Canada: Finally! Offering Memorandum Exemption Available Everywhere: But Still Not Harmonized

Following a number of significant changes to the private placement rules in 2015¹, the securities regulators in Alberta, New Brunswick, Nova Scotia, Ontario, Québec and Saskatchewan (the participating jurisdictions) have finalized further amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106). The amendments will introduce the offering memorandum exemption (the OM exemption) into Ontario and will modify the existing OM exemption in the other participating jurisdictions to add new investor protection measures. Subject to ministerial approval, the amendments will come into force in Ontario on January 13, 2016 and in the other participating jurisdictions on April 30, 2016. While the introduction of the OM exemption in Ontario will provide issuers with greater access to capital (particularly those who already distribute in reliance on the OM exemption outside of Ontario), it is clear that investor protection in the exempt market remains a focus of the securities regulators in Canada.

The OM Exemption — Broad Access to Capital Whitout a Prospects

The OM exemption allows issuers to access capital from investors that might not qualify under other commonly used prospectus exemptions. To distribute securities under the OM exemption, an issuer must provide investors with an offering memorandum and meet certain other requirements. An offering memorandum must include certain prescribed disclosure about the issuer, but is generally less comprehensive than a prospectus. One of the benefits of relying on the OM exemption is that issuers can avoid the extra costs associated with preparing and filing a prospectus. Also, for non-reporting issuers, distributing securities in reliance on the OM exemption (instead of under a prospectus) avoids the continuous disclosure obligations that issuers are subject to following an initial public offering.

Three Variations of the OM Exemption in Canada

Although the OM exemption was previously available in Alberta, New Brunswick, Nova Scotia, Québec and Saskatchewan, the regulators in those jurisdictions are making changes to harmonize their existing OM exemptions with the terms of the new Ontario OM exemption. This harmonization involves the introduction of a number of measures designed to enhance investor protection, which are outlined below. The other provinces and territories of Canada (British Columbia, Manitoba, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut) have maintained their OM exemptions without amendment.

Given the move towards national harmonization amongst certain of the Canadian securities regulators (including British Columbia and Ontario), it is troubling that neither of those two major regulators can come to agreement with respect to a unified approach to the OM exemption. These amendments to NI 45-106 will result in three different forms of the OM exemption across Canada with nuances within those three forms depending on the jurisdiction. This will add complexity for issuers seeking to distribute securities in reliance on the OM exemption in more than one province or territory, as issuers will need to ensure that they comply with the specific requirements of the exemption in each province or territory in which a distribution occurs. Some of the key differences between the three OM exemption regimes are identified in the table below.

(1) In New Brunswick, Ontario and Québec, the OM exemption is not available to investment funds and in Alberta, Nova Scotia and Saskatchewan, the OM exemption is only available to investment funds that are non-redeemable investment funds or mutual funds that are reporting issuers.

(2) In Manitoba, Prince Edward Island, Northwest Territories, Yukon and Nunavut, the OM exemption is only available to investment funds that are non-redeemable investment funds or mutual funds that are reporting issuers.

Investor Protection Measures under the New OM Exemption

Investment limits

In the participating jurisdictions, certain investment limits will be imposed on individual investors purchasing securities in reliance on the OM exemption. The investment limit imposed will vary depending on the circumstances of the individual investor, including whether the investor qualifies as an "eligible investor" by virtue of meeting certain minimum asset or income thresholds. In particular:

• Non-eligible investors may invest up to $10,000 in reliance on the OM exemption in any 12-month period.
• Eligible investors may invest up to $30,000 in reliance on the OM exemption in any 12-month period. However, if an eligible investor receives advice from a registered advisor or dealer that the investment is suitable, the investor may invest up to $100,000 in any 12-month period.
• No investment limit will be imposed on individuals who are "accredited investors" and those who would be eligible to purchase under the "family, friends and business associates" exemption.

No investment limits will be imposed on non-individual investors.

Previously there were no such investment limits in New Brunswick and Nova Scotia. In addition, although the $10,000 investment limit was previously imposed on non-eligible investors in Alberta, Québec and Saskatchewan, the imposition of investment limits on eligible investors is a new feature of the OM exemption in those jurisdictions.

Risk acknowledgement

Investors purchasing securities in reliance on the OM exemption are required to sign a prescribed risk acknowledgement form which highlights the key risks associated with investing in exempt market securities. In the participating jurisdictions, the risk acknowledgement form will include two new schedules that must be completed by each individual investor to confirm the investment limit that is applicable to the investor and to confirm that the investment falls within the applicable investment limit.

Marketing materials

In the participating jurisdictions, all marketing materials used by an issuer in connection with a distribution under the OM exemption will be incorporated by reference into the offering memorandum. This means that marketing materials will be subject to the same liability as the disclosure provided in the offering memorandum in the event of a misrepresentation.

Continuous disclosure obligations

The introduction of continuous disclosure obligations in respect of non-reporting issuers is a significant development, as previously no such obligations were imposed in any jurisdiction in Canada in connection with the use of the OM exemption. Following a distribution of securities in reliance on the OM exemption in the participating jurisdictions, non-reporting issuers will be required to provide audited annual financial statements to investors who purchased securities in reliance on the OM exemption, as well as a notice that accompanies the financial statements which describes how the money raised under the OM exemption has been used.

In addition, in New Brunswick, Nova Scotia and Ontario, following a distribution of securities in reliance on the OM exemption, non-reporting issuers will be required to provide notice to investors who purchased securities in reliance on the OM exemption upon the occurrence of certain significant events, including a discontinuation of the issuer's business, a change in the issuer's industry, or a change of control of the issuer. The notice must be in a prescribed form and must be delivered to investors within 10 days of the occurrence of the event.

The imposition of continuous disclosure obligations alone may cause some issuers to think twice about using the OM exemption. However, the OM exemption is not unique in this regard. The new crowdfunding exemption under Multilateral Instrument 45-108 Crowdfunding, which is expected to come into force in Manitoba, Ontario, Québec, New Brunswick and Nova Scotia on January 25, 2016², includes similar continuous disclosure obligations.

Footnotes

1. Canadian Securities Regulators Publish Crowdfunding Exemption Securities and Capital Markets Bulletin Borden Ladner Gervais LLP November 2015.

2. Significant Changes to Canada's Exempt Market Effective May 5, 2015: Implications for Issuers and Dealers, as well as for Retail Investors Securities and Capital Markets Bulletin Borden Ladner Gervais LLP February 2015 and CSA's Proposed Harmonized Report of Exempt Distribution Securities and Capital Markets Bulletin Borden Ladner Gervais LLP October 2015.

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