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CSA Provides Guidance for Preparing and Filing an Offering Memorandum Under NI 45-106
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By:     Brian Koscak, EMDA Chairman and Partner, Cassels Brock & Blackwell LLP
Afzal Hasan, Articling Student, Cassels Brock & Blackwell LLP

Capital markets participants often struggle with trying to comply with the form requirements for preparing and fi ling an offering memorandum (OM) in connection with the offering memorandum exemption (the OM Exemption) under section 2.9 of National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). Although there are prescribed form requirements (the Forms), one for qualifying issuers (1) and one for non-qualifying issuers, it appears issuers are struggling to get it right.(2)

The Saskatchewan Financial Services Commission (the SFSC) has previously issued a staff notice commenting on its review of OMs in SFSC Staff Notice 45-704 – Review of Offering Memorandums under NI 45-106 Prospectus and Registration Exemptions. The SFSC found material disclosure deficiencies in all OMs that were reviewed, noting that "[i]n general, the OMs were poorly prepared and did not provide the disclosure required” (3) by the Forms.

Based on a review of the number of cease trade orders that have been issued in British Columbia and Alberta for materially deficient OMs, the quality of OMs prepared in other provinces does not seem to be substantially better.

On April 26, 2012, the CSA published Multilateral CSA Staff Notice 45-309 – Guidance for Preparing and Filing an Offering Memorandum under NI 45-106 (the Notice). The Notice offers guidance to issuers that intend to rely on the OM Exemption in s. 2.9 of NI 45-106 by discussing common deficiencies. This is particularly helpful and long overdue since unlike a prospectus that is reviewed and receipted by the securities regulators, OMs generally are not receipted or reviewed by securities regulators (see Pre-Filing of OMs– Help from Certain CSA Members below).

Responsibility for compliance with the NI 45-106 rests with the issuer and not, for example, the exempt market dealer. However, EMDs need to be familiar with and understand the financial and non-financial disclosure of any OM as part of their "Know Your Product” and "suitability obligations” under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.

The Notice states that the OM must be in the correct form, not contain any misrepresentations and provide sufficient information to enable a prospective purchaser to make an informed investment decision.

The sufficiency of information requirement goes beyond the prescribed form requirements whereby issuers must add any other information to enable a prospective purchaser to make an informed investment decision. In contrast, this is not a requirement in preparing an OM that is not made in reliance on the OM Exemption. For example, a voluntary OM provided to an accredited investor who is purchasing securities under the accredited investor exemption in NI 45-106.

The Notice largely provides 19 common deficiencies in connection with an OM prepared in accordance with Form 45-106F2 - Offering Memorandum for Non-Qualifying Issuers. The common deficiencies are summarized below.

Top 19 Common OM Deficiencies

1. Failing to file an OM on time – Some issuers have not fi led an OM within the applicable fi ling deadlines; some have not filed one at all. An OM must be filed no later than 10 days after the first distribution of that OM unless the OM is updated and used in a subsequent distribution, in which case it must be re-fi led (the amended or amended and restated OM) within 10 days of that subsequent distribution date.

2. Failing to update the OM when distributions are ongoing – A number of issuers have used "staledated” OMs. To rely on the OM Exemption, the OM must not contain a misrepresentation as of the date the OM certificate is signed and the date it is delivered to prospective purchases. For example, in a continuous distribution, there are instances where an issuer’s most recent annual financial statements and/or interim financial statements have not been included in the OM at the date it was delivered to a purchaser.

3. Using an incorrect form of update – Issuers should follow the guidance in s. 3.8(3) of Companion Policy 45-106CP – Prospectus and Registration Exemptions when updating an OM. Since OMs need to be easy to read and understand, issuers need to consider whether adding an amendment page to the existing OM is sufficient or whether a new amended and restated OM
should be prepared and delivered to potential purchasers.

4. Failing to include sufficient information to make an informed investment decision – Some issuers have not provided sufficient information regarding their business or the ultimate use of the proceeds raised in connection with the OM offering, or provided overly promotional disclosure regarding the business or the experience of management.

5. Inadequately disclosing the issuer’s business –Some issuers have provided little disclosure about their business and its development. The Notice sets out guidance for mortgage investment entities, investment funds, real estate development entities and for entities with interests in rental properties. The CSA even recommends providing such information in tabular format to make it easer to read.

6. Failing to provide balanced disclosure – Some issuers have presented unrealistic or excessively promotional disclosure in their OMs. Issuers should ensure that the disclosure in their OM is balanced and realistic relative to their current stage of development.

7. Inadequately disclosing available funds and use of available funds – The Notice sets out a number of examples of how issuers have inadequately disclosed the use of available funds.

8. Inappropriately reallocating available funds –Proceeds raised under the OM Exemption must be used for the purposes disclosed in the OM. If available funds may be reallocated to purposes other than those stated, it must be clearly stated. This does not give an issuer the right to use such proceeds for any purpose; rather, funds may only be reallocated for sound business reasons involving the stated business of the issuer.

