The exclusion of proprietary products from Ontario’s proposed offering memorandum (OM) exemption could leave exempt market dealers (EMDs) who sell such investments under pressure both from a competitive and regulatory standpoint.
The proposed OM exemption from the Toronto-based Ontario Securities Commission (OSC) would exclude related party issuers.
“They like the third party issuer model – they get that,” said Cora Pettipas, vice president, National Exempt Market Association (NEMA). “But they want to carve out related party.” Pettipas spoke at NEMA’s Exempt Market Town Hall Meeting in Toronto on Friday.
In other words, EMDs who are also issuers with proprietary products on their shelves can sell their products to accredited investors (households with $300,000 in net income, or net assets of $5 million) but not to eligible investors (individuals with $75,000 in net income or, under the proposed changes, $250,000 in net assets).
As such, EMDs will have a smaller pool of potential investors and therefore face greater competition. “There’s going to be more competition for investors capital and EMDs are going to be at a disadvantage because you won’t be able to use the OM exemption,” said Susan Han, associate counsel, Miller Thomson LLP, at the NEMA event. “You’re going to continue to be stuck with just the more narrow accredited investor exemption.”
Furthermore, in addition to competitive pressures, Han believes EMDs selling propriety products are likely to face more regulatory scrutiny.
“Those of you, EMDs, who have had an OSC audit in the last little while will be very familiar with this,” said Han. “You’re dealing with the regulator’s concern that your client’s portfolio is concentrated.”
As a result, Han said that going forward EMDs selling proprietary products may be only allowed to sell shares in a particular investment that represent no more than 10 to 15 per cent of an accredited investor’s investible assets.