Public and private issuers will soon be able to raise capital using an Offering Memorandum in Ontario. The OSC is adopting an Offering Memorandum (OM) exemption from the prospectus requirement with the objective of facilitating capital raising, particularly by small- and medium-sized issuers. Ontario was the only Canadian jurisdiction without an OM exemption, so the new rule is a positive development, especially for issuers accustomed to using an OM for offerings in Alberta or elsewhere, who will now be able to extend those offerings to Ontario investors without needing to rely on a separate prospectus exemption such as the accredited investor exemption.
Harmonization With Alberta and Québec but not B.C.
Unfortunately, the legal requirements underpinning the OM exemption will not be completely harmonized across Canada, so issuers will still have to contend with varying rules in different jurisdictions. The OSC’s new OM regime aligns most closely with the existing Alberta model. The B.C. OM regime will remain unchanged.
To harmonize with Ontario’s new regime, securities regulators in Alberta, Québec and certain other provinces are amending their rules to impose new, stricter investor protection requirements, described below.
The new rules will take effect in Ontario on January 13, 2016 and in Alberta, Québec and elsewhere on April 30, 2016.
1. Investment Limits
There will be investment limits for investors who are individuals, except those who are accredited investors and those who could purchase under the "family, friends and business associates" exemption.
- Eligible investors1 may invest up to $30,000 under the OM exemption per 12-month period. If, however, an eligible investor receives advice from a portfolio manager, investment dealer or exempt market dealer, he or she may invest up to $100,000 per 12-month period.
- Non-eligible investors may invest up to $10,000 under the OM exemption per 12-month period.
The $30,000 limit for eligible individual investors is a new restriction that could curtail the use of the OM exemption, particularly by small- and medium-sized issuers accustomed to raising capital using an OM in Alberta, Québec and/or the other provinces that previously had no such restriction.
2. Risk Acknowledgement Forms
All investors will have to sign a Risk Acknowledgement Form (RAF) that highlights the key risks associated with the investment. Investors who are individuals will have to complete schedules to the RAF to confirm the category they fall into (eligible, ineligible, accredited, etc.) and that their investment falls within any applicable dollar limit.
3. Financial Statements, Use of Proceeds and Notice of Key Events
Issuers that are not public companies will have to provide investors with audited annual financial statements, accompanied by a notice explaining how the offering proceeds have been used. Investors in Ontario will also be entitled to notice within 10 days of a discontinuation of the issuer's business, a change in its industry or a change of control. In practice, we expect that many issuers will provide all investors with the same continuous disclosure materials when relying on the OM exemption in multiple jurisdictions.
Impact on the Cooperative Capital Markets Regulatory System
Ontario and British Columbia are both participating in the Cooperative Capital Markets Regulatory System (CCMS), under which the exempt market rules are expected to be harmonized. But for now, the Ontario and B.C. OM exemptions will remain quite different, particularly in that B.C. imposes neither investment limits nor continuous disclosure requirements. Securities regulators have struggled to harmonize the exempt market rules across Canada, partly because of a conviction that issuers in different regions, especially small- and medium-sized enterprises, have different capital-raising needs. In its OM rule publication, the OSC indicated that efforts are ongoing to harmonize the exempt market regime among the CCMRS jurisdictions.
1 An “eligible investor” is an investor whose
- net assets, alone or with a spouse, exceeds $400,000,
- net income before taxes exceeded $75,000 in each of the two most recent calendar years and who reasonably expects to exceed that income level in the current calendar year; or
- net income before taxes, alone or with a spouse, exceeded $125,000 in each of the two most recent calendar years and who reasonably expects to exceed that income level in the current calendar year.
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