One of the most significant regulatory developments of the
past few years regards changes to offering memorandum exceptions, and every
Canadian business owner and investor should be aware of how these new rules work.
In 2016, a set of new amendments from provincial securities regulators came into force. They introduced an offering memorandum prospectus exemption in Ontario, and modified preexisting ones in Alberta, Nova Scotia, New Brunswick, Québec, and Saskatchewan to bring them in line with the new Ontario model. The result has been a new capital market that’s more-or-less harmonized, despite a few enduring regulatory distinctions among the provincial jurisdictions involved.
The aim of these changes, in the words of Canadian Securities Administrators (CSA) Chair Louis Morisset, was to “enhance access to capital across Canada while introducing key investor protection measures.” But even more importantly, they represent greater regulatory harmonization among the provinces and a step toward the establishment of a Canada-wide capital market.
An offering memorandum exception allows issuers to attract capital from investors who might not normally qualify under other prospectus exemptions. The mechanism provides several advantages to issuers: an offering memorandum’s upfront disclosure standards are less comprehensive, as are its annual filing requirements, and going the OM exception route can save issuers a lot of money by foregoing the costly preparation and filing process of a prospectus.
But like with any vehicle aimed at individual investors, regulators seek to strike a balance between freeing up capital and promoting the rights and interests of the people who are providing it. With that in mind, here are some of the new investor protections included in the OM exception amendments:
- Non-reporting issuers must now provide investors
with audited annual financial statements along with annual notices outlining
how proceeds from the offering memorandum are being used. In the case of
Ontario, New Brunswick, and Nova-Scotia, non-reporting issuers are also
required to inform investors of a discontinuation of its business, a change of
its industry, or a change of control of the issuer.
- All marketing materials must be referenced in
the offering memorandum so as to ensure uniform liability and disclosure
standards. Marketing materials also need to be filed with the securities
regulator of the province in question.
- Individual investors relying on the offering
memorandum exemption are subject to new investment limits depending on their
financial circumstances. For example, an individual who is not an “eligible
investor” due to insufficient income or assets can invest a maximum of $10,000; an eligible investor can invest up to $30,000; and an
eligible investor who receives suitability advice from a registered
professional can invest up to $100,000.
- Investors must sign a form acknowledging risk.
Notably, in British Colombia and Newfoundland and Labrador – provinces outside the purview of the above amendments – there are no limits for individual investors under the OM exception.
For more details on the changes, please visit: Multilateral CSA Notice of Amendments to National Instrument 45-106 Prospectus Exemptions Relating to the Offering Memorandum Exemption.
Nick Wright is a Toronto business lawyer with extensive experience assisting business’ raise capital. Contact him now at https://wrightbusinesslaw.ca/contact to arrange a time to discuss your business’ legal needs.
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