New Offering Memorandum Regulations Announced

The Canadian Securities Administrators have released the final regulations for the new Offering Memorandum (“OM”) Exemption, quasi-harmonized in six jurisdictions in Canada. Ontario will join the rest of Canada and open up private capital investment to “non-accredited” investors in January of 2016, while Alberta, Saskatchewan, Quebec, New Brunswick and Nova Scotia will enforce the new rules effective May 2016.

The new regulations are designed to provide further investor protection when purchasing securities in private issuers. The key changes fall into three categories:

  • Ongoing disclosure – non-reporting issuers will be required to, among other measures, provide investors with audited annual financial statements and an annual notice describing how the proceeds raised under the OM were used.
  • Disclosure at time of offering – any marketing materials will be required to be incorporated by reference in the offering memorandum so that they are subject to the same liability as the disclosure provided in the offering memorandum in the event of a misrepresentation. This would include videos, pitch decks and executive summaries companies use when marketing their offering.
  • Investor limits – individual investors relying on the offering memorandum exemption will be subject to annual investment limits – $10,000 for an ordinary investor and $30,000 for an eligible investor. If the securities are sold through a dealer, all investments are subject to suitability, but the annual limit for an eligible investor increases to $100,000 per year, subject to suitability.

Companies will be encouraged to be able to reach the large Ontario investor marketplace, but the regulations are certainly complex and will take a while to digest. The 166 page document contains many more details – some of which pertain to certain jurisdictions. I’m glad the regulations don’t come into effect for a couple of months … it will take us that long to figure them all out!

Stay tuned!

ASC Unveils Startup Business Exemption

ASC LogoToday – amongst all the election noise – a little seen press release was issued from the Alberta Securities Commission … Notice of Publication and Request for Comment for a Proposed Multilateral Instrument 45-109 Prospectus Exemption for Start-up Businesses.

In short – it is the ASC’s answer to the recent Start-up Crowdfunding Exemption recently issued by six other jurisdictions – but better. I haven’t dug deep into the detail just yet, but from my first initial review, I have to say I like it. It has a lot of common sense rules to it – a $1 million capital raise, common sense disclosure, a $5,000 maximum investment from an ordinary investor and the ability to conduct concurrent raises, all through a registrant.

For those of you that remember my older post “The Trouble with the OSC’s Crowd” the ASC has solved many of the issues I have with the OSC’s yet to be implemented version. And, better yet, they don’t even call it a Crowdfunding Exemption – it is simply a Start-up Business Exemption that is directed principally at small and very early-stage businesses and is designed to allow them to raise a defined amount of money in a more cost effective way while still providing appropriate investor protection. It is after all, another tool in a company’s capital raising toolbox.

Our team is currently reviewing the proposed exemption in detail and will work with other stakeholders in providing comment. For now, we are pleased to see this initiative from the ASC. Although they stand on their own (with the Nunavut Securities Office), they have provided some solutions for multi-jurisdictional offerings. Stay tuned – we’ll provide more comments soon.

It’s Time to Disrupt the Private Capital Markets

Guest Post – Neal Gledhil, Founder & CEO ECN Capital

Somewhere along the way, it became very expensive for companies to raise capital from private investors. As public company costs continued to rise and investors’ confidence in the public markets waned, it was obvious that companies not ready to do an IPO would look to private capital as a stepping stone to the public markets. The regulators agreed – implementing prospectus exemptions designed to be used by those companies that required this pre-IPO money or in fact, were never going to be a candidate for the public markets.

Today, private capital investment far outweighs the capital raised in the public markets with many companies choosing to stay private while raising substantial amounts of capital. These issuers have had much success working with EMDs to market their offerings to their investor base, and EMDs have become known for the types of investment products they bring to market.

Investors have embraced the private capital markets as well, feeling empowered by choosing their own investments rather than committing their entire investment portfolio to fund managers who, at their discretion, make investment choices on their behalf.  But this ‘freedom to choose your own investments’ is a tricky business. Where do investors find deals they want to invest in, and where do the Issuers find the investors that are looking for their offerings? In many cases, access to deal flow relies on who you know, naturally flowing to professional investors that have the time and the patience to listen to investment pitches and conduct their own due diligence.

This is where the capital raising costs explode. Issuers, intent on finding private capital, engage all sorts of advisors and representatives to market their deals, and EMDs saddled with the burdens of KYP, KYC and Suitability have to charge fees to review, evaluate and determine if the deal is suitable to be presented to their investor base through commissioned dealing representatives. For companies seeking smaller amounts of capital, say $5 – $10 million, the upfront costs they have to pay to dealers to market their deal become onerous. Not because the dealers are unscrupulous and greedy, just because that’s the cost dealers must bear to bring a deal to market. As our dealer friends at the PCMA can contest, being a registered EMD, isn’t a license to print money!

