pace of interconnected policy change however, for issuers in dire
need of capital this process is already too long. Accordingly, the
PCMA recommends against any delay in Ontario’s adoption of the
OM Prospectus Exemption, and we agree that any industry/sector
specific disclosure guidance should be developed in phase two of
the Exempt Market Review.
Types of Securities
5) We are proposing to specify types of securities that may not
be distributed under the OM Prospectus Exemption, rather
than limit the distribution of securities to a defined group of
permitted securities. Do you agree with this approach? Should
we exclude other types of securities as well?
Subject to our response in question 6 below, the PCMA
understands the OSC’s approach to this matter, however, we are
concerned that this creates more disharmony among the CSA
We do not believe the OSC should restrict convertible
securities (e.g., convertible debentures), conventional warrants
and rights and special warrants, which are used extensively by
SMEs raising capital under existing prospectus exemptions. In
start-up and early stage financings, convertible securities and
warrants are commonly used to defer complex valuation issues
(e.g., during seed stage or angel-led financings, bridge financings,
etc.) or to “sweeten” the opportunity for early-stage investors that
participate in higher risk financing rounds.
We do not believe that any type of securities should be
excluded from being sold under the OM Prospectus Exemption.
With proper disclosure under the OM, any kind of security, even
those which are complex, or in fact novel, should be eligible for
sale. SMEs using the OM Prospectus Exemption need flexibility
in designing their product offering to ensure they can effectively
raise capital and respond to unique or innovative opportunities
and investor needs.
6) Specified derivatives and structured finance products
cannot be distributed under the OM Prospectus Exemption.
Should we exclude other types of securities in order to prevent
complex and/or novel securities being sold without the full
protections afforded by a prospectus?
We do not support excluding certain types of securities.
However if the OSC proceeds to do so we suggest one of two
possible approaches involving complex and/or novel securities:
(a) restrict derivatives and structured finance products initially,
but give further consideration to these securities types in phase
two of the Exempt Market Review, or
(b) allow them (consistent with Alberta, British Columbia and
other CSA jurisdictions) and provide further guidance on specific
disclosure requirements in the second phase of the Exempt Market
Review. This is the approach we support.
One of the reasons we do not believe in restricting certain
types of securities is the example of structured products. There
is a difference between simple asset-backed securities, such
as those involving loan and lease financings, and those of more
complicated structures aimed at institutional investors.
We seek clarification by the OSC of whether an issuer raising
capital for loans to those acquiring a new or used automobile would
be considered a complex and/or novel security. We respectfully
submit that these types of issuers should not be considered as
issuing complex and/or novel securities since they can provide
investors with regular distributions and provide a diversified
holding in a portfolio of loans.
7) We have not proposed any limits on the length of time an
OM offering can remain open. This aligns with the current OM
Prospectus Exemption available in other jurisdictions. Should
there be a limit on the offering period? (a) How long does an
OM distribution need to stay open? (b) Is there a risk that
“stale-dated” disclosure will be provided to investors?
(a) An issuer in continuous distribution is different than an issuer
that seeks a one-time capital raise. The PCMA does not believe
a fixed distribution period allows the time and flexibility that is
required by certain types of issuers and offerings. The key concern
should be that the OM does not contain a misrepresentation at the
time of distribution. If the distribution is over a period of time, then
as a matter of law, issuers need to ensure that any disclosure has
not changed or must update the OM accordingly.
There is already an obligation (discussed in NI 45-106CP) to
update an OM if there has been a material change in the business
of the issuer after delivery of an OM and before an issuer accepts
the agreement to purchase securities. There is also a requirement
that financial statements cannot be stale-dated. For example, if
a distribution is ongoing, an OM must contain updated audited
financial statements in its OM that are no later than the 120th day
following the financial year-end of an issuer.
Accordingly, the PCMA believes that no change is required
to impose a distribution period in order to ensure an OM does
not contain a misrepresentation since it is already required under
applicable securities law.
(b) There is always a risk that an issuer will not update
information in its OM while in distribution, although it cannot
contain a misrepresentation as a matter of law. See our response
in 7(a) above. To mitigate against such a risk, the OSC and other
CSA members can provide clear guidance and information to
issuers and registrants as part of their Outreach Programs, Staff
Notices or other publications.