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21 September 20204 minute read

CSA announces proposed changes to the offering memorandum prospectus exemption

On September 17, 2020, the Canadian Securities Administrators (the "CSA") published for comment proposed amendments (the "Proposed Amendments") to the offering memorandum ("OM") prospectus exemption (the "OM Exemption") included in National Instrument 45-106 - Prospectus Exemptions ("NI 45-106") and the corresponding companion policy. The Proposed Amendments are intended to set out a clear framework for issuers, giving greater certainty on disclosure requirements, resulting in better information for investors.

Although the OM Exemption found in section 2.9 of NI 45-106 was originally designed as a small business financing tool, the CSA has found the exemption is frequently utilized by more complex issuers engaged in real estate ownership or development, or issuers acting as collective investment vehicles carrying out mortgage lending or other investments. The Proposed Amendments tailor the disclosure requirements to reflect the types of issuers that most commonly use the OM Exemption.

The Proposed Amendments can be found on the websites of CSA members. Comments on the Proposed Amendments should be submitted in writing by December 16, 2020.

Issuers engaged in real estate activities

The Proposed Amendments include a new defined term for "real estate activities", which would include issuers undertaking activities to generate income or gain from the lease, sale or other disposition of real property (but does not include activities in respect of mineral projects or oil and gas activities).

Under the Proposed Amendments, issuers engaged in real estate activities would be subject to new requirements in utilizing the OM Exemption, including: (a) providing an independent appraisal of an interest in real property if: (i) the issuer has acquired or proposes to acquire an interest in real property from a related party, (ii) a value for an interest in the real property is disclosed in the OM, or (iii) the issuer intends to spend a material portion of the proceeds of the offering on an interest in real property; and (b) completing a new schedule to Form 45-106F2 ("Schedule 1") which will include disclosure relevant to issuers that develop, operate and own real property, disclosure of penalties, sanctions, bankruptcy, insolvency and criminal or quasi-criminal convictions for involved parties other than the issuer (such as a party acting as developer), and disclosure of any transaction history of the issuer's real property with a related party. Schedule 1 would not apply to real property that (on an aggregated basis) would not be significant to a reasonable investor.

Issuers that are collective investment vehicles

The Proposed Amendments also introduce the term "collective investment vehicle", defined as an issuer whose primary purpose is to invest money in a portfolio of securities. This definition would include issuers that hold portfolios of mortgages, loans or receivables. To the extent they are permitted to use the OM Exemption, the definition would also include investment funds.

Under the Proposed Amendments, issuers that are collective investment vehicles would be required to complete new schedule ("Schedule 2") when utilizing the OM Exemption, which will include a description of the issuer's investment objectives, disclosure of penalties, sanctions, bankruptcy, insolvency and criminal or quasi-criminal convictions applicable to persons involved in the selection and management of investments, information regarding the portfolio and its performance.

Note that the Proposed Amendments will be of interest to Mortgage Investment Corporations ("MICs") who typically raise funds via OM and who are subject to enhanced CSA scrutiny in Alberta and  British Columbia as a result of NI 31-103 - Registration Requirements, Exemptions and Ongoing Registrant Obligations.

General amendments

The Proposed Amendments include a number of general amendments meant to clarify parts of NI 45-106 and to improve disclosure for investors.

These general amendments include: (a) clarifying the provisions in the OM Exemption that deal with OM and OM amendment disclosure standards to make them more user-friendly for both issuers and investors; (b) requiring that the filed copy of the OM allows for the searching of words electronically; and (c) various changes with respect to Form 45-106F2 - Offering Memorandum for Non-Qualifying Issuers, such as additional disclosure items to the cover page to highlight certain matters, enhanced disclosure where a material amount of the proceeds will be transferred to another issuer that is not a subsidiary of the issuer, enhanced related party disclosure, and additional disclosure regarding criminal or quasi-criminal convictions.

In addition, the Proposed Amendments also include changes to Form 45-106F4 - Risk Acknowledgment, which is the required form of risk acknowledgment for investors purchasing a security under the OM Exemption. The changes are consistent with recent amendments to risk acknowledgment forms required in connection with use of other prospectus exemptions.

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