Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

Most private issuers in Ontario rely on two prospectus exemptions to raise capital: the accredited investor (AI) exemption and the offering memorandum (OM) exemption, both found in NI 45-106 ‘Prospectus Exemptions’. Each exemption reflects a different policy objective and carries different compliance burdens, disclosure obligations and investor-eligibility constraints. The AI exemption allows issuers to raise capital from investors who meet defined financial thresholds without providing prescribed disclosure. By contrast, the OM exemption permits access to a broader investor base, including certain retail investors, but requires extensive disclosure, audited financial statements and, in certain provinces, restricts the amount that an eligible investor may invest each year.

Choosing between the AI and OM exemptions is a strategic decision that affects every aspect of an issuer’s capital-raising program. It influences who the issuer can target, what disclosure is required, how much compliance infrastructure is necessary, whether registration issues arise under NI 31-103, what liabilities attach to the offering, and how regulators will view the issuer’s governance and investor protection practices. Many issuers use both exemptions concurrently in continuous offerings, although doing so requires disciplined operational coordination. This article explains the legal framework governing both exemptions, outlines the key differences, highlights regulatory risks and offers practical guidance for issuers determining which exemption is most appropriate for their fundraising objectives.

Regulatory Framework and Sources of Law

Both the AI exemption and the OM exemption appear in NI 45-106, which harmonises prospectus exemptions across Canada. The AI exemption is found in s. 2.3, and the OM exemption in s. 2.9, each incorporating detailed definitions, rules and procedural requirements.

The accredited investor exemption reflects the policy assumption that certain investors possess sufficient financial sophistication or resources to evaluate investments without mandated disclosure. The definition of accredited investor is provided in NI 45-106, s. 1.1 and includes individuals with net financial assets of at least $1 million, annual income exceeding $200,000 ($300,000 with a spouse), and institutional categories such as banks, pension funds and registered dealers.

The OM exemption reflects a different policy approach. It allows retail participation under controlled circumstances but requires the issuer to deliver a prescribed offering memorandum (Form 45-106F2), obtain a risk acknowledgement form (Form 45-106F4), comply with investment limits for eligible investors and, as with most other exemptions, file a report of exempt distribution. It is a disclosure-heavy exemption that creates statutory civil liability for misrepresentations, similar to liability under a prospectus but tailored to non-reporting issuers.

Both exemptions interact directly with NI 31-103 ‘Registration Requirements, Exemptions and Ongoing Obligations’. Under NI 31-103, issuers distributing securities may be considered “in the business of trading” and therefore require registration as an exempt market dealer unless an exemption applies. Dealers participating in either type of offering must satisfy KYC, KYP and suitability obligations.

Definitions and Thresholds

The AI and OM exemptions differ significantly in their eligibility criteria.

Accredited Investor Exemption

The AI exemption can be used only where the purchaser meets the definition of an accredited investor in NI 45-106, s. 1.1. Key thresholds include:

1. Net financial assets of at least $1 million, excluding the value of the primary residence.

2. Annual income of at least $200,000 in the last two years (or $300,000 combined with a spouse).

3. Net assets of at least $5 million.

4. Institutional categories such as banks, trust companies, registered dealers, investment funds managed by registered portfolio managers, and similar entities.

Investors must self-certify their AI status through subscription documents and issuers or dealers must additionally verify eligibility information in certain circumstances.

Offering Memorandum Exemption

The OM exemption is broader. Eligible investors can participate subject to investment limits, and accredited investors can also invest without limit. Key features include:

1. Form 45-106F2 offering memorandum containing audited financial statements, detailed risk disclosure, business description, use of proceeds and investor rights.

2. Risk acknowledgement (Form 45-106F4).

3. Investment limits for certain investors (dependant on the applicable province):

• $10,000 in a 12-month period for non-eligible investors
• $30,000 in a 12-month period for eligible investors without dealer suitability,
• $100,000 in a 12-month period for eligible investors with dealer suitability.

4. Civil liability for misrepresentations.

These thresholds make the OM exemption suitable for issuers targeting retail investors.

Application in Practice

Choosing between the AI and OM exemptions requires evaluating the issuer’s capital-raising goals, investor base, compliance systems and growth plans.

