By James Langton

(April 10 – 17: 10 ET) – The Ontario Securities Commission has released a new set of rules governing the exempt market for yet another comment period.

The OSC has been working to overhaul the regulation of the exempt market for almost seven years now. Last fall it finally issued a proposed new rule to do just that. Now it has overhauled that proposal and issued it again for comment, although the comment period will be brief.

The OSC says it received submissions from 26 commentators on the last draft of the rule. As a result of the comments received and the further consideration of the commission, it has made some changes to the proposed rule.

The proposed rule introduces two new exemptions, which the OSC says reflects the recommendation set out in its Task Force Report and the resulting concept paper that considered overhauling this market.

“The purpose of the new exemptions is to create an approach to exempt market regulation that is more consistent with the needs of that market and its investors. The new regime will provide a more rational basis for exempt financings than provided by the current exemptions. The commission believes that the proposed rule represents a significant improvement over existing exempt market regulation.”

The new exemptions are:
> the Closely-Held Issuer Exemption, permitting issuers to raise a total of $3 million, through any number of financings, from up to 35 investors (excluding employees) without concern for the “qualifications” of the investors;
> the Accredited Investor Exemption, which allows issuers to raise any amount at any time from any person or company that meets specified qualification criteria.

One area where it is not making changes concerns the impact of the rule on the distribution of securities of mutual funds and non-redeemable investment funds on a private placement basis, including pooled funds.

The OSC says it received “considerable comment” on this issue, and that commentators were particularly concerned that the proposed accredited investor exemption would adversely impact the distribution of pooled fund securities to non-accredited investors to the extent such distributions are currently being made using the $150,000 exemption.

Instead, the OSC is undertaking a review of the appropriate regulatory response regarding the exempt distribution of pooled funds. Commission staff have been mandated to review the issues raised by pooled funds, with a view to returning to the commission with a proposed scheme.

In the meantime, market participants may sell securities of pooled funds to managed accounts provided the principal of the account is an accredited investor. Market participants will not be able to sell securities of pooled funds to clients who are not accredited investors, even where those clients already hold securities of those pooled funds. Those that are not accredited investors will be able to continue to hold securities of pooled funds which they acquired under exemptions prior to the coming rule, but will not be eligible for exempt purchases of any additional securities.

Comments are due by May 7.