Print Page   |   Sign In   |   Join PCMA
News and Publications : OM Exemption

Offering Memorandum Exemption – The Basics

October 7, 2013  
Share |

By Brian Koscak, Chair, Exempt Market Dealers Association of Canada, Partner Cassels Brock & Blackwell LLP

The offering memorandum (OM) exemption (the OM exemption) is a prospectus exemption that is available in all jurisdictions of Canada except Ontario. The Ontario Securities Commission (OSC) is currently considering adopting the OM exemption as discussed in its August 2013 progress report involving its review of proposed new capital raising exemptions.

The purpose of this article is to provide a brief overview of the OM exemption to allow readers who are less familiar with it, perhaps those market participants in Ontario, to better understand the basics of this prospectus exemption.

There are two models of the OM exemption in Canada; the ‘British Columbia model’ and the ‘Alberta model’, each of which is discussed below. The OSC is currently considering adopting a modified version of the Alberta model of the OM exemption.

I. British Columbia model

The British Columbia model is followed by British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador.

Under the British Columbia model, the OM exemption requires that:

A. the purchaser purchases the security as principal; and

B. at the same time or before the purchaser signs the agreement to purchase the security, the issuer:

  • delivers a prescribed form of OM to the purchaser;
  • obtains a signed prescribed form of risk acknowledgement from the purchaser; and
  • satisfies such other requirements as discussed below.

II. Alberta model

The Alberta model is followed by Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon.

Under the Alberta model, the OM exemption requires that:

A. the purchaser purchases the security as principal;

B. the purchaser is an "eligible investor”[1] or the acquisition cost to the purchaser does not exceed $10,000;

C. at the same time or before the purchaser signs the agreement to purchase the security, the issuer:

  • delivers a prescribed form of OM to the purchaser;
  • obtains a signed prescribed form of risk acknowledgement from the purchaser; and
  • satisfies such other requirements as discussed below, and

if the issuer is an investment fund, the investment fund is:

  • a non-redeemable investment fund, or
  • a mutual fund that is a reporting issuer.

III. OM exemption requirements

Generally, reliance on the OM exemption is subject to the following requirements:

Commission and finder’s fee: No commission or finder’s fee may be paid to any person, other than a registered dealer, in connection with a distribution to a purchaser in the Northwest Territories, Nunavut and Yukon.

Prescribed form of OM: An OM delivered in compliance with the OM exemption must be in compliance with the prescribed form requirements, as set out in Form 45-106 F2 - Offering Memorandum for Non-Qualifying Issuers, which describes the form requirements for private issuers. There is a separate form for public or qualifying issuers.

Cancellation right and holding funds in trust: If the securities legislation where the purchaser is resident does not provide a comparable right, an OM that is delivered to a purchaser must provide the purchaser with a contractual right to cancel the agreement to purchase the security by delivering a notice to the issuer not later than midnight on the second business day after the purchaser signs the agreement to purchase the security. Accordingly, the issuer must: (a) hold in trust all consideration received from the purchaser in connection with a distribution of a security until midnight on the second business day after the purchaser signs the agreement to purchase the security; and (b) return all consideration to the purchaser promptly if the purchaser exercises the right to cancel the agreement to purchase the security.

Statutory rights of action: If the securities legislation where the purchaser is resident does not provide statutory rights of action in the event of a misrepresentation in an OM delivered to a purchaser, the OM must contain a contractual right of action against the issuer for rescission or damages that:

I. is available to the purchaser if the OM, or any information or documents incorporated or deemed to be incorporated by reference into the OM, contains a misrepresentation, without regard to whether the purchaser relied on the misrepresentation;

II. is enforceable by the purchaser delivering a notice to the issuer:

A. in the case of an action for rescission, within 180 days after the purchaser signs the agreement to purchase the security, or

B. in the case of an action for damages, before the earlier of:

(i) 180 days after the purchaser first has knowledge of the facts giving rise to the cause of action, or

(ii) three years after the date the purchaser signs the agreement to purchase the security,

III. is subject to the defence that the purchaser had knowledge of the misrepresentation,

IV. in the case of an action for damages, provides that the amount recoverable:

A. must not exceed the price at which the security was offered, and

B. does not include all or any part of the damages that the issuer proves does not represent the depreciation in value of the security resulting from the misrepresentation, and

V. is in addition to, and does not detract from, any other right of the purchaser.

Certificate: The OM must contain a certificate that states the following: "This offering memorandum does not contain a misrepresentation.