9. Omitting key terms in material agreements – Some issuers have omitted key terms of material agreements, especially for those agreements entered into with related parties in their OM disclosure. For example, the Notice states that some issuers have not disclosed the cost of assets to the related party and the cost of the assets to the issuer for transactions involving the purchase of assets by, or sale of assets to, the issuer from a related party. Additionally, the Notice states that attaching a copy of the agreement or stating that a material contract is available upon request is not a substitute for disclosing a summary of the key terms of the material agreements as required by the OM Exemption. Issuers should also ensure that any notes to its financial statement disclosure that summarize or describe a material agreement in whole or in part contain the same description in the body of the OM.

10. Omitting compensation disclosure – Some issuers have not accurately disclosed the total amount of compensation received by directors, officers and promoters, especially where such compensation is paid through a related party or is not immediately due. Compensation includes any form of remuneration, such as cash, shares and options, and whether direct or indirect.

11. Inadequately disclosing management experience – Some issuers provide management experience
that is overly promotional in nature or generic and insufficient for a prospective purchaser to evaluate management’s background and experience to run the business. More detailed experience, possibly even in tabular form, would be helpful to readers to understand management’s work experience and educational background.

12. Disseminating material forward-looking information (FLI) not included in the OM – Issuers are reminded that they cannot provide prospective investors with sales literature or any other type of document that uses FLI that is not included in the OM. More importantly, when FLI is used, issuers must comply with sections 4A.2 and 4A.3 of National Instrument 51-102 – Continuous Disclosure Obligations.

13. Omitting required interim financial reports – Some issuers have omitted interim financial statements. Issuers are reminded to consider updating interim financial statements in connection with continuous offerings where OMs are updated.

14. Omitting key elements of financial statements –Issuers must include a full set of financial statements, and not only select financial statements.

15. Failing to obtain required audits – Certain issuers did not include audited financial statements as required by the OM Exemption. This is a basic requirement that cannot be missed by issuers.

16. Omitting required audit reports or including non-compliant audit reports – Some issuers have neglected to include the audit report for comparative financial statements when statements have been audited in accordance with the OM Exemption. In certain circumstances, the auditor’s report has been qualified or not prepared in the specified form. Issuers, except for investment funds, must include financial statements in the OM that comply with National Instrument 52-107 – Acceptable Accounting Principles and Auditing Standards ( NI 52-107). The Notice discusses the financial statement requirements for investment funds which is outside the scope of this article.

17. Inappropriately using a Notice to Reader – The CSA stated in the Notice that issuers cannot attach a cautionary disclaimer in the form of a Notice to Reader to their interim financial reports (e.g., "Readers are cautioned that these financial statements may not be appropriate for their purposes.”) Issuers must obtain the requisite expertise from external advisors if they do not have the expertise themselves to prepare financial statements as required under the form requirements. See also #18 and #19 below.

18. Failing to prepare financial statements in accordance with appropriate accounting principles and improperly certifying the OM – The CSA noted that many of the OMs reviewed reflected a variety of inappropriate accounting principles. Financial statement disclosure must comply with NI 52-107. This is a very important requirement. Certifying signatories of an OM should review a complete OM, including required financial statements, before signing an OM. All items in the OM, including the required financial statements must be placed before the certificate page to ensure it is properly certified. Generally, issuers must prepare the financial statements in accordance with Canadian GAAP applicable to publicly accountable enterprises and not Canadian GAAP applicable to private enterprises. Canadian GAAP applicable to publicly accountable enterprises other than investment funds has transitioned to IFRS for fiscal years beginning on or after January 1, 2011. Issuers must prepare all of their interim financial reports and annual financial statements included in an OM for fiscal years beginning on of after January 1, 2011 in accordance with IFRS.

19. Improperly certifying the OM – The CSA noted problems with signatures and some issuers who are not including or attaching financial statements before signing and dating the certificate page.

Consequences of failing to Comply with the OM requirements under the OM Exemption.

The Notice outlined the consequences of failing to comply with the applicable OM disclosure requirements, which vary in degree of severity from:

(a) Requiring the issuer to file a revised or amended OM;

(b) Same as (a) and the revised OM must also be delivered to existing purchasers;

(c) Same as (b) and the issuer must grant rescission rights to certain investors;

(d) Imposing a cease trade order (CTO) requiring the issuer to address (a), (b) or (c) before the CTO is revoked. For example, a recent review of the Alberta Securities web site indicates that the ASC has issued almost a dozen CTOs relating to deficient OMs since 2011.

(e) Irrespective of (a), (b), (c) or (d), take enforcement action. The bottom line is that issuers must take their disclosure obligations seriously under the OM Exemption or they may face regulatory consequences. This is especially important since the OM Exemption is based on protecting investors from a public policy perspective based on, among other things, providing potential investors with a prescribed form of offering document to ensure investors can make a fully informed decision. Arguably, a failure to satisfy the form requirements and thus providing materially deficient disclosure to purchasers violates the OM Exemption and is an illegal trade.

