In addition to the exemptions discussed in the article entitled “Proposed Amendments to the Accredited Investor and $150,000 Minimum Amount Exemptions in National Instrument 45-106“, as part of the Ontario Securities Commission’s (“OSC“) larger exempt market review, the OSC has published for comment four additional prospectus exemptions. These proposals are designed to bring Ontario in line with other provinces and to facilitate greater access to capital for issuers at various stages of the development process.
The four new exemptions are:
- the offering memorandum exemption (the “OM Exemption“)
- the family, friends and business associates exemption (the “FFBA Exemption“);
- the existing security holders exemption; and
- the crowdfunding exemption.
This article will focus on the OM Exemption and FFBA Exemption. For more information on the existing security holders exemption, please refer to the article entitled “New Prospectus Exemption for Distributions to Existing Security Holders.” For more information on the crowdfunding exemption, please refer to our Fall 2013 SPN edition.
The OM Exemption
All provinces and territories of Canada, except Ontario, currently have a form of offering memorandum exemption. The exemption available in British Columbia, New Brunswick, Nova Scotia and Newfoundland can be found in section 2.9(1) of National Instrument 45-106 (the “BC Model”). While the exemption available in Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Quebec, Saskatchewan and Yukon is found in section 2.9(2) of National Instrument 45-106 (the “Alberta Model”). Ontario’s proposed OM Exemption is based largely on the Alberta Model. Recently, several other CSA jurisdictions have proposed amendments to their existing offering memorandum exemptions (for example, see Multilateral CSA Notice of Publication and Request for Comment Proposed Amendments to National Instrument 45-106 Prospectus and Registration Exemptions relating to the Offering Memorandum Exemption published by the Alberta Securities Commission, Autorité des marchés financiers, Financial and Consumer Affairs Authority of Saskatchewan and Financial and Consumer Services Commission (New Brunswick)). Despite these various proposals and amendments, it appears that Canada will still be without a harmonized approach to offering memorandums if in fact the rules are finalized as published.
The OSC’s proposed OM Exemption would be available to reporting and non-reporting issuers (but not investment funds) and would allow an issuer to issue securities, other than derivatives and structured finance products, by providing prospective investors with an offering memorandum, in a prescribed form, instead of a prospectus. The OM Exemption will not impose limits on (1) the amount of money an issuer can raise, (2) the number of offerings an issuer can make in any given time period, (3) the number of offerings that may be made by individuals involved with the issuer or (4) the length of time an offering can remain open.
However, the OSC has imposed a number of investor protection measures that will limit the availability of the OM Exemption. An issuer seeking to rely on the OM Exemption will be required to determine whether a prospective investor is “accredited”, “eligible” or none of the above, an ordinary individual investor. For the purposes of the OM Exemption, an individual is an “eligible investor” if they meet certain income and asset thresholds, are an accredited investor or have obtained advice from an “eligibility advisor”. Investors who are not “eligible investors” will not be able to invest more than $10,000 under the OM Exemption in a calendar year. For individual investors who meet the definition of “eligible investor”, their investment under the OM Exemption will be capped at $30,000 per calendar year. For non-individual investors, the criteria for being an “eligible investor” is based on net assets and not income. It is worth noting that accredited investors will continue to be able to invest over and above $30,000 per year in reliance on the accredited investor exemption (outside of the OM Exemption).
For non-reporting issuers, in order to rely on the OM exemption they will be required to deliver to investors (1) audited annual financial statements (within 120 days of their most recently completed financial year) and (2) a notice outlining the aggregate use of the proceeds raised by the issuer pursuant to OM Exemption. There will be some additional continuous disclosure obligations for non-reporting issuers relying on the OM Exemption including, notification of investors within 10 days of a fundamental change, a significant change to the issuer’s capital structure, a major reorganization, amalgamation or merger, a take-over bid or issuer bid, a significant acquisition or change to the directors and officers of the issuer.
The FFBA Exemption
The FFBA exemption will allow reporting and non-reporting issuers (but not investment funds) to raise capital from family, friends and close business associates without a prospectus or any other disclosure document at the time of distribution. The FFBA Exemption also can apply to selling security holders, provided that all other conditions of the FFBA Exemption are met. This exemption is currently available in all other provinces and territories in Canada other than Ontario (with a variation specific to Saskatchewan contained in section 2.6 of National Instrument 45-106). The FFBA Exemption does not impose any restrictions on the size of the offering, the number of offerings an issuer can undertake in a given time period or the amount that an individual investor can invest. However, it cannot be used for the distribution of novel or complex products.
Other key features of the FFBA Exemption include a prohibition against advertising to solicit investors and payment of any commission, finder’s fee, referral fee or similar payment. The OSC has provided additional guidance for issuers on the definition of a “close personal friend” or “close business associate.” The onus of establishing one of these relationships is on the issuer. Interestingly, the OSC has commented that a relationship based on participation in internet forums or social media will not meet the definition of “close personal friend” or “close business associate.”
In order to rely on the FFBA Exemption, a risk acknowledgement form will need to be signed by the investor, the relevant director, officer, founder or control person with whom the investor has the close relationship and the issuer.
The OSC’s comment period for all of its proposed exemptions remains open until June 18, 2014. It is expected that there will be significant input from stakeholders which could result in further amendments to the current proposals.
For more information, see the OSC’s Introduction of Proposed Prospectus Exemptions and Proposed Reports of Exempt Distribution in Ontario.