Under the AI exemption, the issuer may distribute securities with minimal procedural requirements. The issuer prepares subscription documents that contain representations regarding accredited investor status and AML/KYC procedures. Marketing materials must be balanced and non-misleading, but the issuer does not need to prepare prescribed disclosure. The primary compliance obligations relate to eligibility, business-trigger analysis for dealer registration and timely filing of Form 45-106F1 after each distribution.

By contrast, the OM exemption imposes additional obligations. The issuer must prepare a compliant offering memorandum in Form 45-106F2, including IFRS-compliant audited financial statements. The issuer must ensure that all material facts are disclosed and must update the OM for material changes. The issuer must deliver the OM to each investor, obtain a risk acknowledgement, use a registered dealer when the registration trigger has been met, and file Form 45-106F1 along with the OM. The compliance burden increases significantly if the issuer conducts continuous offerings or rolling closes.

In practice, many issuers find that using the OM exemption requires building a compliance infrastructure resembling that of a public offering, albeit at a smaller scale. It demands legal review, financial auditing, internal controls and ongoing disclosure updates.

Grey Areas and Regulator Focus

One grey area arises where issuers rely on the accredited investor exemption while engaging in broad marketing campaigns that reach retail-oriented audiences. Regulators may scrutinise whether the issuer has implemented adequate procedures to verify accredited investor status, whether marketing materials are misleading or insufficiently balanced, and whether the issuer’s activities trigger dealer registration under NI 31-103.

Regulators also focus on marketing practices, particularly where issuers present overly optimistic projections or simplified summaries of complex risks. OSC Staff have emphasised that marketing materials must be consistent with the OM and must not omit material risks.

Where issuers combine both exemptions in the same offering, regulators expect clear disclosure of how the exemptions interact and whether marketing materials are suitable for both AI and OM investors.

Illustrative Scenarios

Consider a real estate development fund that wishes to target high-net-worth investors and family offices. Because these investors qualify as accredited investors, the fund may choose to rely solely on the AI exemption. This avoids the cost and complexity of preparing audited financial statements and a formal offering memorandum. The fund conducts a continuous offering to accredited investors, files Form 45-106F1 and avoids the additional compliance burden associated with broader retail OM distributions.

In another scenario, a private mortgage fund seeks to access a broader investor pool, including retail participants. To raise capital from eligible investors who are not accredited, the fund adopts the OM exemption. It prepares a comprehensive offering memorandum, works with a registered dealer for investor onboarding, and implements detailed valuation and financial reporting systems. Although more burdensome, this approach supports a larger and more diverse investor base.

A hybrid scenario involves an issuer that uses both exemptions simultaneously. For example, a private equity fund may raise initial capital exclusively from accredited investors using the AI exemption, then expand to eligible investors under the OM exemption. In this case, the issuer must ensure that marketing materials are compliant for both exemptions and that the OM is updated for all material changes.

Compliance Checklist

• Identify the target investor base and assess investor eligibility thresholds.
• Determine whether retail or non-accredited investors will participate. If so, the offering memorandum exemption may be desirable.
• Evaluate whether the issuer can prepare audited financial statements and comply with Form 45-106F2 disclosure requirements.
• Assess whether a registered dealer is required under NI 31-103 and whether the issuer’s distribution activities trigger dealer registration obligations.
• Ensure marketing materials align with the selected exemption and contain balanced risk disclosure.
• Implement AML, KYC, and investor qualification procedures in coordination with the exemption(s) used.
• File Form 45-106F1 within ten days of each distribution.
• If both the accredited investor exemption and offering memorandum exemption are used concurrently, to avoid inconsistencies, harmonise disclosure practices, suitability processes, marketing approvals, and record-keeping procedures.

Conclusion and Next Steps

Choosing between the offering memorandum exemption and the accredited investor exemption requires a nuanced understanding of regulatory requirements, investor eligibility, operational burdens and market expectations. The AI exemption offers speed, relative simplicity and lower cost, but restricts the investor pool. The OM exemption allows broader participation, including retail investors, but imposes audit, disclosure, suitability and filing obligations. Issuers must evaluate their fundraising goals, governance capacity and compliance infrastructure before selecting an exemption. A well-informed exemption strategy can support efficient capital raising while maintaining regulatory compliance and investor protection.

Book a Consultation

If you are forming, restructuring, or operating a private investment fund or carrying out an exempt offering in Canada, contact us to schedule an initial consultation with Nick Wright.