Canada: New Retail Opportunities: Prospectus Exemption For IIROC Dealers

Last Updated: January 22 2016
Article by Brett Kagetsu and Denis Silva

Most Read Contributor in Canada, October 2018

British Columbia, Alberta, Saskatchewan, Manitoba and New Brunswick (the Jurisdictions) have introduced a new investment dealer prospectus exemption (ID exemption) intended to increase levels of investment by retail investors in the Jurisdictions in private placements, without the requirement to prepare an offering memorandum or to seek accredited investor certificates and risk acknowledgement forms.

The ID exemption will allow issuers listed on a Canadian exchange to distribute securities to investors in a Jurisdiction who have obtained advice about the suitability of the investment from an investment dealer registered in that Jurisdiction (IIROC dealer).  Since all IIROC dealers are required to provide suitability advice to their clients before a trade or recommendation, this exemption will expand the pool of available investors to effectively be any client of an IIROC dealer, provided that the IIROC dealer determines that the investment is suitable for that investor. Traditionally, the principal way to offer securities to retail investors who were not accredited investors in connection with a private placement would be to prepare an offering memorandum. Offering memoranda require significant input from management and an issuer's professional advisors and so there are cost and time delays with preparing it. Another advantage of the ID exemption is that there are no investor or capital raising limits like there are in some jurisdictions under the offering memorandum exemption or under the crowdfunding exemptions.

Investment Dealer Prospectus Exemption

The ID exemption will exempt an issuer from filing a prospectus when issuing securities in the Jurisdictions if certain requirements are met, including the following:

  • Availability:  the issuer must be a reporting issuer in at least one jurisdiction of Canada, have a class of securities listed on a Canadian stock exchange and be current in its required continuous disclosure filings;
  • Eligible securities:  an offering can only consist of a listed equity security, a unit comprised of a listed equity security and a warrant to acquire another listed equity security, or another security convertible into a listed security at the securityholder's sole discretion;
  • News release: a news release announcing the offering must include reasonable detail of the proposed distribution, including the minimum and maximum size of the offering and the use of proceeds; disclosure of any material fact about the issuer that has not been generally disclosed; and a statement that there is no material fact or material change that has not been generally disclosed; and
  • Suitability: the purchaser must have obtained advice regarding the suitability of the investment and, if the purchaser is resident in Canada, that advice must have been obtained from an IIROC dealer.

An investor under the ID exemption will have a right of action against the issuer for rescission or damages in the event of a misrepresentation in the issuer's continuous disclosure record, regardless of whether the investor relied on the misrepresentation. Securities acquired in reliance upon the ID exemption will be subject to a four-month hold period.

Conclusion

Suitability advice is among the most fundamental obligations owed by IIROC dealers to their clients and the introduction of the ID exemption acknowledges the value of IIROC dealer suitability advice. 

As the ID exemption may be relied upon to issue securities to non‑accredited investors in the Jurisdictions, it should increase financing options for all reporting issuers. In particular, it also should simplify brokered financings for issuers and IIROC dealers since there is no requirement to prepare an offering memorandum (if targeting retail investors) or to coordinate the delivery of accredited investor certificates and risk acknowledgement forms.

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.

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