 2014

  • The final FFBA Exemption does not include a prohibition on distributions of novel or complex products. However, short-term securitized products will be unavailable for distribution under the FFBA Exemption.
  • The final FFBA Exemption does not include a prohibition on advertising to solicit purchasers. Instead, companion policy guidance reflects the OSC's expectation that advertising will not be used to find purchasers for distributions made solely under the FFBA Exemption.
  • The final FFBA Exemption does not include a prohibition on commissions, finder's fees, referral fees and similar payments in connection with distributions under the FFBA Exemption. The OSC will adopt the narrower prohibition in place in other CSA jurisdictions that prohibits payments of fees to a director, officer, founder or control person of an issuer in connection with the FFBA Exemption.
  • In Ontario, a risk acknowledgement form – Form 45-106F12 – is required for all purchasers under the FFBA Exemption, not just individual investors. This form requires the purchaser to acknowledge the key risks related to purchasing securities in the exempt marketplace (described above) and requires the purchaser and the person with whom the purchaser has an applicable relationship to confirm such relationship. The form must also be signed by an executive officer of the issuer.
  • A Form 45-106F1 will be required to report distributions under the FFBA Exemption until the new Form 45-106F11, currently subject to a separate CSA initiative, is in place. Form 45-106F1 is currently required to be filed in connection with a distribution under the corresponding exemption in all provinces except British Columbia (which requires a lengthier Form 45-106F6).

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