The Offering Memorandum Exemption In A Nutshell

December 16, 2013 Legal Issues, Regulation, Consultation No comments

Mondaq | by Brian P. Koscak and Alixe Cormick* | December 16, 2013

The offering memorandum exemption (the OM exemption) in Section 2.9 of National Instrument 45-106 Prospectus and Registration Exemptions (NI 45 106) allows issuers to sell to anyone regardless of their income, net worth, investment amount, or relationship to the principles of the issuer. Everyone an issuer could solicit in Canada with a fully registered prospectus may be solicited using an offering memorandum prepared in the required form under the OM exemption. The OM exemption is available in all jurisdictions of Canada other than Ontario. The Ontario Securities Commission recently announced on December 4, 2013, it intends to publish new capital raising prospectus exemptions for a 90-day public comment period in the first quarter of 2014. One of these proposed exemptions is the OM exemption.

How does the OM exemption work?

To rely on the OM exemption, issuers must comply with some basic requirements and prepare and deliver an offering memorandum in the required form as set in the forms to NI 45-106. The basic requirements vary depending on the province where the issuer and investor reside. The form of the offering memorandum also varies depending on whether an issuer is a reporting issuer or a non-reporting issuer. Certain provinces have also provided for exemptive relief allowing non-reporting issuers raising $500,000 or less to include unaudited versus audited financial statements in their offering memorandum, subject to certain terms and conditions.

Basic OM exemption requirements

The OM exemption requirements follow two models. For simplicity, we will refer to them as the British Columbia model and the Alberta model.

(a) British Columbia model

The British Columbia model is followed by British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador. Issuers relying on the OM exemption to sell from or to investors in these provinces must ensure:

the investor purchases the securities offered as principal;
they deliver an offering memorandum in the required form to the investor prior to the subscription agreement being signed; and
they obtain a signed risk acknowledgment in the required form from the investor and keep it for eight years.

(b) Alberta model

The Alberta model is followed by Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon. Issuers relying on the OM exemption to sell from or to investors in these provinces must ensure all of the requirements set-out in the British Columbia model is met, and must also ensure:

the investor is an "eligible investor" * as defined in NI 45-106, or the acquisition cost to the investor does not exceed $10,000;
if the issuer is an investment fund, the investment fund is a non-redeemable investment fund, or a mutual fund that is a reporting issuer; and
they pay no commission or finder's fee to any person, other than a registered dealer, in connection with a distribution to an investor in the Northwest Territories, Nunavut, and Yukon.

The OM exemption offering memorandum

The offering memorandum required by the OM exemption must be in the prescribed form under section 2.9 of NI 45-106. There are five forms recognized for this purpose under NI 45-106:

Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers is the form used by private issuers and the majority of issuers relying on the OM exemption to sell their securities.

Form 45-106F3 Offering Memorandum for Qualifying Issuers is the form used by reporting issuers who have a current annual information form posted on SEDAR. It allows reporting issuers to incorporate by reference information required in the offering memorandum from the issuers' SEDAR filings.

The other three forms of offering memoranda apply only to issuers selling syndicated mortgages or real estate securities in Alberta and British Columbia, as these forms are specific to those provinces. These forms typically are used when real estate is sold in connection with an investment contract. When and how these 'real estate securities' are sold will be the subject of a separate blog post.

Each of these offering memorandum forms require issuers to provide a:

two-day "cancellation right" to investors to cancel their commitment to purchase securities under the offering memorandum. Issuers must hold each investor's funds received with the sale of securities in trust until this cancellation right has expired. Issuers must return all funds held in trust to the investor promptly if the investor exercises this cancellation right;
statutory right of action that provides an investor with a right of rescission or right to sue for damages;
certificate dated the date of the offering memorandum that states: "This offering memorandum does not contain a misrepresentation." All principals and promoters of the issuer must sign the certificate; and
an amended offering memorandum or an amendment to the offering memorandum with a new certificate, if the offering memorandum provided to an investor ceases to be accurate before the investor commits to purchase securities under the offering memorandum.

Except in British Columbia, issuers must file a copy of the offering memorandum, and if applicable, a Form 43-101 technical report if a mining company or a Form 51-101F1 or F2 statement or report if an oil and gas company, with its first Form 45-106F1 Report of Exempt Distribution within ten days after the accepting the first subscription from an investor. In British Columbia, issuers must use BC Form 45-106F6 Report of Exempt Distribution. Issuers only need to file the offering memorandum and any related reports with the first exempt distribution report unless the issuer amends the offering memorandum.

In future posts, we will discuss various informational requirements contained in these offering memorandum forms.