On October 29, 2015 the Ontario Securities Commission (“OSC”) along with other Canadian Securities Administrator (“CSA”) jurisdictions published certain amendments to National Instrument 45-106 – Prospectus Exemptions (“NI 45-106”) allowing Ontario investors to purchase securities by way of offering memorandums.
This is a fantastic development for issuers because they can now offer their securities on an exempt basis to a much broader scope of individuals. Raising capital in Ontario is no longer bound to only accredited investors, private issuers and friends and family exemptions. The pool of available investors is now almost limitless without the substantial burdens of a public offering and going public.
It is expected that as of January 13, 2016 in Ontario, an issuer can use the offering memorandum exemption if it follows certain requirements – including:
- Capping how much investors can invest using the offering memorandum exemption within a 12 month period. The cap is between $10,000 to $100,000.
- The investor must sign the new risk acknowledgement form.
- The issuer must provide yearly audited financial statements, a notice on how the proceeds are being spent and a notice to the investors on the occurrence of key material events (change in control or industry and discontinuation of the business).
- There is an amended risk acknowledgement form which must be signed by all investors.
- Any marketing materials used must be delivered to the OSC and are subject to the actions for misrepresentation if they are, for example, false, misleading or inaccurate.
- There is a now an “OM standard term sheet” that must contain certain information required to be given to the investor.
For more information please read the details below or contact us by email or at 416.519.6886.
Previously Used Exemptions
Previously, most companies raised money in Ontario by selling securities through two main exemptions to the prospectus requirement: (i) accredited investor exemption; and (ii) founder, control person and family exemption. The view of the securities regulators behind these exemptions is that accredited investors have a certain level of sophistication, the ability to withstand financial loss and the financial resources to obtain expert advice, and friends and family have a relationship with a principal of an issuer.
However, companies in other provinces benefited from the offering memorandum exemption and being able to attract funds from a much broader group of investors.
How does the Offering Memorandum Exemption Work
The new Offering Memorandum exemption brings in several new concepts relating to its use; including:
- Investment limits
- New schedules to the risk acknowledgement form
- Disclosure of audited annual financial statements, notice of use of proceeds and notice of specified key events
- Marketing materials
- Specific form of term sheet
Of note, this new exemption is not available to investment funds in Ontario. As well, an issuer cannot use the offering memorandum exemption to sell specified derivatives (such as a knock-out warrant or other non-standard derivatives) or structured finance products (such as principal protected notes).
a. Investment Limits
The new rules put limits on how much an investor can purchase from any issuer over a 12 month period using the offering memorandum exemption. The amendment create three groups of investors and associated limits:
- in the case of a purchaser that is not an eligible investor, $10,000;
- in the case of a purchaser that is an eligible investor, $30,000; and
- in the case of a purchaser that is an eligible investor and that received advice from a portfolio manager, investment dealer or exempt market dealer that the investment is suitable, $100,000.
An eligible investor is in essence a lower-level accredited investor. An eligible investor is a person or entity that meets the following (among other qualifications):
- has net assets, alone or with a spouse, in the case of an individual, exceed $400,000,
- has net income before taxes exceeded $75,000 in each of the 2 most recent calendar years and who reasonably expects to exceed that income level in the current calendar year, or
- has net income before taxes, alone or with a spouse, in the case of an individual, exceeded $125,000 in each of the 2 most recent calendar years and who reasonably expects to exceed that income level in the current calendar year.
If you don’t fit into one of these brackets then you are a non-eligible investor and you are stuck at a maximum of $10,000 per year of offering memorandum purchases.
