The Private Capital Markets Association of Canada (PCMA) is pleased to see the success of its multi-year advocacy campaign to bring the Offering Memorandum Exemption (OM exemption) to Ontario. Our voice and advocacy, supported by others across the industry, was a catalyst for this important regulatory change.  

Since 2012, the PCMA has worked with securities regulators to emphasize the need for a robust and harmonized OM exemption across Canada, and most importantly, for Ontario to catch-up to the rest of Canada and introduce the OM exemption in Ontario. We believe this new capital raising tool will enable Ontario’s companies and investors access to much greater opportunities in the private markets. After a strong industry response to initial proposals in 2014, we knew the intellectual battle was won and the OSC was committed to bringing an OM Exemption to Ontario.

On October 29, 2015, the securities regulatory authorities in Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan published Multilateral CSA Notice of Amendments to National Instrument 45-106 Prospectus Exemptions Relating to the Offering Memorandum Exemption. The amendments introduced an offering memorandum prospectus exemption in Ontario and modified the existing offering memorandum exemption in Alberta, New Brunswick, Nova Scotia, Québec and Saskatchewan to strengthen investor protection. As a result of the amendments, the offering memorandum exemption will now be available in all jurisdictions of Canada.

The PCMA is especially pleased that important adjustments to the proposed OM rules were adopted in the final rules based on the advocacy of the PCMA and others, specifically:

• Removal of a restriction on dealers trading in securities of related issuers
• Significantly higher investor limits with a new category of up to $100,000 based on suitability advice
• No changes to the eligible investor definition
• Significant advancement in harmonizing the OM rules across Canada

Here is a selected history of the PCMA's advocacy work, which contributed to this significant regulatory change in Ontario:

Comment Letters and Policy Proposals

All of the PCMA policy proposals to regulators on the OM can be reviewed HERE

Timeline of the PCMA’s early work to get the OM exemption on the agenda

A special timeline from 2013 that outlined the PCMA’s early efforts (formerly as the Exempt Market Dealers Association of Canada) on behalf of our members, to make the OM exemption a priority for Ontario. Review it HERE

Industry Dialogue that moved opinion

A series of articles were published in the PCMA’s Private Capital Markets magazine, including:

Make the OM exemption safer? Safer than what? by David Gilkes, Vice Chair, PCMA

Your Association at Work. There is much we can accomplish together by Geoffrey Ritchie, Executive Director, PCMA

No Caps under the Offering Memorandum Exemption by Brian Koscak, Chair PCMA and Philip du Heaume, VP Legal and Compliance, Raintree Financial Solutions

Unlocking Capital Raising: Has Ontario’s Offering Memorandum Battle Been Won? by Brian Koscak, Chair, PCMA

OSC Offering Memorandum Proposals a Positive Step Forward but Key Changes are Needed! by Geoffrey Ritchie, Executive Director, PCMA

Influencing Change: Ontario & the Offering Memorandum Exemption by Geoffrey Ritchie, Executive Director PCMA

Making Progress: How the EMDA is leading change and influencing the future of Canada’s exempt market by Geoffrey Ritchie, Executive Director, PCMA

Please watch for further analysis of the proposed rule in the next edition of the Private Capital Markets magazine – Canada’s leading source of information on the private capital markets.

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.

Toronto, ON, September 3, 2013 - On August 28, 2013, the Ontario Securities Commission (OSC) released a progress report on its review of certain prospectus exemptions to facilitate capital raising in Ontario (the OSC Progress Report) as set out in OSC Staff Consultation Paper 45-710 Considerations for New Capital Raising Prospectus Exemptions published on December 14, 2012 (the Consultation Paper).

The OSC Progress Report states that after reviewing feedback from a broad range of stakeholders, the OSC has determined it will consider the following capital raising prospectus exemptions:

• an offering memorandum (OM) exemption (the OM exemption);
• an equity crowdfunding exemption;
• a family, friends and business associates exemption; and
• a streamlined version of the existing rights offering exemption currently available across Canada.

The Exempt Market Dealers Association of Canada (EMDA) is very pleased that the OSC is considering adopting a form of OM exemption for Ontario. The EMDA has been advocating for Ontario to adopt a form of OM exemption following the Alberta model for some time (review our advocacy timeline here), however, we have proposed two additional requirements, that: (a) the exemption involve a registered dealer to enhance investor protection; and (b) OMs should be publicly posted to provide greater transparency for market participants and investors. The EMDA has referred to its form of OM exemption as the ‘Eligible Investor Exemption’ as set out in our comment letters to the OSC which are publicly available on the OSC’s website. Accordingly, the EMDA supports the OSC’s review of the OM exemption under the Alberta model rather than viewing it as a variation of a crowdfunding exemption as discussed in its Consultation Paper.

