From the Regulators

Commission continues work on developing four new possible exemptions, including crowdfunding

By James Langton |

The Ontario Securities Commission (OSC) says it is continuing to work on a crowdfunding exemption, along with three other possible new prospectus exemptions, in order to facilitate capital raising in the exempt market.

The OSC on Wednesday published OSC Notice 45-712 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising. The review was initiated last year in order to look at ways to foster capital raising for start-ups and small and medium-sized enterprises (SMEs) and to modernize the exempt market regulatory regime in Ontario.

In the report, the commission doesn't definitively commit to introducing any new exemptions, but it does say that it has decided to continue working on developing four new possible exemptions, including: a crowdfunding exemption; an offering memorandum (OM) exemption, similar to what's available in other provinces; a family, friends and business associates exemption; and, a streamlined version of the existing rights offering exemption currently available across Canada.

"Building on the concept idea in our consultation paper, staff will continue to work to develop a crowdfunding regulatory framework," it says. "We recognize that for crowdfunding to be a viable method of raising capital, the regulatory framework must provide investors with adequate protections, while at the same time not imposing excessive regulatory costs on issuers and funding portals." It also says that it's developing a regulatory framework for funding portals too.

Along with the progress report, the OSC also published the results of an investor survey carried out by the Brondesbury group that aims to assess investor interest in, and thoughts on, the prospect of equity crowdfunding. It found that investors are split on whether or not they are interested in investing this way. About half the respondents to an online survey carried out in the spring said they would be interested in crowdfunding, and half would not. It also found a strong correlation between those who are interested in venture investing generally and those who are open to using crowdfunding.

According to the survey, the biggest concerns about crowdfunding are the potential for fraud, and the risk of losing money. Other significant concerns include a lack of unbiased information about a potential investment, and the lack of liquidity.

Apart from a possible crowdfunding exemption, the OSC also says that it intends to develop a proposal for an OM exemption that is "substantially harmonized" with the existing Alberta model; that it will work with the rest of the Canadian Securities Administrators (CSA) to see if the existing rights offering exemption could be streamlined to improve its efficiency and effectiveness; that it will consider adopting a broader family, friends and business associates exemption that's largely harmonized across Canada; and, that it will consider developing an exemption to allow an issuer to issue securities to its existing security holders via private placement without an offering document, just relying on its continuous disclosure.

Additionally, it says that aims to amend the accredited investor (AI) exemption to allow fully managed accounts to purchase any securities on an exempt basis, including investment funds; which will harmonize this exemption with other Canadian jurisdictions.

The report also indicates that the commission has ruled out various other possible exemptions, including an exemption based on investor sophistication, such as meeting certain work experience and educational criteria; and, a registrant advice exemption. It has also ruled out changes to the existing private issuer exemption, and will not seek to re-introduce the closely-held issuer exemption.

While the report does not fully commit to introducing any new exemptions, the commission says that this work is a priority. It also notes that any proposals will go out for public comment before it makes any final decisions on whether to introduce these proposed new exemptions or not. The report also sets out principles to guide OSC staff in crafting these proposals, and deciding whether to bring them forward.

"The exempt market plays an important role in Ontario's capital markets, especially for start-ups and SMEs," said Howard Wetston, chair and CEO of the OSC. Indeed, it says that over $100 billion was raised in the exempt market in Ontario in 2012, up by 20% from 2011. It notes that the accredited investor exemption accounted for approximately 90% of this total; and, that approximately $7 billion was also raised under the minimum amount prospectus exemption, up from $4 billion in 2011.

"It is important as a securities regulator that our continued work in this area promotes an exempt market that is innovative and globally competitive and that facilitates capital raising while protecting investors," Wetston added.