OSC Considers New Capital Raising Exemptions

By: Michael M. Lee

The Ontario Securities Commission (“OSC”) recently published OSC Staff Consultation Paper 45-710 – Considerations for New Capital Raising Prospectus Exemptions.  A copy of it can be found here. This consultation paper forms part of the OSC’s review of the current legislation regulating the distribution of securities in the “exempt market” as embodied in NI 45-106 – Prospectus and Registration Exemptions and the Ontario Securities Act.

NI 45-106 was originally introduced in 2005.  In many respects, NI 45-106 did not invent anything new.  Rather, it harmonized many of the prospectus exemptions which were already available in the different provinces prior to 2005.

Many things have happened since 2005, not in the least of which is the global financial crisis, which led to a significant decrease in capital raising resources for businesses (both large and small).  The pressing question we need to now address is whether NI 45-106 (and related rules in Ontario), which was designed at a time when global market meltdowns were simply unimaginable, needs to be revamped such that the much-needed economic recovery is not impeded by antiquated rules and regulations.

The OSC does not intend to address in 45-710 the issues around the diminishing relevancy of the “accredited investor” criteria and the $150,000 “minimum purchase amount” threshold as a means of investor protection (the CSA is looking into that issue).  Rather, its focus is on whether additional prospectus exemptions should be introduced in Ontario.  We applaud the OSC for recognizing the need for exempt market issuers (which are usually small to medium-sized businesses – the engine of the economy) to have more avenues to access capital to fund their operations.

We believe that Ontario should at the very least introduce an “Offering Memorandum” exemption such that small issuers can gain access to a greater number of potential investors, so long as an adequate amount of disclosure is given and investors are made to acknowledge the risks they are taking.  This would also bring Ontario in line with the rest of the provinces which already have this exemption.

We are also very excited about the possibility of a “crowd-funding” exemption being made available in Ontario.  Crowd-funding is a great tool for giving small start-ups the “kick-start” (pun intended!) they need to get going.  As many have noted, limitations can be put on the amount invested and the frequency in which issuers and investors can participate in crowd-funding initiatives.  It is a win-win situation if capital-starved companies can get the funding they need in an environment where no investor ever loses that much on an investment.  The technology is there to make this happen and we would be remiss not to embrace this while similar efforts are already underway in some shape or form in other countries such as the UK and the US.

Sources:
OSC Staff Consultation Paper 45-710: http://www.osc.gov.on.ca/en/SecuritiesLaw_45-710.htm
Photo: http://crowdsourcingweek.com/crowdfunding-is-propelling-social-innovation/