Offerings to Existing Securityholders: Ontario Adopts New Prospectus Exemption

Issuers listed on the TSX, TSX-V, CSE or Aequitas NEO (once the latter is operational in March 2015) will soon be able to raise capital in Ontario from their existing securityholders without a prospectus. The Ontario Securities Commission (OSC) has adopted a prospectus exemption, expected to come into force on February 11, 2015, that is substantially similar to the existing securityholder exemption adopted by the other Canadian Securities Administrators (CSA) earlier this year.

Key Features of the Exemption for Sales to Existing Securityholders

The key features of the new exemption are as follows:

• only the class of listed securities, or units consisting of the listed security plus a warrant to acquire the listed security, may be offered;
   
• the maximum amount of dilution is 100% (the other CSA jurisdictions did not impose a dilution limit);
   
• unless an investor obtains suitability advice from a registered dealer, the investor’s maximum investment in an issuer under the exemption must not exceed $15,000 in the prior 12-month period;
   
• the issuer must announce the offering by news release, providing reasonable detail about the offering, including the minimum and maximum number of securities offered and gross proceeds, the intended use of proceeds and details about how securities will be allocated;
   
• the offering must be made available to all persons that hold securities as of a record date at least one day before announcement of the offering;
   
• there is no requirement that securities be allocated pro rata among existing securityholders (consistent with the other CSA jurisdictions); however, in order to support the fair treatment of all securityholders, issuers are expected to implement policies and procedures to provide reasonable assurance that investment opportunities will be fairly allocated among securityholders; while there is little guidance provided on the expected scope of such policies and procedures, the OSC noted that the exemption should not be used in a manner that results in securityholders suffering significant dilution;
   
• the securities will be subject to a four-month hold period, as is customary for exempt market purchases; and
   
• the exemption is not available to investment funds (the other CSA jurisdictions do permit investment funds to use the exemption).

The OSC's rule publication is available at http://www.westlawecarswell.com/oscb/on3748/on3748-42.htm.

Significant Developments in the Exempt Market

The new exemption for sales to existing securityholders is one of several reforms to the exempt market that securities regulators in both Canada and the United States have been considering over the past couple of years. The overall objectives are improving access to capital by small- and medium-sized businesses and increasing investment opportunities for retail investors. Related developments benefitting this significant segment of the capital markets include the potential adoption of crowdfunding regimes in both countries; the TSX’s recent launch of a capital raising and secondary trading platform for the exempt market that could become an incubator for pre-IPO companies; the OSC’s proposal to introduce additional prospectus exemptions for distributions under an offering memorandum and distributions to family, friends and business associates; and the liberalization under the JOBS Act of the private placement marketing rules in the United States.

To discuss these issues, please contact the author(s).

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