Section 2.9 of NI 45-106 also set out who must sign this certificate which varies depending on the type of legal entity that is offering the securities. This certificate must be true: (a) at the date the certificate is signed; and (b) at the date the OM is delivered to the purchaser. If a certificate ceases to be true after it is delivered to the purchaser, the issuer cannot accept an agreement to purchase the security from the purchaser unless: (a) the purchaser receives an update of the OM; (b) the update of the OM contains a newly dated certificate signed in compliance with section 2.9 of NI 45-106 and (c) the purchaser re-signs the agreement to purchase the security.

Risk acknowledgement form: A risk acknowledgement must be in the required form and an issuer relying on it must retain the signed risk acknowledgment for eight years after the distribution.

Filing OM and any update with securities regulatory authority: The issuer must file a copy of an OM delivered to a purchaser and any update of a previously filed OM with the securities regulatory authority on or before the 10th day after the distribution under the OM or update of the OM.

Further information, insight and practice tips about the OM exemption will be provided in future updates.

Brian Koscak is a Partner at the law firm of Cassels Brock & Blackwell LLP located in Toronto, Ontario and practices in the area of corporate and securities law. Brian is the Chairman of the Exempt Market Dealers Association of Canada, a national non-for-profit organization representing exempt market dealers, issuers and compliance professionals across Canada. Brian is also a member of the Ontario Securities Commission’s Exempt Market Advisory Committee which is considering new ways to raise capital in Ontario, including the OM exemption. Brian can be reached at 416-860-2955 or at bkoscak@casselsbrock.com.

The contents of this article do not constitute legal advice and is provided for information purposes only. This article does not necessarily reflect the opinions of Cassels Brock & Blackwell LLP or any of its lawyers or clients. The content of this article is not intended to be used as a substitute for specific legal advice or opinions.

Notes:

[1] An "eligible investor” means:

a. a person whose (i) net assets, alone or with a spouse, in the case of an individual, exceed $400,000, (ii) net income before taxes exceeded $75,000 in each of the two most recent calendar years and who reasonably expects to exceed that income level in the current calendar year, or net income before taxes, alone or (iii) with a spouse, in the case of an individual, exceeded $125,000 in each of the two most recent calendar years and who reasonably expects to exceed that income level in the current calendar year,

b. a person of which a majority of the voting securities are beneficially owned by eligible investors or a majority of the directors are eligible investors,

c. a general partnership of which all of the partners are eligible investors,

d. a limited partnership of which the majority of the general partners are eligible investors,

e. a trust or estate in which all of the beneficiaries or a majority of the trustees or executors are eligible investors,

f. an accredited investor,

g. a person described in section 2.5 [Family, friends and business associates], or

h. a person that has obtained advice regarding the suitability of the investment and, if the person is resident in a jurisdiction of Canada, that advice has been obtained from an "eligibility adviser”. An "eligibility adviser” means (a) a person that is registered as an investment dealer and authorized to give advice with respect to the type of security being distributed, and (b) in Saskatchewan or Manitoba, also means a lawyer who is a practicing member in good standing with a law society of a jurisdiction of Canada or a public accountant who is a member in good standing of an institute or association of chartered accountants, certified general accountants or certified management accountants in a jurisdiction of Canada provided that the lawyer or public accountant must not (i) have a professional, business or personal relationship with the issuer, or any of its directors, executive officers, founders, or control persons, and (ii) have acted for or been retained personally or otherwise as an employee, executive officer, director, associate or partner of a person that has acted for or been retained by the issuer or any of its directors, executive officers, founders or control persons within the previous 12 months.


more Events

The upcoming calendar is currently empty.

Click here to view past events and photos »

Featured Members

Legal