Under what circumstances can companies issue exempt offerings in Ontario?
An exempt offering is an offering of a security that is exempt from the requirement that a full prospectus be prepared. Such exemptions are often relied upon to reduce the cost and compliance burden involved with a non-exempt offering. But what kind of issuances qualify for such an exemption? Here are the most common types of exempt offerings in Ontario:
Crowdfunding Exemption. Canadian start-up companies are authorized to sell securities under the crowdfunding prospectus exemption. Such sales can only take place via an online portal that is registered with the Ontario Securities Commission. Private individuals can buy securities under this exemption so long as they remain within a yearly limit of $2,500 per investment and $10,000 in total crowdfunding purchases. The limits are higher for accredited investors ($25,000 per investment, $50,000 per year) and are waived entirely for larger institutional investors such as governments and banks.
Accredited Investor Exemption. Companies are authorized to sell securities to investors without a prospectus so long as the purchaser in question fulfils the conditions of an accredited investor, which include: 1) a net income of $200,000 in each of the two most recent calendar years, and a net income of more than $200,000 in the current calendar year; 2) a pre-tax net income of $300,000 when combined with a spouse in each of the two most recent calendar years, and an expected net income of more than $300,000 in the current calendar year; 3) financial assets (excluding one’s house) of at least $1 million pre-tax, either individually or combined with a spouse, but net of related liabilities; and 4) net assets (all assets minus debt) of at least $5 million either individually or combined with a spouse. So long as these criteria are met, an accredited investor can invest unlimited amounts in a prospectus-exempt offering.
Family, Friends, and Business Associate Exemption. Companies are authorized to sell securities to family, friends, and close business associates under this prospectus exemption. No limits are imposed on this kind of purchase.
Minimum Amount Investment Exemption. Companies can sell their securities to an investor that is not an individual (ie a corporation or government agency) so long as the purchase price is at least $150,000.
Existing Security Holder Exemption. Public companies listed on certain exchanges can sell prospectus-exempt securities to investors who already hold the security being offered; these investors are able to purchase up to $15,000 in securities per year under this exemption. It is also possible for this limit to be exceeded so long as it’s on the advice of an investment dealer.
Rights Offering Exemption. Public companies can also sell securities to existing investors under a rights offering prospectus exemption. These rights are extended by the company to preexisting security holders on a pro rata basis; rights holders can then choose to exercise their right and pay the subscription price for the securities. No limits are imposed on this kind of purchase.
Offering Memorandum Exemption. Prospectus exemptions also apply to companies that issue an offering memorandum. An offering memorandum is similar to a prospectus, but it’s aimed at a specific group of private investors rather than the public at large. An offering memorandum typically contains the offering terms of the investment, the risks involved, and/or the business plan of the offering entity. Purchasers of this type of exempt offering fall into two categories: eligible and non-eligible investors. To qualify as an eligible investor, the party in question must have net assets (alone or with spouse) in excess of $400,000; pre-tax net income of $75,000 in the previous two calendar years and an expectation to exceed that level in the current year; and net income (alone or with spouse) in excess of $125,000 in the previous two calendar years, with an expectation to exceed that level in the current year. Under the offering memorandum exemption, eligible investors are authorized to purchase up to $30,000 in securities per year, and this can be further exceeded up to a limit of $100,000 per year if done so on the advice of an accredited portfolio manager. Non-eligible investors are authorized to make $10,000 in purchases per year.
Many of these exempt market offerings involve additional registration and due diligence requirements. We strongly encourage that you consult with the relevant authorities to get the most up-to-date information. You can also book a telephone consultation to discuss how Wright Business Law can help you with your business’ needs.