Prospectus Exempt Securities: Offering Memorandum
If there was one rule which single-handedly prevented the efficient raising of capital in Ontario, it was the restrictions on the Offering Memorandum exemption (the “OM Exemption”). However, in 2016, Ontario introduced a set of new amendments which created a viable offering memorandum prospectus exemption.
An offering memorandum exception allows issuers to attract capital from investors who might not normally qualify under other prospectus exemptions.
Almost any entity may issue securities in Ontario without a prospectus under the OM Exemption. Importantly, there are no limits on the amount of funds an entity can raise using the OM Exemption; however, there are investor limits.
Under the OM Exemption, investor limits are determined by two categories of investors:
- Individuals who are not otherwise ‘eligible investors’ cannot investor more than $10,000 in any 12 month period;
- Individual who are ‘eligible investors’ may not invest more than $30,000 in any 12 month period unless they have received advice from a registered investment dealer/portfolio manager or exempt market dealer, in which case they may invest up to $100,000 in any 12 month period
An ‘eligible investor’ includes an individual whose net assets, alone or with a spouse, exceed $400,000, whose net income before taxes exceeded $75,000, or together with a spouse exceeded $125,000, in the last 2 years and who expects such income level to increase. Notably, individuals who qualify as ‘accredited investors’ or under the ‘family, friends and business associates’ prospectus exemptions can invest an unlimited amount under the OM Exemption.
As for the company issuing the securities, it must:
- Prepare and provide investors with an offering memorandum (“OM”) in the prescribed form (Form 45-106F2);
- Include in the OM audited financial statements and marketing materials used in selling the securities; and,
- File the OM and marketing materials with the Ontario Securities Commission within 10 days of first issuance of securities under the OM Exemption.
Investors are required to complete a risk acknowledgement form, in addition to documents confirming their status as eligible or non-eligible investors.
With this amendment, Ontario and other Canadian jurisdictions have largely harmonized their offering memorandum exemption guidelines; however, differences remain in each province with respect to investors limits and the incorporation by reference of marketing materials into the OM.
In my practice advising small businesses, start-ups and joint-venture partners, this issue comes up often. Contact me if you wish to discuss anything in this article or business law in general.