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 Exempt Market Offerings in Ontario
Exempt market offerings are an essential part of the capital-raising landscape for companies in Ontario and across Canada. These offerings allow businesses, particularly startups and private companies, to raise funds without needing to comply with the full registration and disclosure requirements of public offerings. Instead, the companies rely on certain exemptions under Canadian securities laws to access investors who meet specific criteria.
In this blog post, we’ll explore what exempt market offerings are, how they work, and what both issuers and investors should know about them in Ontario.
- What Are Exempt Market Offerings?
Exempt market offerings refer to investment opportunities in securities that are not subject to the usual regulatory requirements of public offerings. These offerings are considered “exempt” from the registration and prospectus requirements under the Securities Act (Ontario) and other applicable provincial securities laws. The exemptions are typically based on the type of investor (e.g., accredited investors) or the nature of the investment offering itself.
Exempt market offerings allow businesses, especially small or emerging companies, to raise capital from qualified investors without the burden of preparing a full prospectus or undergoing lengthy regulatory approvals, which can be costly and time-consuming.
- Types of Exempt Market Offerings in Ontario
Under Ontario’s Securities Act, there are several types of exemptions that allow businesses to conduct exempt market offerings. The most common exemptions include:
A. Accredited Investor Exemption
The accredited investor exemption is one of the most widely used exemptions in Ontario and across Canada. It allows issuers to offer securities to investors who meet certain financial criteria. Accredited investors are typically high-net-worth individuals, institutional investors, or certain types of corporations, and they are presumed to have the financial knowledge and ability to bear the risks associated with investing in securities that are not subject to full regulatory oversight.
Criteria for Accredited Investors:
Individuals with a net income of $200,000 or more in each of the last two years, or $300,000 with a spouse.
Individuals with financial assets of at least $1 million (excluding their primary residence).
Certain types of financial institutions, pension funds, and mutual funds.
This exemption is attractive to companies because it allows them to raise capital from a pool of investors who are more likely to understand the risks involved in their investment.
B. Family, Friends, and Business Associates Exemption
This exemption allows businesses to offer securities to individuals who have a close relationship with the issuer. These investors are generally presumed to be more familiar with the company and its risks, making the offering less risky for both the company and the investor.
The investor must have a pre-existing, close relationship with the issuer or a senior officer of the issuer (such as being a close family member, friend, or business associate).
This exemption is frequently used by early-stage companies seeking to raise initial capital from trusted networks before expanding to accredited investors or broader markets.
C. Offering Memorandum Exemption
Under this exemption, a company can raise capital from a broader group of investors who are not necessarily accredited but are provided with a comprehensive offering memorandum. The offering memorandum must disclose relevant information about the company, its business, the securities being offered, and the risks involved.
Investors must receive this memorandum before purchasing the securities. This exemption is often used by companies looking to raise funds from a wider pool of investors who may not meet the accredited investor criteria but still want access to private investment opportunities.
D. Private Issuer Exemption
This exemption is available to private companies that are not publicly listed and have fewer than 50 shareholders. It allows these companies to issue securities to a small number of investors, such as directors, employees, and certain other individuals or entities.
Under this exemption the company cannot have more than 50 shareholders (excluding certain family members and employees) and securities can only be sold to a select group of people, including employees, founders, and close associates of the business.
This exemption is particularly useful for small businesses or private companies looking to raise capital without needing to file a prospectus or go through the public offering process.
- Benefits of Exempt Market Offerings
Exempt market offerings offer a range of advantages for both businesses and investors:
A. Lower Costs and Less Regulatory Burden
For issuers, one of the primary benefits of exempt market offerings is the reduction in the cost and complexity of raising capital. Unlike public offerings, exempt market offerings don’t require a prospectus or the filing of extensive documentation with securities regulators, saving time and money.
B. Access to Capital
Exempt market offerings provide access to capital for businesses that may not have the resources or track record to go public. Startups, early-stage companies, and private firms can raise funds from investors who are willing to take on higher-risk investments in exchange for potentially higher returns.
C. Attractive Investment Opportunities
For investors, exempt market offerings can present unique investment opportunities that may not be available through traditional investment channels. These investments can offer high return potential, especially if the company grows successfully.
D. Flexibility
Exempt market offerings give issuers more flexibility in terms of the structure and terms of the investment. Companies can negotiate directly with investors, tailoring the offering to meet both their capital needs and the interests of the investors.
- Risks and Considerations for Investors
While exempt market offerings can offer high rewards, they also come with substantial risks, especially due to the limited regulatory oversight. Here are some important factors for investors to consider:
Limited Liquidity: Exempt market securities are often illiquid, meaning they cannot be easily sold or transferred. Investors should be prepared to hold their investment for a long period before realizing a return.
Risk of Loss: Like any investment, there is the potential for significant financial loss, particularly in the case of startups and small businesses. The lack of full disclosure and less stringent regulatory oversight means investors may have less information about the company’s financial health.
Limited Information: Since exempt market offerings are not subject to the same disclosure rules as public offerings, investors may have access to less information about the company, its financials, and risks.
Accredited Investor Status: If you are an investor considering participating in an exempt market offering, it’s important to ensure you meet the criteria of an accredited investor or understand the specific requirements of the offering you’re interested in.
- Conclusion
Exempt market offerings present a valuable opportunity for businesses to raise capital and for investors to access high-potential investment opportunities that may not be available through traditional public markets. However, these offerings come with risks due to their reduced regulatory oversight and lack of liquidity.
In Ontario, as in the rest of Canada, businesses and investors need to carefully assess the advantages and risks associated with exempt market offerings and ensure compliance with applicable securities laws. Consulting with a legal or financial advisor is highly recommended for both issuers and investors to navigate this complex landscape effectively.
Whether you are a business owner seeking to raise capital or an investor exploring new opportunities, understanding the dynamics of exempt market offerings in Ontario is crucial to making informed decisions and maximizing potential returns.
Sources:
Ontario Securities Commission
NI 45-106: Prospectus Exemptions, Canadian Securities Administrators.
Canadian Securities Administrators