Published on December 16, 2013
OSC Exempt Market Update Timothy J. McCunn
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
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
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
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
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
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
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
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
Exempt Markets Why make changes? 1.Jobs Act / Crowdfunding 2.Slowdown in VC funding 10
Exempt Markets Proposed changes •The balancing of objectives: o Investor protection versus efficient capital markets 11
Exempt Markets Proposed changes •Crowdfunding •Family, friends & business associates •Offering •Rights memorandum offering 12
Exempt Markets Issuer restrictions • • • HQ in Canada Incorporated in Canada No investment funds 13
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
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
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
Exempt Markets Offering Memorandum •Harmonization with BC and Alberta •Could potentially be the one change with the greatest impact •Similar to crowdfunding 17
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
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
Thank You Tim McCunn 613.238.6321 email@example.com
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