OSC proposes four new prospectus exemptions

In its proposals, the commission is seeking to:

> bring back the offering memorandum (OM) exemption;

> introduce the OSC’s version of an exemption for existing shareholders, similar to one adopted recently by most other provinces;

> create a new exemption to allow firms to raise funds from friends and family; and

> introduce equity crowdfunding, which would allow startups to raise funds from a large number of investors through registered online platforms.

The commission says that the exemptions “are intended to facilitate capital raising by businesses at different stages in their development, while maintaining an appropriate level of investor protection.”

The new OM exemption allows firms to raise capital based on an offering memorandum providing upfront disclosure, and imposes ongoing disclosure requirements. For investors that don’t qualify as accredited investors, the exemption imposes investment limits of either $10,000 or $30,000 per year depending on their financial circumstances.

Regulators in Alberta, Quebec, New Brunswick, and Saskatchewan, are also proposing to amend their own existing OM exemptions to impose similar requirements.

The so-called friends & family exemption, which allows companies to raise capital from investors that are within their personal networks, is largely harmonized with existing exemptions in other provinces. And, the new exemption to allow firms to raise funds from existing shareholders is also harmonized with an exemption that was adopted earlier this month by most other provinces. It imposes an investment limit of $15,000 where investors don’t receive suitability advice, and it requires companies to distribute securities equitably among shareholders.

The proposed new crowdfunding exemption limits companies to raising up to $1.5 million during a 12-month period. It also limits investors to risking $2,500 in a single investment, and up to $10,000 per year. It also imposes registration requirements on online crowdfunding portals and sets some minimum disclosure requirements for issuers.

Separately, regulators in New Brunswick, Manitoba, Nova Scotia, Quebec and Saskatchewan are also proposing their own version of this exemption. The five provinces are also considering a second crowdfunding exemption similar to the one that was adopted by Saskatchewan late last year, which sets lower investment and capital raising limits, but is only available to non-reporting issuers, and doesn’t require portals to register. (See Investment Executive, Provinces choose different paths to equity crowdfunding, March 20, 2014.)

British Columbia is only proposing the second of these two exemptions, which is aimed more at startups.

Next: Differences remain between jurisdictions
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Differences remain between jurisdictions

The OSC’s introduction of these various new exemptions follows a review of this market, which was initiated back in 2012. Following that, the regulator indicated that it would propose these four new exemptions in the first quarter of this year.

“Today we have proposed new tools, which will transform Ontario’s exempt market by providing greater access to capital for businesses and expanding investment opportunities for investors,” said Howard Wetston, chair and CEO of the OSC.

“We have done so in a balanced and responsible manner that is intended to facilitate capital raising while maintaining an appropriate level of investor protection,” Wetston added. “We look forward to receiving input on these proposals, which are tailored to address the needs of Ontario’s capital markets.”

One of the constant criticism of the provinces’ approach to the exempt market is that exemptions are not the same in every jurisdiction, and today’s assorted proposals from various regulators likely won’t quell that complaint.

However, Bill Rice chair of the Canadian Securities Administrators (CSA) and chair and CEO of the Alberta Securities Commission (ACS) notes, “There has been serious effort by the jurisdictions involved to achieve significant alignment among these proposals. Differences in regulatory approach reflect differences in local experience and feedback. Our intent is to review the submitted comments and achieve as much harmonization as possible before the final rules come into force.”