So herein lies the problem. Many a good company seeking capital has nowhere to turn and investors wanting to invest that never have a chance to find investment opportunities that may interest them.

Enter disruption. Enter technology.

“A disruptive business model expands participation in the market by lowering the cost to serve previously unprofitable customers, typically through the introduction of a new technology or business process.” – Ryan Caldbeck, CEO CircleUp

Until quite recently, there has been very little adoption of technological efficiencies in the private capital markets. Much of the process is antiquated and laborious, requiring person-to-person interface and paper pushing along the way.  Administration costs are high and the entire process requires a great amount of time and involvement by the EMD and the dealing representative to execute. Some of this is certainly a result of securities regulations, however the other part in my opinion, is that the investment community has been slow to adopt the technological efficiencies available.

From client onboarding to transaction execution, today’s dealers can achieve efficiency by embracing technology, not simply to comply with securities regulations, but to improve that compliance and create a better environment for the Investor. This doesn’t mean that person-to-person interaction is not required at certain points and in certain circumstances in order to comply with KYP, KYC and Suitability obligations, but technology can assist in much of the administrative burden while improving compliance.

We believe that the private capital markets are undergoing a shift as investors seek to discover opportunities outside of their usual networks and make investment decisions independently. This has been occurring in the public markets for years, illustrated by the significant rise in popularity of online discount brokers. It is a natural progression to manifest in the private markets.

Our goal in developing the ECN Capital marketplace is to use technology to improve the private market experience for all stakeholders. But beyond this, we are a conduit to find unique opportunities that would be typically inaccessible to most investors.

Implementing technological efficiencies in different parts of the economy typically results in broader exposure, convenience and a reduction in the costs. The competitive nature of industry means that those savings can be passed on to the end user. It should be no different in the private capital markets. These savings should be passed on to the investor and the issuer. This is our mission at ECN Capital, and it is an evolution that will undoubtedly occur in the industry over time.

Without question the disruption has begun and technological efficiencies will be implemented in the private capital markets reducing costs for investors and issuers. In our opinion, intermediaries will have to adapt and what is lost in revenues per transaction will ultimately be made up by multiples in volume.


CSA Adopts New Exemption for Distributions to Existing Security Holders

For Immediate Release
March 13, 2014

Vancouver – The securities regulatory authorities in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, Nova Scotia, Yukon, Northwest Territories, Nunavut, and Prince Edward Island today adopted a prospectus exemption that, subject to certain conditions, will allow issuers listed on the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSX-V), and the Canadian Securities Exchange (CSE) to raise money by distributing securities to their existing security holders.

On November 21, 2013, those jurisdictions published the proposed exemption in Multilateral CSA Notice 45-312 – Proposed Prospectus Exemption for Distributions to Existing Security Holders. The CSA received 241 comment letters from a wide range of market participants, including issuers, registrants, investors, law firms, and advocacy groups.

“The comments we received reflected overwhelming support for the proposed exemption, with many agreeing that it will reduce costs for investors and provide issuers with access to an additional source of financing,” said Bill Rice Chair of the CSA and Chair and Chief Executive Officer of the Alberta Securities Commission. “Certain changes to the exemption were made in response to suggestions that were submitted, including expanding it to include issuers listed on the TSX and CSE.”

Prior to the adoption of this exemption, retail security holders who wanted to make an additional investment in an issuer they had already invested in usually had to buy the securities on the secondary market at the market price and pay brokerage fees. This meant that issuers did not have access to their existing shareholders as an additional source of capital.

In order to acquire securities under the exemption, an existing security holder must confirm in writing that they are a security holder of the issuer. This limits use of the exemption to investors that have already made an investment decision in the issuer. Other key conditions designed for investor protection include:

unless an investor has obtained advice regarding the suitability of the investment from a registered investment dealer, the aggregate amount invested by the investor in any one issuer in the last 12 months under the exemption must not be more than $15,000, and the investor will have rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record.

A copy of the CSA notice and exemption is available on participating CSA member websites.

The Ontario Securities Commission announced on December 4, 2013 that it would publish for comment four new capital raising prospectus exemptions in the first quarter of 2014, including a proposed prospectus exemption for distributions to existing security holders. It intends to publish the proposed prospectus exemptions on or around March 20, 2014.

The CSA, the council of the securities regulators of Canada’s provinces and territories, co-ordinates and harmonizes regulation for the Canadian capital markets.