The Ontario Securities Commission (OSC) published a consultation paper Friday that examines whether to expand access to the exempt market by allowing crowdfunding, among other new ways to raise capital outside the registered market.
In a new paper, the OSC sets out possible concepts for new prospectus exemptions in Ontario, including: an exemption to allow crowdfunding; an offering memorandum exemption; an exemption based on an investor’s investment knowledge; and an exemption based on an investor receiving advice from a registrant.
The paper, which comes as a result of an expanded review of the $87 billion (based on capital raised in Ontario in 2011) exempt market initiated earlier this year, stresses that these are just concepts at this point — the regulator hasn’t decided whether new prospectus exemptions are warranted, or not. And, if they are, exactly what the parameters of the exemptions should be.
In terms of crowdfunding, the OSC’s concept incorporates many of the investor protection elements of the crowdfunding exemption set out in new U.S. legislation, known as the JOBS Act (which have yet to be enshrined in rules by US regulators). The OSC model would impose restrictions on issuers, including: qualification criteria; it would limit capital raising to $1.5 million under this exemption in any 12-month period; restrict the type of securities that could be issued; and, limits on advertising.
Investors wouldn’t have to qualify to participate in crowdfunding, but it would set investment limits ($2,500 in a single investment, and $10,000 in a year). It would also require some disclosure at the point of sale, and on an ongoing basis; that investors sign a risk acknowledgement; and, provide a two-day ‘cooling off’ period.
Additionally, all investments under this exemption would have to be made through a registered funding portal, subject to certain requirements.
The proposed knowledgeable investor exemption would impose a work experience condition and an educational qualification condition on prospective investors, requiring that: they have worked in the investment industry for at least one year in a position that requires knowledge of securities investments; and have either a CFA or CIM designation or an MBA from an accredited university.
The paper notes that while broadening access to the exempt market would make it easier for companies to raise capital and easier to invest in a wider range of opportunities, there are risks, too. The OSC would have to adjust its regulatory oversight of this market, it says, particularly, if either a crowdfunding or OM exemption is introduced, which would require systems to ensure proper disclosure and to oversee funding portals.
There are also concerns about the financial literacy of retail investors, it says, which will be heightened if retail investors are able to make investments in the exempt market without the benefit of expert advice. As a result, the OSC says that it is conducting investor research to help better understand: investors’ desire to invest in start-ups; their perceptions of the risks associated with investing in the exempt market; the experiences of exempt market investors; and, the role of professional advisors in investors’ investment decision-making; among other things.
“Given the importance of the exempt market to Ontario, this consultation paper is a vital step in soliciting meaningful feedback from stakeholders on concept ideas to appropriately address exempt market capital raising concerns and continue to deliver strong investor protection,” said Howard Wetston, chair and CEO of the OSC.
Comments are due by February 12, 2013. During the comment period, the OSC also plans to hold public consultation sessions, along with its investor research.