However, the CSA has made it quite clear that you cannot rely on a simple statement that says “I am an eligible investor” or “I am an accredited investor”. The CSA has placed on an onus on issuers or agents to do some due diligence to ensure what is claimed is factual. They recommend the following:
- You need to take reasonable steps to ensure the purchaser meets the appropriate exemption, including:
- how you identified or located the potential purchaser;
- what category of accredited investor or eligible investor the purchaser claims to meet;
- what type of relationship the purchaser claims to have and with which director, executive officer, founder or control person of the issuer (if relying on this exemption);
- how much and what type of background information is known about the purchaser; and
- whether the person who meets with, or provides information to, the purchaser is registered
- You need to show and have a written trail that you took steps to ensure that the purchaser met the relevant exemption;
- If you are relying on an exemption with certain definitions (such as the accredited investor) you need to be able to help guide the potential investor as to what the different categories mean (i.e. what is the difference between financial assets (e.g. cash, securities, insurance policies) and net assets (e.g. total assets minus total liabilities – this is broader and can include things like cars, boats, houses, cottages, etc.)).
- You must keep all this documentation for 8 years.
The onus on an issuer to prove eligibility is much more stringent than it used to be.
b. New schedules to the risk acknowledgement form
Under the offering memorandum exemption all subscribers must sign Form 45-106F4 – Risk Acknowledgement, which highlights for investors the key risks associated with investing in securities acquired under the offering memorandum exemption. The new Form 45-106F4 has two new schedules (see them here) which ask the investor to confirm their investing status (e.g. eligible investor, non-eligible investor, accredited investor, etc.) and confirm that the investor is within their investment limits if they are an eligible or non-eligible investor.
c. Disclosure of audited annual financial statements, notice of use of proceeds and notice of specified key events
Disclosure of Audited Financial Statements
An issuer relying on the offering memorandum exemption must provide annual financial statements to the subscribers within 120 days of the fiscal year end. The financial statements must be audited. The issuer must also provide audited financial statements for the current period in which the distribution occurred on the later of 60 days from the date of distribution or 120 days after the fiscal year end. The financial statements must be presented using IFRS. There are other rules relating to comparative periods and transition years.
Notice of Use of Proceeds
Issuers are also required to provide a notice that accompanies the financial statements which describes how the money raised under the offering memorandum exemption has
been used – Form 45-106F16 – see it here. This form basically lays out the balance left over from last year, how much was raised this year, how much was spent and what remains.
Notice of Key Events
A notice of key events takes the form of 45-106F17 (see the notice here) and must be made available to all subscribers under the offering memorandum within 10 days of each specified event; being:
- a discontinuation of the issuer’s business;
- a change in the issuer’s industry; and
- a change of control of the issuer.
This regime imports the idea similar to that of a material change report issued by reporting issuers. An issuer is obliged to provide these notices until: (i) it becomes a reporting issuer (i.e. a public company); or (ii) it ceases to carry on business.
The CSA as stated that “made available” means mailing the notice or providing a notice (via email or some other form of digital means) that the disclosure documents can be viewed on a public website of the issuer or a website accessible by all holders of securities.
d. Marketing materials
All marketing materials provided as part of the offering must be incorporated by reference into the offering memorandum. The reason for this change is that the exemption requires the issuer to sign a certificate that indicates that the offering memorandum does not contain a misrepresentation. As marketing materials are incorporated by reference into the offering memorandum, the issuer must also ensure that the information contained in marketing materials does not contain a misrepresentation. This creates liability for an issuer based on the marketing materials used.
As an issuer signing a certificate, you must ensure that you review the marketing materials to confirm that they are consistent with the offering document and are fair, balanced and not misleading.
The marketing materials must also be delivered to the OSC when filing the offering memorandum or within 10 days of their delivery if given after the filing of the offering memorandum.
e. Specific form of term sheet
The new offering memorandum exemption requires the issuer to use a standardized term sheet that contains very brief information on the issuer and the securities being sold. This is meant to be an overview of the offering with the offering memorandum (and market materials) providing the details.
See what type of information is required here.
When Will It Become Available
These new rules are expected to come into effect on January 13, 2016 in Ontario and in Alberta, New Brunswick, Nova Scotia, Québec and Saskatchewan on April 30, 2016.
How Can Corporate Counsel Help
We can help you to review these new rules and determine if using an offering memorandum is right for your company. We can also help prepare your offering memorandum, the OM term sheet and related filings at a great price.
Contact us to learn more: