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Offering Memorandum Exemption

By: Mujir A. Muneeruddin & Grant Duthie | Capital Markets | March 18, 2016

On January 13, 2016 amendments to National Instrument 45-106 Prospectus Exemptions became effective, allowing use of the Offering Memorandum exemption in Ontario (the “OM Exemption”). Previously, the OM Exemption had been available in each of the other provinces and territories, providing many early stage and junior issuers with a vital alternative to conventional prospectus exemptions, which generally require investors to meet onerous income or asset tests, or to have specific relationships with the issuer.

These amendments will also become effective on April 30, 2016 in Alberta, New Brunswick, Nova Scotia, Québec and Saskatchewan, serving to harmonize the OM Exemption in these jurisdictions with Ontario (collectively, the “Amending Jurisdictions”).

Fundamentals

The basic tenets of the OM Exemption in the Amending Jurisdictions are as follows:

(a) Investment Limits. While there is no limit on the size of an offering that may be completed by an issuer in reliance on the OM Exemption, there are certain limits that apply to investors. Individual investors are subject to investment limits depending upon whether they are “eligible investors” (i.e. investors who meet specified net income or net asset tests).

i. individuals who are not eligible investors may not invest more than $10,000 in any 12 month period;

ii. individuals who are eligible investors may not invest more than $30,000 in any 12 month period, and this may be increased to $100,000 if the investor receives suitability advice from a portfolio manager, investment dealer or exempt market dealer;

iii. individuals who are eligible investors and who qualify under either the “accredited investor” or “family, friends and business associates” prospectus exemptions may invest an unlimited amount; and

iv. non-individual investors may invest an unlimited amount, provided that they have not been created or used solely to purchase or hold securities in reliance on the OM Exemption.

(b) Risk Acknowledgment Form. All investors must complete and sign a Risk Acknowledgment Form. Individual investors must additionally complete two schedules to the Risk Acknowledgment Form, which require investors to confirm that they meet one of the categories of individual investor outlined above and have not exceeded the investment limit applicable to the category.

(c) OM Marketing Materials. The offering memorandum must contain a statement indicating that any OM Marketing Materials are incorporated by reference, and the issuer must file these with the relevant securities commissions. OM Marketing Materials are generally defined as any written communication other than a term sheet regarding a distribution under the OM Exemption that contains material facts relating to an issuer, its securities or an offering. As a result, issuers are subject to the same liability for misrepresentations (i.e. rescission or damages) in OM Marketing Materials as they are for misrepresentations in the offering memorandum itself.

(d) Disclosure. Issuers that are not reporting issuers will now be required to make certain disclosure to the relevant securities commissions and investors as a consequence of using the OM Exemption. This includes disclosing: any OM Marketing Materials prepared after the offering memorandum has been filed; audited financial statements, together with a notice describing how capital raised under the OM Exemption has been used; any discontinuance in business, change of industry or change of control; or a change in financial year end by more than 14 days.

(e) "Market Participant". In Ontario and New Brunswick, issuance of securities pursuant to the OM Exemption (among others) will result in the issuance being designated a “market participant” (as opposed to a full-blown "reporting issuer"). This means that the issuer may be required to provide its books and records to the relevant securities commission, and may be subject to compliance reviews by securities commission staff.

Trends

The new OM Exemption reflects a liberalization of the capital markets but issuers have nonetheless appeared hesitant to utilize it in Ontario. One possible explanation is that issuers and their counsel are still unclear as to how the exemption should be implemented in practice. Part of this confusion likely arises from the fact that there are significant differences in how the OM Exemption applies in the Amending Jurisdictions as compared to the rest of Canada (e.g. in B.C. there are no investment limits imposed on individual investors), and that there are minor differences even within the Amending Jurisdictions (e.g. the designation of issuers in Ontario and New Brunswick as “market participants”).

While issuers may be unclear on the requirements of the OM Exemption, it is important to keep in mind that securities commissions, as always, will not relax their standards or expectations as to disclosure and form compliance. In fact, some of the first issuers to use the new OM Exemption in Ontario have been forced by regulators to amend and restate (in one case, multiple times) their offering memorandums to better bring them into compliance with applicable rules. Thus, it is important for issuers to ensure that they have a complete understanding as to the various disclosure and form requirements applicable in each jurisdiction.

 

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