This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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- Understanding the Ontario Offering Memorandum Exemption
In Ontario, the securities market is governed by stringent regulations designed to protect investors and ensure transparency in the financial markets. One key provision under Ontario securities law that allows certain businesses to raise capital without the burden of a prospectus is the Offering Memorandum Exemption. This exemption provides an alternative route for companies seeking to raise funds through the issuance of securities, without the need to file a formal prospectus.
This article provides an overview of the Ontario Offering Memorandum Exemption, explaining its purpose, eligibility requirements, and key legal considerations for both issuers and investors.
- What is the Ontario Offering Memorandum Exemption?
The Offering Memorandum Exemption is set out under National Instrument 45-106 – Prospectus Exemptions (NI 45-106). It allows companies (usually private businesses) to offer securities to investors without the requirement to file a prospectus with the Ontario Securities Commission (OSC). Instead, issuers can provide potential investors with an offering memorandum – a document containing detailed information about the company, its financials, risks, and other material information.
This exemption is especially valuable for small to mid-sized businesses and start-ups looking to raise capital from a wider pool of investors without the time-consuming and costly process of preparing a full prospectus.
- Key Features of the Offering Memorandum Exemption
Offering Memorandum: The offering memorandum is a disclosure document that provides investors with material information about the issuer and the securities being offered. It is not as exhaustive as a prospectus but still includes key details such as:
• Information about the business and its management
• A description of the securities being offered
• Financial statements
• Risk factors associated with the investment
• The use of proceeds from the sale of securities
The offering memorandum serves to inform potential investors, allowing them to make an informed decision about whether to invest in the securities being offered.
Exemption from the Prospectus Requirement: By using the offering memorandum exemption, issuers avoid the time-consuming and expensive process of preparing a full prospectus. However, this exemption is not available to all issuers. The exemption is designed for private companies and smaller issuers who do not meet the criteria for a prospectus but still want to offer securities to the public or a select group of investors.
Eligibility Criteria: Under the Ontario offering memorandum exemption, the issuer must meet certain eligibility requirements. Key conditions include:
• Type of Issuer: The exemption is primarily available to private companies. Public companies or reporting issuers are generally excluded from using this exemption.
• Investment Limits: Investors purchasing securities under this exemption are subject to certain investment limits. For example:
• ‘Non-eligible’ investors can invest up to $10,000 per year in securities under the offering memorandum exemption.
• ‘Eligible’ Investors can invest up to $30,000 per year without the recommendation of a portfolio manager, investment dealer or exempt market dealer that and up to $100,000 per year with such approval.
• ‘Accredited’ investors are generally not limited in the amount that they can invest. Accredited investors are typically institutional investors, high-net-worth individuals, or experienced businesspeople who can bear the risk of the investment.
• Investor Protections: The exemption includes investor protection measures, such as a right of rescission (the ability to cancel the investment) if the offering memorandum contains a material misstatement or omission.
- Advantages of the Offering Memorandum Exemption
Cost-Effective and Time-Saving: Preparing a full prospectus can be a costly and time-consuming process. By using the offering memorandum exemption, issuers can save on legal, accounting, and regulatory fees. This is particularly beneficial for smaller businesses, start-ups, and growing companies that do not have the resources to undergo a full prospectus filing.
Access to a Broader Pool of Investors: The offering memorandum exemption allows issuers to raise funds from a wider group of investors, including individuals who may not meet the accredited investor criteria. This is an appealing feature for businesses looking to secure investment from a broad audience without being limited to high-net-worth individuals or institutional investors.
Flexibility: The offering memorandum exemption offers flexibility in structuring investments. Issuers can offer various types of securities, including equity, debt, and hybrid securities. Additionally, the exemption can be used for both private placements and offerings to a broader group of investors, as long as the offering memorandum requirements are met.
Investor Protections: While this exemption provides a less stringent regulatory framework than a prospectus, the offering memorandum still serves to protect investors. The document ensures that investors are provided with important information about the company and the investment risks involved.
- Risks and Considerations for Investors
While the offering memorandum exemption provides greater access to capital, it also poses certain risks for investors. These risks should be carefully considered before proceeding with an investment:
Limited Information: Unlike a prospectus, which is subject to extensive regulatory scrutiny, the offering memorandum is not subject to the same level of detailed oversight. As a result, the information provided to investors may be less comprehensive or more difficult to verify.
Liquidity Risk: Securities issued under the offering memorandum exemption are typically illiquid, meaning that investors may have difficulty selling or transferring their investment. This can be a particular concern for smaller companies or start-ups where market demand for the securities may be low.
Higher Risk of Fraud: While the offering memorandum aims to disclose material information to investors, the lack of full regulatory scrutiny may increase the risk of fraud or misrepresentation. Investors should always perform their own due diligence and consult with financial advisors before proceeding with investments.
Risk of Loss: As with any investment, there is a risk of loss, particularly in the case of early-stage or start-up businesses. Investors should be aware of the specific risks involved with the business and sector in which they are investing.
- Legal Requirements and Filing Process
To use the offering memorandum exemption in Ontario, the issuer must prepare and deliver an offering memorandum to potential investors. The offering memorandum must include specific information, such as:
• Detailed information about the issuer’s business, including its history, management, and financial position
• A description of the securities being offered, including the terms of the offering
• Financial statements (usually for the past two years)
• A description of the risks associated with the investment
Once the offering memorandum is prepared, the issuer must ensure that it complies with the legal requirements under the Securities Act (Ontario). The issuer is not required to file the offering memorandum with the Ontario Securities Commission (OSC) before offering securities, but they must keep copies available for inspection and provide them to investors upon request.
- Conclusion
The Ontario Offering Memorandum Exemption is a powerful tool for private companies and start-ups to raise capital without the expense and complexity of filing a prospectus. While it provides a cost-effective and flexible way to attract investors, it also involves certain risks that both issuers and investors need to understand.
Issuers should carefully prepare their offering memorandum to ensure compliance with the legal requirements and provide potential investors with sufficient information to make an informed decision. Likewise, investors should conduct their own due diligence and understand the risks involved in investing through this exemption.
By consulting with legal and financial professionals, both issuers and investors can navigate the offering memorandum exemption effectively, ensuring a smoother and more successful capital raising process.
Sources:
NI 45-106 – Prospectus Exemptions
Ontario Securities Act, RSO 1990, c. S.5.
Canadian Securities Administrators (CSA)
Ontario Securities Commission (OSC)