Crowdfunding and other prospectus exemptions proposed by the OSC and other CSA regulators

March 20, 2014

The Ontario Securities Commission today published for comment four new prospectus exemptions intended to assist companies that are seeking to raise capital, while maintaining an appropriate level of investor protection. As we've previously discussed, the OSC initiated a consultation process in December 2012 to consider potential prospectus exemptions, with updates released in August and December of 2013.

As discussed in detail below, the proposed exemptions announced today consist of an offering memorandum and family friends and business associates exemption, which are available in other provinces but would be new for Ontario, and an existing securityholder exemption, similar to that which was adopted by other Canadian regulators last week. With respect to crowdfunding, the OSC has also published its own proposed exemption, with some of its counterpart regulators proposing a similar but separate exemption.

  1. Offering memorandum exemption. This proposed exemption is based on the existing offering memorandum exemption currently found in section 2.9(2) of NI 45-106 Prospectus and Registration Exemptions that is not available in Ontario. While the proposed exemption would not place limits on the size or frequency of offerings an issuer could make, there would be limits for individual investors, namely $30,000 for eligible investors and $10,000 for non-eligible investors. In addition, individual investors would be required to sign a risk acknowledgement form prior to or at the time of purchasing a security in reliance on this exemption.

    Meanwhile, Alberta, Quebec, and Saskatchewan have also published for comment proposed amendments to NI 45-106 relating to the OM exemption that is currently available in those provinces, intended to generally align the exemption with Ontario's proposal and New Brunswick has proposed amending its OM exemption to conform to that proposed by the OSC.
  2. Family, friends and business associates exemption. This proposed exemption is based on the existing family, friends and business associates exemption currently found in section 2.5(1) of NI 45-106 that is not available in Ontario. No limit has been proposed on the size of an offering made under this exemption but only certain types of securities could be distributed. In addition, there would be expanded guidance on the meaning of close personal friend and close business associate, with the onus of establishing the existence of such relationships would be on the issuer.

    Similar to the proposed OM exemption, individual investors would be required to sign a risk acknowledgement form prior to or at the time of purchasing a security in reliance on this exemption. Also of note, in connection with the proposed implementation of this exemption, the OSC is also proposing the repeal of the existing founder, control person and family exemption in section 2.7 of NI 45-106. 
  1. Existing security holder exemption. This exemption would allow companies listed on the TSX, TSX-V or Canadian Securities Exchange to raise capital from existing security holders based on the issuer's existing continuous disclosure. Offerings under this exemption would be limited to 100% of the issuer’s outstanding securities of the same class and investors would be limited to investments of no more than $15,000 every 12 months unless they obtain suitability advice in respect of the investment. As we discussed last week, regulators in most other Canadian jurisdictions recently adopted a similar exemption. 
  2. Crowdfunding exemption. Under this exemption, both reporting and non-reporting issuers and their affiliates would be able to raise up to $1.5 million per year. Investors would also be limited to investing no more than $2,500 in a single investment, and no more than $10,000 in a year under the exemption. However, the exemption would not be available to investment funds or real estate issuers, nor in respect of novel or complex securities. Corresponding requirements for crowdfunding portals have also been proposed.

    Meanwhile, Quebec, Saskatchewan, Manitoba, New Brunswick and Nova Scotia also published a similar proposed crowdfunding exemption for both reporting issuers and non-reporting issuers with similar compliance requirements. However, with respect to start-up companies specifically, these regulators have also proposed a different and less onerous exemption that would target very early stage companies that are non-reporting issuers. This exemption is similar to that which is currently available in Saskatchewan.

    Under the start-up exemption, non-reporting issuers would be limited to raising no more than $150,000 per offering and investors would not be able to invest more than $1,500 in a single investment. The exemption would also be subject to less onerous compliance requirements. British Columbia has also published for comment its own start-up exemption proposal applicable to non-reporting issuers with similar (lower) investment limits.

Certain amendments are also proposed in respect of reports of trade required to be filed in connection with prospectus exempt distributions. Among other changes, the OSC along with regulators in Alberta, New Brunswick and Saskatchewan is proposing new forms of report that differentiate between investment funds and non-investment fund issuers. In these jurisdictions, the year-end filing exemption currently available to investment fund issuers would also be reduced to require filings within 30 days of each quarter.

The OSC and other regulators are accepting comments on their proposed prospectus exemptions until June 18, 2014.

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