The Ontario Securities Commissions (the OSC) has recently published proposals which, if enacted, will facilitate the raising of capital by issuers in the exempt market.
On March 20th, the OSC published for a 90-day comment period the following four proposed prospectus exemptions:
- Offering Memorandum Exemption – Offering memorandum exemptions are currently available elsewhere in Canada. Under this proposed exemption, an issuer will be able to raise money from investors who are provided with an offering memorandum in prescribed form. While there is no limit on the size of the offering, the number of offerings an issuer can make or the length of time an offering can remain open, there are proposed limits on the amount each investor can invest: a cap of $10,000 per calendar year for individual non-eligible investors; and a cap of $30,000 per calendar year for individual eligible investors who are not accredited investors. Complex or novel securities cannot be offered under this exemption and post offering disclosure obligations apply.
- Family, Friends and Business Associate Exemption – This exemption would allow start-ups and SMEs to gain greater access to capital from individuals in their social networks. This exemption is proposed to apply to issuers as well as selling security holders. Only prescribed securities which are not novel or complex may be distributed under this exemption. There is no proposed limit on the size of the offering and there are no proposed limits on investment by individual investors. Similar exemptions currently exist in other Canadian jurisdictions.
- Existing Security Holder Exemption – This exemption, which is based on an existing exemption adopted by other Canadian securities regulators, is available to reporting issuers on the TSX, TSX-V or the Canadian Securities Exchange. Only classes of equity securities already listed by the issuer on the exchange may be distributed in reliance on this exemption. An issuer cannot use this exemption to increase the outstanding securities in a class by more than 100%. Investors must represent in writing that they held the type of listed security under the exemption as of the record date and continue to hold such securities. In a twelve month period, an investor cannot invest more than $15,000 under this exemption unless investment advice regarding suitability has been obtained. If the purchaser is a resident in a Canadian jurisdiction, this advice must be obtained from a registered investment dealer within the jurisdiction in which the purchaser resides.
- Crowd Funding Exemption – This exemption will allow issuers to raise capital through crowd funding portals. Issuers must be incorporated, have their head office and have a majority of directors resident in Canada. Limited types of securities can be offered under this proposed exemption, issuers cannot raise more than $1.5 million in a twelve month period and an offering can only remain open for 90 days. An offering document must be given disclosing the minimum offering size and maximum offering size (if applicable). Under this proposed exemption, an offering cannot be completed unless the minimum offering is fully subscribed and the issuer has the financial resources, upon completion of the offering, to achieve the next milestone in its written business plan or carry out the activities set out in the plan. Limits on investment for individual investors apply: a single investment under the exemption cannot exceed $2,500; and an individual cannot invest more than $10,000 under the exemption in a calendar year. In addition, investments under this proposed exemption must be made through a registered funding portal.
The OSC has worked with securities administrators in Manitoba, New Brunswick, Quebec, Saskatchewan and Nova Scotia in formulating the Crowd Funding Exemption.
With the exception of the Existing Security Holder Exemption, the signing of a risk acknowledgement form by most investors is a requirement for use of the proposed exemptions.
The author wishes to thank Kaitlind de Jong, articling student, for her valuable assistance in preparing this legal update.