Will the New Offering Memorandum Prospectus Exemption have an Impact?

On January 16, 2016, Ontario adopted a new “Offering Memorandum” Prospectus Exemption to permit companies (other than investment funds) to raise capital by issuing securities without a prospectus provided that they issue an Offering Memorandum in prescribed form and comply with the requirements of the exemption.[1]

Overview of the Offering Memorandum Exemption

This new exemption brings Ontario substantially in line with Alberta, Quebec,
Saskatchewan, New Brunswick and Nova Scotia, and will considerably facilitate small to medium sized companies raising capital in these provinces.  Unlike other prospectus exemptions widely used by small to medium businesses, the Offering Memorandum Exemption does not have any ceiling on the amount which can be raised, and it can be used to raise capital from investors who have no relationship to the business (unlike the “founders, friends and business associates” exemption), and does not require investors to satisfy certain criteria (such as the “accredited investor” exemption).

Investor Limitations

However, as part of the investor protection aspects which accompany the introduction of the exemption, the exemption is not without limits on investors.

First, investors who are ineligible investors[2] cannot invest more that $10,000 under the Offering Memorandum in any 12 month period. This limit increases to $30,000 in any 12 month period for eligible investors. There is an exception for eligible investors to permit investments up to $100,000 in a 12 month period if he or she receives advice from a portfolio manager, investment dealer or exempt market dealer confirming that the investments in excess of $30,000 are suitable for the person.

Second, investors have to sign a Risk Acknowledgement in a prescribed form which also confirms they are within the above investment limits.

Issue Limitations and Requirements

Issuers who want to raise capital in Ontario (and the other participating provinces) have to comply with a number of requirements:

The Offering Memorandum must be in the prescribed form and include among other things audited financial statements.

1. Marketing materials used with prospective investors are deemed to be part of the Offering Memorandum.
2. Although the prescribed form of Offering Memorandum requires disclosure of how the proceeds are intended to be used, investors must be given notice after the offering is complete as to how the proceeds of the offering were actually used.
3. Audited financial statements must be made available to investors each year after the issuance of shares under the exemption.
4. A mandatory notice to investors if the issuer discontinues the business, changes the industry in which it carries on business, or there is a change in control of the issuer.

Preliminary Assessment of the Offering Memorandum Exemption

My personal view is that this prospectus exemption will not be widely adopted, and that companies seeking to raise capital will continue to rely on other existing exemptions, especially the “accredited investor” exemption. Some of the reasons underlying this view are the following:

Investor Limits:  Although there is no limit on how much money can be raised by an issuer with this exemption, the investor limits (described below) are a significant practical limitation on the total amounts which companies will be able to raise.

Expense:   Preparation of the Offering Memorandum will be a material expense, and in many cases will be a significant percentage of the proceeds which issuers will be able to raise.

Liability:  The Offering Memorandum document creates significant liability for issuers and their directors and officers for misrepresentation, especially in this era of availability of class actions on behalf of investors.

Audited Statements:  The auditing of annual financial statements is often a significant expense for companies desperately seeking capital, whether to grow or just keep the dream alive.  In my experience, the vast majority won’t have audited statements when contemplating a capital raise with this exemption, and therefore the requirement to get them audited will be an additional substantial expense of the offering.  In addition, most entrepreneurs behind small to medium business perceive little benefit from the expense of an audit every year, which becomes mandatory if this Offering Memorandum exemption is used.