Exempt market dealers pleased with broader scope of OSC review

OSC seeks members for Exempt Market Advisory Committee

“I applaud them for that, because I think that we might end up actually seeing some significant changes, all of which would be for the better,” Kaufman said.

Members of the EMDA’s board of directors agreed. “It was encouraging when the OSC came out with their views about broadening the scope [of the exempt market],” said Brian Koscak, chairman of the EMDA and partner at Cassels Brock & Blackwell LLP.

Koscak said new avenues for raising capital would support the economy and would create attractive new opportunities for investors.

“Our capital markets need it,” he said. “The ministers of finance are looking to stimulate growth in the economy, and there’s a lot of money sitting on the sidelines right now. We can do it right, we can do it in a manner that protects investors, while allowing dealers to do good transactions.”

A major source of frustration for exempt market dealers in Canada, speakers said, is the lack of harmonized rules across the country. Specifically, the offering memorandum (OM) exemption is available in every province except for Ontario, which presents challenges for dealers who want to operate in multiple provinces, according to Kaufman.

“It’s very difficult to do what you want to do as an EMD…when you want to be a multi-jurisdictional actor,” he said.

Indeed, the absence of the OM exemption in Ontario means fewer investors in the province can tap into exempt market opportunities. Members of the industry acknowledge that the existing rules are in place for good reason: to protect investors.

“The bar is high for a reason,” Kaufman said. He believes it’s unlikely that Ontario will adopt the OM exemption as it exists in other provinces.

However, the EMDA is urging the OSC to adopt a variation of the OM exemption that includes additional investor protection safeguards. It suggests an ‘eligible investor exemption’, which would allow Ontario investors to invest up to $10,000 in an investment that’s accompanied by the OM disclosure document. Those wishing to invest more than $10,000 would be required to meet certain eligibility criteria, including a certain level of income and net assets.

As an added safeguard, the EMDA recommends that investors relying on the exemption be required to invest through a registered dealer who is accountable for know your client (KYC), know your product (KYP) and suitability determinations. And, it calls for regulators to require that issuers publicly post OMs for greater transparency.

The push for the adoption of the OM exemption in Ontario comes as regulators in other provinces crack down on deficiencies within the disclosure documents. They’ve identified a variety of problems with OMs, such as the inclusion of unrealistic or excessively promotional information, omission of material information and failure to keep the forms up to date.

Koscak expects that regulators will impose stricter rules pertaining to OMs. “This year, [the regulators] are all over this,” he said. “This is the beginning of more information.”

Meanwhile, speakers at the conference acknowledged that there are problems with the accredited investor exemption that’s currently in place in Ontario. It enables investors with a certain amount of financial assets to invest in prospectus-exempt securities, regardless of their level of financial knowledge.

“There’s absolutely no possible justification for having the exemption,” Kaufman said.

He added that the rules surrounding the accredited investor exemption – and other exemptions – are not as clear as they should be. For instance, he said it’s unclear in certain cases which assets should be considered financial assets when determining whether a client is accredited. He urges regulators to introduce more prescriptive rules.

“It’s not always so clear what the rules are on these grey matters,” he said. “I’d much rather have clearer definitions, and be more prescriptive.”