The above article only summarizes some of the guidance provided by the CSA in the Notice and readers are urged to read the Notice in its entirety which is publicly available on the websites of the Canadian securities regulatory authorities.

Who can help Issuers with OM Disclosure?

Issuers, especially smaller issuers, may be hesitant to engage lawyers who have specialized experience in securities law and they may choose to prepare OMs ‘in-house’ for cost reasons. Although the ‘cost of funds’ is always an important consideration, issuers should be mindful that completing the Forms is not just a perfunctory exercise, but one that needs the requisite expertise of someone who is familiar with the Form disclosure requirements and who can effectively work with management to obtain the necessary information. The retention of skilled professionals will reduce the likelihood that issuers will inadequately comply with the Form requirements which could incur regulatory sanctions which could significantly add to costs and draw negative attention to the issuer. For these and other reasons professional legal advice on your OM is highly recommended.

Pre-Filings of OMs – Help from Certain CSA Members

So what if you want to obtain additional comfort, whether you use a lawyer or not, on whether your OM is compliant?

Two CSA members allow issuers to pre-file OMs to confirm whether the OM is in compliance with applicable securities law - the SFSC and the New Brunswick Securities Commission (NBSC).

(a) Saskatchewan Financial Securities Commission

In Saskatchewan, issuers may pre-file a draft OM on a voluntary basis for staff review and comment before it is used. Staff Notice 45-706 Voluntary Pre-Offering Review of Offering Memorandums Under NI 45-106 Prospectus and Registration Exemptions sets out the details. (5) The SFSC notes that the primary users of this service have been first time issuers, and that issuers have regularly made use of this service since its inception in 2008.

(b) New Brunswick Securities Commission

In New Brunswick, issuers may provide a draft OM on a voluntary basis for staff review to identify any significant issues before it is used. The availability of this service was disclosed in January 2011 in the NBSC’s "Guide to Raising Money Using an Offering Memorandum”(6), but the practice has been informally encouraged by the NBSC prior to that date. The NBSC reports that is has been regularly used by issuers in the province.

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.

For more information contact: Brian Koscak

Post Script - the OM Exemption not in Ontario, but Coming Soon?

As readers know, the OM Exemption is not available in Ontario. Since the securities regulators do not review, comment or receipt OMs as they do in a prospectus, a primary concern for Ontario has always been the quality of OM disclosure. This is another reason why the industry needs to review the quality of its OMs if Ontario is to consider adopting the OM Exemption.

The EMDA, in its comment letter involving CSA Staff Consultation Note 45-401 – Review of the
Minimum Amount and Accredited Investor Exemptions – Public Consultations, has recommended that Ontario adopt a form of OM exemption. We refer readers to the EMDA comment letter that is available on the EMDA web site. (7)

On June 7, 2012, the Ontario Securities Commission (the OSC) announced that it is broadening the scope of its exempt market review as a result of stakeholder feedback. The expanded review will consider whether the OSC should introduce new prospectus exemptions that may assist capital raising for business enterprises, while protecting the interests of investors. (8) This means that the OM Exemption is back on the OSC’s regulatory agenda, which is great news for all market participants.


1. "qualifying issuer” means a reporting issuer in a jurisdiction of Canada that: (a) is a SEDAR filer, (b) has filed all documents required to be filed under the securities legislation of that jurisdiction, and (c) if not required to file an annual information form (AIF), has filed in the jurisdiction, (i) an AIF for its most recently completed financial year for which annual statements are required to be filed, and (ii) copies of all material incorporated by reference in the AIF not previously filed.

2. Note that certain jurisdictions such as Alberta and British Columbia have separate and specific form requirements involving certain types of real estate offerings.

3. SFSC Staff Notice 45-704, "Review of Offering Memoranda under NI 45-106 Prospectus and Registration Exemptions” available at: http:// www.sfsc.gov.sk.ca/adx/aspx/adxGetMedia.aspx?DocID=1558,1396,1375,1364,2259,2257,244,1,Documents&MediaID=2962&Filena

me=45-704-amended-Mar7-11-clean.pdf

4. This exemption is available in all Canadian jurisdictions except Ontario.

5. See: http://www.sfsc.gov.sk.ca/adx/aspx/adxGetMedia.aspx?DocID =1559,1396,1375,1364,2259,2257,244,1,Documents&MediaID=2963&Filename=45-706-jan18-08.pdf

6. See http://www.nbsc-cvmnb.ca/nbsc/docs/OM-Brochure-(FINALweb)-EN.pdf

7. See: EMDA comment letter involving CSA Staff Consultation Note 45-401 – Review of the Minimum Amount and Accredited Investor Exemptions – Public Consultations at: http://www.emdacanada.com/?page=SpeakingupforEMDs

8. OSC Staff Notice 45-707 – OSC Broadening Scope of Review Of Prospectus Exemptions at http://www.osc.gov.on.ca/en/SecuritiesLaw_sn_20120607_45-707_prospectus-exemptions.htm

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