In August 2013, the Ontario Securities Commission (OSC) provided an update on their review of changes to the Exempt Markets regulations. If implemented, these changes will open up several new sources of capital for start-up companies. This development will be welcome news for small and growing companies who require capital. In this presentation, corporate and commercial lawyer Tim McCunn details the proposed changes and what they mean for businesses looking to raise funds in 2014.
2. Existing Rules
•
The shares of a private company are NOT exempt
from securities regulation
•
The current holder will have acquired the shares,
most likely, under an exemption from prospectus and
registration requirements, see NI 45-106 of the CSA
•
The sale now will be a “first trade” of securities
acquired under the exemption, and under NI 45-102
the “first trade” will be a “distribution” – i.e., attract
prospectus and registration requirements – unless
certain criteria are met (which likely can be met)
2
3. Existing Rules
•
If the “trade” is a “distribution” then you must find
another exemption under 45-106. This is usually
eminently do-able, but the analysis must be done!
The target company may not qualify for “private
issuer” status – it’s a question of fact; the buyer might
not be an “accredited investor”; it IS possible to go
offside these rules, and you must be diligent on this
score
3
4. The “Closed System”
ABC Co.
The Closed System
Distribution
of
Securities
Exempt Market
(Private Market)
Non-exempt Market
(Public Market)
Prospectus
NI 45-106
and Local
Exemptions
Continuous
Disclosure
Resale Rules
(or Restrictions)
Continuous
Disclosure
Source: Mark R. Gillen, Securities Regulation in Canada (3d) (Toronto: Thomson Carswell) (2007) p. 244.
4
5. National Instrument 45-106 Prospectus and
Registration Exemptions
•
•
•
•
•
•
•
•
•
PROSPECTUS AND REGISTRATION EXEMPTIONS
2.3 Accredited investor
2.4 Private issuer
2.5 Family, friends and business associates
2.6 Family, friends and business associates Saskatchewan
2.7 Founder, control person and family- Ontario
2.8 Affiliates
2.9 Offering memorandum
2.10 Minimum amount investment
5
6. Accredited Investor Exemption [Section 2.3]
•
The prospectus and dealer registration requirement do not
apply in respect of a trade in a security if the purchaser
purchases the security as principal and is an accredited
investor
•
Generally speaking, the definition of “accredited investor”
includes individuals, corporations, funds, partnerships, trusts
and other entities that are “well advised, well informed or well
off”
6
7. Accredited Investor Exemption [Section 2.3]
•
an individual who (either alone or with a spouse) beneficially owns,
directly or indirectly, financial assets having an aggregate realizable
value that before taxes, but net of any related liabilities, exceeds
$1,000,000
•
an individual who (either alone or with a spouse) has net assets of at
least $5,000,000
•
an individual whose net income before taxes exceeded $200,000 in
each of the 2 most recent calendar years (or exceeded $300,000 when
combined with a spouse) and who reasonably expects to exceed that
net income level in the current calendar year
•
a person, other than an individual or investment fund, that has net
assets of at least $5,000,000 shown on the most recently prepared
financial statements
7
8. Private Issuer Exemption [Section 2.4]
•
The prospectus requirement and the dealer registration
requirement do not apply in respect of a trade in a security of a
private issuer to a person who purchases the security as
principal and is one of the permitted purchasers
8
9. Private Issuer Exemption
A private issuer is an issuer:
•
(a)
that is not a reporting issuer or an investment fund;
•
(b)
whose securities (other than non-convertible debt securities):
•
(i)
are subject to restrictions on transfer that are contained in the issuer's
constating documents or security holders’ agreements, and
(ii) are beneficially owned, directly or indirectly, by not more than 50
persons, not including employees and former employees of the issuer
or its affiliates provided that each person is counted as one beneficial
owner unless the person is created or used solely to purchase or hold
securities of the issuer in which case each beneficial owner or each
beneficiary of the person, as the case may be, must be counted as a
separate beneficial owner; and
(c) that has distributed securities only to permitted purchasers described in
section 2.4(2) of NI 45-106
9
14. Exempt Markets
Investor Protection
•
•
•
•
•
$2,500 investment order limit ($10K per year)
Disclosure document / 1 year financials (audited if
$500K) raised
Risk acknowledgement
Cooling off period
Ongoing disclosure
Funding Portal
•Must
be registered
14
15. Exempt Markets
Family, friends & business associates
•Harmonization
•Expand
o
with BC and Alberta
exemptions to include:
“close personal friends” or “close business
associates” is the biggest addition
15
16. Exempt Markets
Family, friends & business associates
•Now
it’s a slightly more restrictive:
50 people
•OSC still concerned about loose definition: may add further
restrictions: certification of CFO + risk acknowledgement form
16
18. Exempt Markets
Offering Memorandum
•Issuer
Restrictions
o Canadian
o $1.5M per year
o No advertising
•Investor Protection
o $2500 per investment, $10,000 per year
o Disclosure document / financials (audited if $500k raised)
o Risk acknowledgment
o Cooling off period
o On-going disclosure
18
19. Exempt Markets
Rights Offering
•This
is aimed at TSX and TSX Venture issuers
•Today: section 2.1 NI 45-106
•Proposed amendments:
o
10 days to 3 review period
o
Remove 25% dilution restrictions
o
Reduce to 10 from 21 the minimum exercise period
•Introduce a new exemption “Existing Security Holding
Exemption”
o
$10,000 limit per year
19