The Offering Memorandum Exemption in Ontario
In 2016, provincial securities regulators enacted a series of new amendments meant to free up new avenues of venture capital for Canadian startups and small businesses. In addition to new prospectus exemptions such as the integrated crowdfunding exemption, these reforms introduced an offering memorandum prospectus exemption in Ontario, while modifying preexisting versions of it in Alberta, Nova Scotia, New Brunswick, Québec, and Saskatchewan to bring them in line with the new Ontario framework. The result has been a segment of the exempt market that’s more-or-less harmonized across Canada, save a few enduring regulatory distinctions between the provinces.
The offering memorandum exception now stands as one of the many ways companies can legally sell securities without embarking on the costly process of issuing a prospectus. An offering memorandum somewhat resembles a prospectus. But unlike a prospectus, it’s aimed at a specific group of private investors rather than the public at large, and consequently carries relatively lenient disclosure requirements on the part of the issuer.
In Ontario, those purchasing securities from an issuer that’s exempt under an offering memorandum fall into two categories: eligible and non-eligible investors. To qualify as an eligible investor, the purchaser must have:
- Net assets (alone or with spouse) in excess of $400,000.
- pre-tax net income of $75,000 in the previous two calendar years and an expectation to exceed that level in the current year.
- Net income (alone or with spouse) in excess of $125,000 in the previous two calendar years, with an expectation to exceed that level in the current year.
Under the offering memorandum exemption, eligible investors are authorized to purchase up to $30,000 in securities per year, and this ceiling can be exceeded up to a limit of $100,000 if done so on the advice of an accredited portfolio manager, investment dealer, or exempt market dealer. Non-eligible investors are authorized to make up to $10,000 in purchases per year.
The issuer also bears certain responsibilities. These include but are not necessarily limited to:
- An issuer must provide purchasers with an offering memorandum. This is a document that contains the terms of the investment, the risks involved, and/or the business plan of the offering entity. The offering memorandum must include certain data and follow a specific format, as outlined in detail in Section 2.9 of National Instrument 45-106. For example, it must include a certificate stating: “This offering memorandum does not contain a misrepresentation.”
- An issuer must obtain signed risk acknowledgement from the person or institution purchasing the securities. The form required by the Ontario Securities Commission (OSC), Form 45-106F4, can be found here.
- An issuer cannot use the offering memorandum exception to distribute specified derivatives or structured finance products.
The offering memorandum exception has become an important segment of Ontario’s exempt market, which on a whole has tripled in size in under a decade, growing from $30.7 billion in 2010 to $91.6 billion in 2017, according to the most recent data provided by the OSC. The year 2017 alone represented a 27% increase in proceeds and a 17% increase in issuers compared to the previous year. Over the course of 2017, some 25.9% of all individual investors made purchases under the offering memorandum exception. The overwhelming majority of such investments over $10,000 targeted the real estate or mortgage sectors.
The same report found that small Canadian issuers – defined as having annual financing of under $1 million and asset size of under $5 million - accounted for 37% of all exempt market issuers, and their investor base consisted overwhelmingly of individual investors (77%).
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