Brian Koscak, Chairman of the EMDA, remarks, "We commend the OSC for its hard work and consultative process in considering new capital raising exemptions for Ontario. The EMDA believes the OSC’s number one priority should be to adopt a form of OM exemption for Ontario. We welcome a national and harmonized OM exemption; however, we support Ontario adopting its own form of OM exemption if that harmonization process takes too long to work through the CSA.”

Geoff Ritchie, Executive Director of the EMDA states, "We have a funding gap in Ontario, and it holds back the development of emerging businesses and limits options for Ontario investors. The root cause is a prospectus exemption gap in Ontario. Between the private issuer exemption and the accredited investor exemption, there are not many prospectus exemptions for private or public companies to raise capital in Ontario. The OM exemption will meet that need and be good for Ontario’s economy and Ontario investors.”

The OM exemption, as set out in Section 2.9 of National Instrument 45-106 – Prospectus and Registration Exemptions (NI 45-106), is available across Canada except for Ontario. The OSC states that it will consider the Alberta form of OM exemption which, among other things, limits investments to $10,000 from the public unless the investor is an ‘eligible investor’. An eligible investor includes a person whose: (a) net assets, alone or with a spouse, in the case of an individual, exceed $400,000; and (b) 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.

The OSC will consider whether additional measures should be included in any form of OM exemption in Ontario, including: (a) whether and how the form of OM could be streamlined so that it is more cost-effective for small and medium-sized companies and more user-friendly for investors; (b) possible limits on the types of securities offered; and (c) appropriate investment limits.

Equity Crowdfunding

The OSC Progress Report states that the OSC is still considering a form of equity crowdfunding exemption for Ontario which it hopes will strike the right balance between protecting investors while not imposing excessive regulatory costs on issuers and funding portals. The EMDA supports selling securities on the internet by registered dealers and for Canada to adopt an equity crowdfunding framework that is harmonized and nationalized across the country.

Family, Friends and Business Associates Exemption

The private issuer exemption permits raising capital from certain enumerated categories of investors, including close personal friends, close business associates and certain family members of a director, executive officer, founder or control person of an issuer. Ontario is the only jurisdiction in Canada that does not have a form of family, friends and business associates exemption in Canada as a stand-alone exemption. The OSC Progress Report states the OSC is considering adopting a broader family, friends and business associates exemption with the goal of harmonization across Canada.

Other Highlights

The OSC Progress Report provides a summary of comments on the Consultation Paper, an investor survey report and the OSC’s findings from its research involving small and medium-sized enterprises.

The OSC Progress Report stated that the OSC will not be considering the following prospectus exemptions or amendments that it discussed in its Concept Proposal: (a) the investor sophistication exemption; (b) the registrant advice exemption; (c) changes to the existing private issuer exemption; or (d) the re-introduction of the closely-held issuer exemption.

About the Exempt Market Dealers Association of Canada

The Exempt Market Dealers Association of Canada (EMDA) is a not-for-profit industry association that brings together exempt market issuers, exempt market dealers and professional advisers to the exempt market. The EMDA is the leading national industry voice for the exempt market to securities regulators, government agencies and the capital markets and provides valuable services and benefits to its members, including: exclusive customized insurance programs for exempt market dealers, regulatory and compliance guidance, opportunities for professional development and continuing education, and access to a network of exempt market professionals from coast to coast. For more information please visit our website: www.emdacanada.com

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For more information, please contact:

Brian Koscak EMDA Chairman 416.860.2955 brian.koscak@emdacanada.com

David Gilkes EMDA, Vice Chairman 416.915.4219 dgilkes@emdacanada.com

Geoffrey Ritchie EMDA Executive Director 416.509.9179 gritchie@emdacanada.com

Jerome Hass, Special to Financial Post

Monday, Feb. 15, 2016

Rather than spending taxpayer dollars on subsidies for productivity and innovation, we have the opportunity for a cost-free alternative

On Jan. 13, 2016, new regulations came into effect in Canada’s largest capital market that were intended to increase access to the exempt market, both to facilitate capital-raising for small and medium-sized enterprises (SMEs) and to harmonize Ontario’s regulations with the rest of the country. But don’t expect to be able to “invest like the rich” in these exempt markets anytime soon, since neither objective will be fully achieved by the proposed regulations.

Read the full article HERE