|January 23, 2014|
Previously published on January 17, 2014
The Ontario Securities Commission (the “OSC”) has announced it will publish for comment in the first quarter of 2014 the following proposed capital raising prospectus exemptions (the “proposed exemptions”):
an offering memorandum (“OM”) exemption;
a family, friends and business associates exemption;
an existing security holder exemption; and
a crowdfunding exemption, together with a registration framework for funding portals.
The proposed exemptions are an extension of the OSC’s ongoing review of Ontario’s prospectus exemptions and follow the release of the OSC’s Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising in August of 2013 (the “Progress Report”).
The OSC’s review of Ontario’s exempt market and the proposed exemptions seek to address concerns raised by many market participants that Ontario securities law does not reflect changing investor demographics and behaviour or the challenges faced by small and medium-sized enterprises (“SMEs”) in accessing Ontario’s capital markets.
The Proposed Exemptions
The proposed exemptions are expected to increase the number of capital raising exemptions available to SMEs, and better-harmonize Ontario’s prospectus exempt distribution rules with those of the other provinces.
The Progress Report sets out the conceptual framework for each proposed exemption. In September of 2013, we published a summary of the proposed exemptions.
Included below is a high-level summary of the proposed exemptions.
Offering Memorandum: The OSC has favoured the adoption of the Alberta form of the OM exemption, which would see amounts raised pursuant to the exemption limited to $1.5 million in any 12-month period, with investments by individual investors limited to $2,500 per investment and $10,000 in total per 12-month period, unless the investor is an “eligible investor”.
In developing an OM exemption, the OSC has stated it will consider whether additional measures are required to facilitate capital raising by issuers while protecting the interests of investors. Such measures could include:
assessing whether and how the form of OM could be streamlined to be more cost-effective for SMEs and more user-friendly for investors;
possible limits on the types of securities offered; and
appropriate investment limits.
Crowdfunding Exemption: The OSC has stated it will contemplate an equity crowdfunding exemption that imposes similar investment limits as those applied to the OM exemption, with the main difference being that equity crowdfunding investments would need to be made through a funding portal registered in an appropriate dealer or adviser category in Ontario.
Family, Friends and Business Associates Exemption: Currently, Ontario securities law does not provide for a “family and friends” exemption, although companies can raise funds from family members without a prospectus by way of the private issuer and founder, control person and family exemptions. The OSC has stated it will consider broadening the scope of persons to whom securities can be sold without a prospectus to include “close personal friends” and “close business associates”, so as to achieve substantial harmonization with the exemption available in other Canadian jurisdictions.
The OSC has previously expressed concern that implementing a “family and friends” exemption of the kind currently in force in other provinces may allow securities to be issued to an unlimited number of undefined “close personal friends” and “close business associates”. The OSC has stated that it will consider imposing additional conditions on this exemption to mitigate the investor protection risks associated with the exemption’s otherwise broad scope.
Existing Security Holder Exemption: In November of 2013, the Canadian securities regulators in all jurisdictions except Ontario and Newfoundland and Labrador published for comment a proposed prospectus exemption that would allow TSX Venture Exchange-listed issuers to, in certain circumstances, distribute securities to their existing security holders based on the issuer’s existing continuous disclosure record. The OSC has stated it supports the regulators’ proposal and will consider comments received on that proposal in developing its existing security holder exemption, with the goal of substantial harmonization. The OSC will also consider whether the exemption should be made available to issuers listed on other exchanges.
Background - The Exempt Market in Ontario
Ontario securities law prohibits the distribution of securities unless a prospectus is filed with a provincial securities commission. This prohibition is not absolute, and a limited number of exemptions exist to allow securities to be distributed without a prospectus. Distributions of securities that are authorized by an exemption to the prospectus requirement are said to be “exempt distributions” and occur in the “exempt market”.
An exempt distribution typically avoids much of the delay and cost associated with producing and filing a prospectus. This makes the exempt market an attractive means of accessing the capital markets for many SMEs. In 2012 alone, over $104 billion was raised in Ontario through exempt distributions.1
The expediency and cost-effectiveness of exempt distributions are tempered by the absence of statutory protections typically associated with prospectus-level disclosure. As a result, the limited number of exemptions are justified by underlying policy reasons that favour not requiring a prospectus in the particular circumstances described by each exemption. The OSC’s regulation in this area seeks to balance the benefits of greater access to the exempt market for issuers with concerns relating to investor protection and registrant conduct.
Notable capital raising prospectus exemptions under Ontario securities law include exemptions for minimum investment amounts; accredited investors; rights offerings; private issuers; and founders, control persons and family.
1 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising, OSC Notice 45-712, 36 OSCB 35(Supp-6) (2013), at 14 note 1.