108 Private Capital Markets | Fall 2014 | www.pcmacanada.com
should be able to remain open as long as an issuer likes,
provided that there has not been a material adverse change in the
business and affairs of an issuer and the offering document does
not contain a misrepresentation; and (c) an issuer can use the
Proposed Exemption as many times as it likes provided that it has
not raised more than the Threshold Amount under any prospectus
exemption, including the Proposed Exemption.
The PCMA also believes that the investment limits should be
increased to $2,500 since $1,500 is too low to be meaningful. This
would mean at least 200 investors would have to invest $2,500
to invest up to the Threshold Amount. This is the same minimum
number of investors that would have to invest under the Proposed
Exemption under the proposed a $300,000 investment limit.
The Proposed Exemption should clarify whether a transaction
fee can be paid by the issuer to the portal. Although the funding
portal can charge the issuer for its services, no commission can be
paid to an agent in respect of the offering so clarification is required.
We assume a portal can enter into a referral arrangement
with another individual for issuers and/or investors referred to the
portal - we believe this should be confirmed and clarified.
There is a concern that each of the funding portal’s promoters,
directors, officers and control persons be resident of Canada. We
believe this may unduly restrict foreign portals from operating in
Canada who may have the resources and expertise to develop
a viable portal framework in the participating jurisdictions who
adopt the Proposed Exemption.
PCMA believes that additional guidance should also be
provided on what other offering document or marketing materials,
if any, can be provided by an issuer to an investor on the funding
portal. Furthermore, many issuers seek clarification of whether a
funding portal can host a road show presentation by an issuer in
each of the participating jurisdictions.
Individual information forms for Prescribed Individuals
involving an issuer or portal asks certain prescribed questions.
It is not clear what happens when an individual discloses that:
(a) they have resigned or been dismissed for cause by an employer;
(b) been convicted of an offence under any legislation; (c) he
or she is not up-to-date with all of their financial commitments;
or (d) been subject to any proceedings or any order resulting
from proceedings under any securities legislation or derivatives
legislation or both in any province, territory, state or country.
It is not clear when such affirmative disclosure would prohibit such
person from being involved in an offering or funding portal and
clarification is required.
Improvements on offering memorandum exemption
9. The offering memorandum exemption is not widely used
by small and early-stage businesses. We have heard that the
costs of complying with the financial statement requirements
in the offering memorandum form may be prohibitive and we
welcome suggestions on ways to adjust those requirements.
Are there other issues with the offering memorandum
exemption that we should reconsider in order to make it a
more useful exemption for small businesses?
(a) Financial statement requirements
We believe issuers that seek to raise capital under the offering
memorandum exemption should be provided relief from the
audited financial statement requirements. On December 20, 2012,
the Canadian Securities Administrators (the CSA) (other than
British Columbia and Ontario) published Multilateral CSA Notice
45-311 Exemptions from Certain Financial Statement-Related
Requirements in the Offering Memorandum Exemption to Facilitate
Access to Capital by Small Businesses. Each CSA member (other
than British Columbia and Ontario) issued a harmonized interim
local order (the Order) that provides an exemption from certain
financial requirements set out in the offering memorandum.
The Order remains in force until December 14, 2014.
The Order provides relief from the audited financial
statement requirement and the requirement for issuers to prepare
financial statements using Canadian GAAP applicable to publicly
accountable enterprises provided that: (a) the issuer and related
issuers raise no more than $500,000; (b) no investor invests
more than $2,000 in any 12-month period; (c) the issuer is not
a reporting issuer, investment fund, mortgage investment entity
or real estate issuer; (d) the issuer does not distribute complex
securities; and (e) the offering memorandum contains a bold
warning on the front page.
In February 2013, the BCSC published a Notice and Request
for Comment on National Instrument 45-106 Prospectus and
Registration Exemptions Proposed Prospectus Exemption to
Assist Capital Raising by Small Businesses (the BC Proposal).
We are not aware of any report or follow-up communication
by the BCSC in connection with the BC Proposal. We submit that
the relief from certain financial statement requirements under the
offering memorandum exemption as set out in the Order should be
followed by the BCSC and similarly adopted as a local BC order.
(b) Other issues with the OM exemption
Issuers, dealers and other capital market participants require
additional guidance on the non-financial disclosure requirements
involving the OM exemption. We are very concerned with the
different views that various CSA members have with the level,
quality and extent of required disclosure among themselves but
also within the corporate finance and enforcement branches of
such CSA members. This needs to be clarified.
Moreover, the various prospectus exemptions (i.e., the
Proposed Exemption, the Equity Crowdfunding Exemption
and the OM exemption) have different disclosure requirements
yet the same prohibition against having a misrepresentation.
It is not clear how the law involving a misrepresentation can
be the same law but applied differently among three different
prospectus exemptions (i.e., the Proposed Exemption, the Equity
Crowdfunding Exemption and the OM exemption) with three
different disclosure requirements. We submit that additional
clarification and guidance is required.