The exempt market is getting a boost on Wednesday as rule change takes effect in Ontario that will allow companies to raise funds under an offering memorandum (OM) prospectus exemption in the province with the largest capital market.
Regulators in Ontario and several other provinces finalized rule changes last October that introduce the OM exemption in Ontario and modify the exemption's requirements in several provinces that already have the OM exemption. The rule changes take effect in Ontario on Wednesday, while those in Alberta, New Brunswick, Nova Scotia, Quebec and Saskatchewan are slated to take effect on April 30.
"After years of considerable effort and consultation with the Ontario Securities Commission, our industry is extremely pleased to see the adoption of the offering memorandum exemption in Ontario," said Craig Skauge, president of the Calgary-based National Exempt Market Association (NEMA). "This will provide much needed access to capital for entrepreneurs and simultaneously provide everyday Ontario citizens with access to alternative investments that have historically only been available to the wealthiest 1% of Ontario residents."
The OM exemption is designed to help firms raise capital from a broader range of investors than other exemptions, which are limited in various ways, either by the investor's financial circumstances (in the case of the accredited investor exemption), or their connection to the company (the friends and family exemption).
Under the OM exemption, any investor can participate in these private offerings, subject to receiving upfront disclosure (the OM) from the issuer, which is less extensive than what's provided in a traditional prospectus. The investor must sign a risk acknowledgement form.
In addition, regulators are also imposing new continuous disclosure requirements, requiring firms to provide investors with audited annual financials and disclosure about how the funds raised under the exemption are being used, to address concerns about the adequacy of disclosure and the added risks of dealing in the exempt markets (such as a lack of liquidity). Regulators are also setting investment limits and ensuring that investors have can sue for any misrepresentations in the disclosure they receive.
The basic investment limits will restrict the typical retail investor to investing $10,000 a year; investors that meet certain financial requirements will face a $30,000 limit, although this can go as high as $100,000 for eligible investors that also receive suitability advice from a dealer. Many in the investment industry have opposed the imposition of investment limits, but the regulators stuck to their guns and have determined that they are a necessary investor protection measure.
In announcing the decision to introduce the OM exemption in Ontario, the regulators said that the move will improve access to capital for small- and medium-sized firms.
"We believe the OM exemption will provide business enterprises with a cost-effective way to raise capital by allowing them to distribute securities under an offering memorandum, while maintaining an appropriate level of investor protection," the regulators said.
The move follows a review of the exempt market that was carried out by the Ontario Securities Commission (OSC) that will also see it — along with regulators in Manitoba, Quebec, New Brunswick and Nova Scotia — introduce a new crowdfunding exemption, which is slated to take effect on Jan. 26.