Accredited Investor Exemption Still First in Popularity

June 26, 2017

Foreign and Canadian issuers primarily rely on the accredited investor exemption when raising capital on a prospectus exempt basis, as reported in the recently published OSC Staff Notice 45-715 2017 Ontario Exempt Market Report. The Report, which summarizes capital raising activity by non-investment fund issuers in Ontario’s exempt market during 2015 and 2016, also notes an increase in activity in Ontario’s exempt market and the general take-up of prospectus exemptions that were introduced during 2015 and 2016. Notably, Ontario’s exempt market accounted for less than one-fifth of the total gross proceeds raised by Canadian issuers domestically and less than one-tenth of gross proceeds raised globally.

Who’s Raising Capital in the Exempt Market?

The Report identifies the types of issuers that have accessed the exempt market in Ontario:

  • Foreign issuers raised the majority of capital ($45.6B in 2016), with U.S. based issuers accounting for the largest share ($28.2B in 2016). Canadian based issuers raised approximately $26.8 billion in the exempt market in 2016.
     
  • Reporting issuers represented 60% of the exempt market activity by Canadian issuers in 2016. 95% of the foreign issuers participating in Ontario’s exempt market were non-reporting issuers, with some being publicly listed in their home jurisdictions.
     
  • Financial issuers, such as banks and investment firms, represented less than 30% of the number of issuers accessing the exempt market in 2016; however they accounted for approximately 72% of the gross proceeds raised in Ontario.
     
  • In 2016, more than 700 natural resources issuers (mining and energy) raised approximately $3 billion in the Ontario exempt market. Technology and life sciences issuers represented almost 20% of Canadian issuers raising capital in the exempt market but only raised less than 5% of the gross proceeds in 2016.
     
  • Special purpose vehicles, such as asset-securitization vehicles, raised approximately $9 billion (33% of total gross proceeds) in 2016.

Capital formation by small Canadian issuers was also a focus of the Report, which estimates that such issuers accounted for approximately 57% of Canadian issuers raising capital in  in Ontario’s exempt market between 2014 and 2016 (while representing less than $300 million or 1% of gross proceeds raised annually in that market). Small Canadian issuers continue to be an important priority of the OSC.

Which Exemptions Are Being Used?

As noted above, the accredited investor exemption was the most popular exemption relied on in 2015 and 2016, accounting for 90% of the gross proceeds raised in Ontario by Canadian issuers, with the minimum amount exemption taking second place on a gross proceeds basis, accounting for approximately $2 billion gross proceeds (8%) among Canadian issuers. When considering the number of issuers who relied on a particular exemption, the newly adopted family, friends and business associates exemption was the second most used exemption in Ontario. Issuers have generally relied on one prospectus exemption when accessing the exempt market and approximately 30% of Canadian issuers relied on multiple exemptions in 2016.

The new prospectus exemptions (including, the family, friends and business associates exemption, the existing shareholder exemption or the offering memorandum exemption) were used to raise a total of $163 million from their adoption until the end of 2016. There has been no reported use of the crowdfunding exemption as of December 2016. 

Debt vs Equity?

The last few years have seen more capital raised in Ontario by way of debt offering than equity offering by both Canadian and foreign issuers. While less than 10% of Canadian issuers offered debt securities, these offerings raised the most capital in 2016 (68% or $18.2 billion).

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