There is big news in Ontario for small and medium sized issuers - for the first time, issuers in Ontario will have access to an offering memorandum prospectus exemption (OM exemption). Prior to this, Ontario was the only jurisdiction in Canada not to have some form of OM exemption.
The OM exemption in National Instrument 45-106 Prospectus Exemptions (NI 45-106) is being amended with respect to the provinces of Ontario, Alberta, Québec, Saskatchewan, New Brunswick and Nova Scotia (collectively, the “Participating Jurisdictions”).
In the Participating Jurisdictions, the purpose of the amendments is to introduce new investor protection measures. In Ontario, the goal is to allow businesses, particularly small and medium sized enterprises, greater access to capital while still maintaining appropriate investor protection measures.
The OM exemption is expected to come into effect in Ontario on January 13, 2016 and, in its revised form, in Alberta, Québec, Saskatchewan, New Brunswick and Nova Scotia on April 30, 2016. However, there are some limitations and conditions that will affect the use of the OM exemption once it comes into effect.
New features of the offering memorandum exemption
The new OM exemption incorporates many of the features of the old exemption, for example, delivery of an offering memorandum in the prescribed form and obtaining a signed risk acknowledgement from investors in the prescribed form. Some of the new key features of the OM exemption in the Participating Jurisdictions include:
- Investment limits: The amount an individual may invest is being limited as follows:
The definition of eligible investors in NI 45-106 also encompasses accredited investors and persons relying on the family, friends and business associates exemption. However, the amendments clarify that an eligible investor who qualifies under the accredited investor exemption or the family, friends and business associates exemption is not subject to an investment limit under the OM exemption.
- non-eligible individual investors cannot invest more than $10,000 under the exemption in any 12 month period;
- eligible individual investors (those who meet certain income or financial asset tests) cannot invest more than $30,000 under the exemption in any 12 month period; and
- eligible individual investors that receive suitability advice from a portfolio manager, investment dealer or exempt market dealer can invest up to $100,000 under the exemption in any 12 month period.
- Amendments to the risk acknowledgement form: The required risk acknowledgement form is being amended to request further information from investors who are individuals, including confirmation of status (i.e. whether the investor is an eligible investor, non-eligible investor, accredited investor or an investor who would qualify to purchase securities under the family, friends and business associates exemption) and confirmation that the investor is within their investment limits.
- Increased disclosure requirements: Non-reporting issuers will need to provide further disclosure under the OM exemption, including audited annual financial statements accompanied by a notice which describes how the money raised was used. In addition, in Ontario, New Brunswick and Nova Scotia, non-reporting issuers will also need to provide notice to investors of certain specified key events, including a discontinuation of the issuer’s business, a change in the issuer’s industry or a change of control in the issuer.
- Marketing materials: Marketing materials will be incorporated by reference into the offering memorandum and, in the event of a misrepresentation, will therefore be subject to the same liability as an offering memorandum. These marketing materials will need to filed with the applicable securities regulatory authority and, along with the offering memorandum, will be available for public viewing.
- Distribution of certain types of securities prohibited: The OM exemption will not be available for distributions of specified derivatives or structured finance products.
- Investment funds: Non-redeemable investment funds or mutual funds that are reporting issuers will be allowed to use the OM exemption in Alberta, Nova Scotia and Saskatchewan. However, in Ontario, Québec and New Brunswick, investment funds will not be able to use the exemption.
- No review by the Ontario Securities Commission (OSC): The offering memorandum will not be reviewed by OSC staff prior to the offering but may be reviewed after filing.
It will be interesting to see the level of interest in the OM exemption, as non-reporting issuers may view the disclosure requirements as being too onerous and too costly because, for example, they will likely not have previously prepared audited financial statements. Junior companies that are already reporting issuers may find raising capital using the OM exemption to be more cost effective than using a prospectus offering.
If you have any questions about this bulletin or if you would like further information about these amendments, please contact the authors.