On March 20, 2014, the Ontario Securities Commission (OSC) published for public comment four new prospectus exemptions intended to facilitate capital raising while maintaining investor protection. The proposed exemptions are:
- Crowdfunding prospectus exemption;
- Offering memorandum prospectus exemption;
- Family, friends and business associates prospectus exemption; and
- Existing security holder prospectus exemption.
Proposed regulatory requirements applicable to online crowdfunding portals were also published for comment in connection with the crowdfunding exemption.
1. Crowdfunding prospectus exemption
Currently, there are no crowdfunding portals in Canada that permit the sale of "securities" to the general public. The current crop of crowdfunding portals in Canada and the United States only permit businesses to raise money through donations or the pre-order of products – but not by selling shares or other securities. The Securities and Exchange Commission in the United States issued proposed rules for the sale of securities on crowdfunding sites on October 23, 2013. The comment period on those proposals ended in February 2014 but no rules have yet become law.
The OSC has been considering implementing a crowdfunding exemption since late 2012. In June of 2013 the OSC released a decision permitting the launch of an online portal to connect accredited investors to potential investment opportunities in social or environmental impact projects in Ontario, signalling a step towards regulated crowdfunding portals.
The proposed crowdfunding exemption, which is not limited to accredited investors, would allow certain issuers with a significant connection to Canada to raise capital by issuing certain kinds of securities. Under the proposed exemption, eligible issuers would be able to raise up to a total of $1.5 million within a 12-month period utilizing the exemption. Investment amounts for a single investor would be limited to $2,500 per single investment and $10,000 total for all investments made under the exemption within a calendar year. Issuers would be required to provide a disclosure document containing basic information regarding the issuer, the offering and the funding portal to investors at the point of sale, and certain limited disclosure would be required on an ongoing basis. Issuers utilizing the exemption would be required to include certain financial information in their offering document and prepare annual financial statements to be made available to their investors. Investors would be required to sign a risk acknowledgement form highlighting the key risks associated with the investment. Investment funds and private real estate issuers would not be permitted to use the exemption.
Crowdfunding portals would be required to register with the OSC. To attempt to address concerns about fraud, the portals would be required to conduct background checks on issuers wishing to raise money using the portals.
Proposals for similar crowdfunding exemptions were also published for comment in Manitoba, Quebec, New Brunswick, Nova Scotia and British Columbia on March 20, 2014. The exemption proposed by the British Columbia Securities Commission sets investment limits at lower amounts than the exemptions proposed in other jurisdictions. Amendments were also proposed to the existing exemption in Saskatchewan.
2. Offering memorandum prospectus exemption
Under this proposed Ontario exemption, businesses (other than investment funds) would be permitted to raise capital based upon an offering memorandum in prescribed form delivered to investors at the point of sale of securities. The exemption also requires that certain limited disclosure be provided to investors on an ongoing basis. The proposed exemption does not limit the frequency or size of offerings, but does impose investment limits upon individual investors utilizing the exemption. An individual "eligible investor" would be able to invest up to $30,000 total over a 12-month period in offerings by different issuers under the exemption, and an individual non-eligible investor would be limited to an investment of $10,000 total over a 12-month period. The proposal contains a detailed definition of "eligible investor", which includes, among other things: (i) a person whose net income or net assets fall above a specified threshold, (ii) an accredited investor, or (iii) a person who has obtained advice regarding the suitability of the investment, which advice must be obtained from an "eligibility adviser", as defined in the proposal, if the investor is a Canadian resident. Investors would be required to sign a risk acknowledgement form highlighting the key risks associated with the investment.
Securities regulatory authorities in other Canadian jurisdictions currently have a similar form of offering memorandum exemption. Alberta, New Brunswick, Quebec and Saskatchewan recently published for comment proposed amendments to their offering memorandum exemptions that would bring the exemptions substantially in line with the exemption proposed by the OSC.
3. Family, friends and business associates prospectus exemption
This proposed exemption would allow issuers (other than investment funds) to sell certain types of securities to family members, close personal friends and close business associates of the principals of the business. The OSC has provided greater guidance regarding whether an investor qualifies as a "close personal friend" or "close business associate". The proposal does not contain a limit on the amount that could be invested under the exemption but does preclude advertising to solicit investors and the payment of commissions or finder's fees in connection with a distribution under the exemption. Investors would be required to sign a risk acknowledgement form.
Family, friends and business associates exemptions are already available in several Canadian jurisdictions.
4. Existing security holder prospectus exemption
This proposed exemption, which has been modeled on the existing security holder exemption recently adopted by Canadian securities regulators in all jurisdictions except Ontario and Newfoundland and Labrador, would allow public issuers (other than investment funds) listed on the Toronto Stock Exchange, TSX Venture Exchange and Canadian Securities Exchange to raise capital by distributing securities to existing investors. An offering under this exemption must be made available to all existing security holders on a pro rata basis. Each investor would be required to have been a security holder on the record date for the offering, which must be at least one day before the issuance of a press release announcing the offering. Investments under the exemption would be limited to an aggregate of $15,000 per investor within a 12-month period from any one issuer, unless the investor received suitability advice from a registered investment dealer.
5. New forms of report of exempt distribution
The OSC also proposed two new reports of exempt distribution to be filed following the use of certain prospectus exemptions, being Form 45-106F10 Report of Exempt Distribution for Investment Fund Issuers (Alberta, New Brunswick, Ontario and Saskatchewan) and Form 45-106F11 Report of Exempt Distribution for Issuers Other Than Investment Funds (Alberta, New Brunswick, Ontario and Saskatchewan). With the exception of the offering memorandum prospectus exemption, the filing fee for a report of exempt distribution would remain at $500, as currently set by OSC Rule 13-502. The fee for a report of exempt distribution under the offering memorandum exemption would be the greater of $500 or 0.025% of the proceeds raised in Ontario under the distribution. The OSC anticipates a significant increase in capital raising by non-reporting issuers targeted at retail investors as a result of the offering memorandum exemption. Consequently, it anticipates needing more money to conduct exempt market compliance review programs when the exemption is implemented, which this new fee is expected to provide.
The proposals are open for public comment until June 18, 2014. The Notice and Request for Comment can be found on the OSC website at www.osc.gov.on.ca.
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