On October 29, 2015, securities regulators in six provinces announced their intention to adopt or modify a prospectus exemption available to issuers that prepare and deliver an offering memorandum (OM) to investors. Ontario intends to adopt an OM exemption, thereby becoming the last Canadian jurisdiction to do so. Each of Alberta, Saskatchewan, Québec, New Brunswick and Nova Scotia (together with Ontario, the Participating Provinces) intend to modify certain aspects of their existing OM exemption such that, in each case, it will be substantially harmonized with Ontario's OM exemption. The result is that issuers will be able to raise capital across Canada by way of an OM exemption, though certain aspects of the exemption will continue to vary by jurisdiction.
The adoption of an OM exemption by Ontario and the changes to the OM exemption by the other Participating Provinces are collectively referred to as the Amendments. Subject to ministerial approvals, the Amendments will apply in Ontario on January 13, 2016 and in the other Participating Provinces on April 30, 2016. The securities regulators' notice of the Amendments is available here.
Any distribution of securities in Canada must either be qualified by a prospectus or be exempt from the prospectus requirement. The OM exemption allows issuers in jurisdictions other than Ontario to raise funds from investors who are either not sufficiently wealthy or not in a sufficiently close relationship with the issuer to qualify for certain other exemptions. It is found in section 2.9 of National Instrument 45-106 Prospectus Exemptions.
Certain conditions of the OM exemption apply across the nine provinces and three territories in which the OM exemption currently exists, while certain other conditions vary depending on the jurisdiction into which securities are distributed. The common conditions include a requirement that the OM contain audited financial statements of the issuer, and that investors sign a risk acknowledgement form. The variable conditions include, in certain provinces and territories, an investment limit of $10,000 (all figures in CA$) per investor unless the investor satisfies certain criteria, including having a specified level of income or assets. The OM exemption does not impose any disclosure obligations on the issuer following completion of the offering and associated filings.
Summary of the Amendments
The Amendments introduce a new set of conditions that will impact issuers using the OM exemption in the Participating Provinces. These include new investment limits, certain continuous disclosure obligations and rules regarding marketing materials, as summarized below.
Limits on investment amounts
Individual investors will be limited in the amount that they can invest in any 12-month period under the OM exemption in the Participating Provinces. The amounts, set out below, apply to each investor's investments in all issuers under the OM exemption in the 12-month period.
- An individual investor:
- who is a not an "eligible investor", because the investor does not meet a threshold of income or assets1, may invest a maximum of $10,000;
- who is an eligible investor may invest a maximum of $30,000; and
- who is an eligible investor and who receives suitability advice from a registered professional may invest a maximum of $100,000.
To illustrate, consider an individual, non-eligible investor in a Participating Province. If that investor's first investment under the OM exemption is for $5,000, the investor may invest a maximum of an additional $5,000 in any other issuer under the OM exemption during the following year.2
There will be no limitation on investment by a non-individual investor (such as a company or a limited partnership), or an investor who satisfies certain other prospectus exemptions, namely the "accredited investor" exemption or the "family, friends and business associates" exemption.
Subject to the per-investor limitations above, there will be no limit on the aggregate amount of funds that an issuer may raise under the OM exemption in the Participating Provinces, which is consistent with the OM exemption as it currently exists.
Continuous disclosure obligations
The Amendments will introduce limited continuous disclosure obligations for non-reporting issuers that use the OM exemption in the Participating Provinces. Such issuers will be obliged to make audited annual financial statements "reasonably available" to investors under the OM exemption within 120 days of the issuer's year-end, together with a description of the use of proceeds.3 In Ontario, New Brunswick and Nova Scotia, non-reporting issuers will also have to notify investors of certain issuer events, namely a discontinuation of its business, a change of its industry or a change of control.
Issuers using the OM exemption in the Participating Provinces will have to incorporate into the OM by reference any marketing materials used in connection with the distribution. There is an exception for a "standard term sheet," which has a comprehensive definition in the Amendments. The result of this incorporation by reference is that investors will have the same rights of action against the issuer in the event of a misstatement in marketing materials as they would if the misstatement were made in the text of the OM.
Marketing materials will also have to be filed with or delivered to the securities regulator in any Participating Province into which securities are distributed under the OM exemption.
Changes to risk acknowledgement form
The Amendments provide for changes to the form of risk acknowledgment that must be completed by individual investors in the Participating Provinces. Two new schedules that classify investors and stipulate the investment limits described above have been added to the form.
Issuers will not be able to use the OM exemption to issue "specified derivatives" or "structured finance products" in the Participating Provinces. The existing prohibition on using the OM exemption to issue "short-term securitized products" will apply in all jurisdictions.
In addition, the Amendments include certain limitations on the use of the OM exemption by investment funds. Most significantly, investment funds will not be able to use the OM exemption in Ontario, Québec and New Brunswick.
Impact of the Amendments
The Amendments introduce a new set of criteria that will impact issuers using the OM exemption to distribute securities in any of the Participating Provinces. In the jurisdictions that are not adopting the Amendments, the existing rules of the OM exemption will continue.
Regarding transition to the new rules, issuers that are conducting a distribution under the OM exemption in any of the Participating Provinces will likely want to terminate such distribution prior to the implementation date of the Amendments. The selection of April 30, 2016 as the implementation date in all Participating Provinces other than Ontario relates to the fact that many issuers using the OM exemption have a December 31 year-end.4
The Amendments are arguably a step sideways for the goal of harmonization of securities laws across Canada. On the one hand, they broadly align the OM exemption among six provinces, including three of the four largest capital markets in Canada, being Alberta, Ontario and Québec. On the other, they impose a new "jurisdiction bloc" into the OM exemption, in that certain aspects of the exemption apply differently in various jurisdiction groups. For example, in British Columbia and Newfoundland there is no limit on investment by non-eligible investors, while in Manitoba, Prince Edward Island and the territories the limit is different than will be the case in the Participating Provinces.
1 The thresholds are: (i) net assets, alone or with a spouse, in excess of $400,000; and (ii) net income before taxes in excess of $75,000 (or $125,000 with a spouse) for the two previous calendar years, and a reasonable expectation of exceeding those levels in the current calendar year.
2 The limits will not apply retroactively to investments that preceded the implementation of the Amendments.
3 The annual financial statements must also be filed with or delivered to the securities regulator in each of the Participating Provinces where a distribution occurs, other than Nova Scotia. The notice of use of proceeds need not be provided in any year after the proceeds of a financing under the OM exemption have been fully expended and investors have been notified of the use of proceeds.
4 An OM is generally required to include financial statements for the most recent financial year ended more than 120 days before the date of the OM. Therefore, on April 30, 2016 (the 121st day of 2016) any financial statements included in an OM for the year ended December 31, 2014 will no longer be usable.
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