20 Private Capital Markets | Spring 2014 | www.pcmacanada.com
b. Prohibition on investment funds using the OM Exemption
c. Prohibition on proprietary products of related issuers
It is not clear why an issuer who seeks to rely on the OM
Exemption should be precluded from doing so through a related
dealer firm. The prohibition suggests the CSA believes there are
conflicts of interest so insurmountable that appropriate ’
know-your-product’, ‘know-your-client’ and suitability assessments are
not possible by a related dealer. It should be noted that significant
participants in the mutual fund dealer and investment dealer
communities regularly, and often exclusively, sell proprietary
products or securities of related issuers. Surely the conflict
mitigation approaches employed by those sectors of the capital
markets under applicable securities law should be available to all
registered dealers. An outright prohibition appears unjustified and
disproportional absent further explanation from the CSA.
The impact of the related party prohibition would be significant
for multiple issuer groups including mortgage investment
corporations, real estate and oil and gas companies that have
in-house registered dealers who would be unable to sell securities
of their own issuers to Ontario investors under the proposed
Ontario model of the OM Exemption.
d. $30,000 investment limit per year
The introduction of investment limits on eligible investors for
trades through a registered dealer is unsatisfactorily explained.
Registered dealers have suitability obligations under applicable
securities law and should be allowed the professional discretion
to evaluate the suitability of any amount an investor may choose
to invest. The sale of investments that are unsuitable for a client
by their nature, or because of the size of the investment, are well
within the existing jurisdiction of the CSA to investigate and pursue
regulatory action against the firm if warranted.
For example, for an investor with $800,000 of net assets
(and who does not satisfy any of the financial tests for qualifying
as an accredited investor) investing in more than $30,000 of
exempt market securities may be very suitable. For others, an
investment of even $30,000 may be totally unsuitable. That is
why the suitability rule exists and arguably there is no need for an
investment limit. The CSA need to trust registered dealers to do
their job and have faith in the securities regulatory framework that
they have developed or provide more education through outreach
programs or regulatory guidance explaining how suitability is to be
done in a compliant manner.
In addition to the above, the amount of the proposed limit also
raises questions. We know the Alberta Securities Commission’s (the
ASC) review of the OM Exemption in Alberta for 2011 and 2012
indicated that the average size of an investment by an individual
eligible investor was $45,700 in 2011 and $47,900 in 2012 while
the median was approximately $26,200 and $27,500 respectively.
It would appear that the proposed $30,000 investment limit for
eligible investors was based on the median investment size rather
than the average investment size. Such data, if indeed the source
of the proposed limit, is only based on two years and reflects the
experience of only a single CSA member. Furthermore, the CSA has
not provided any evidence to indicated that the proposed investment
limits, if implemented, would not negatively impact the amount of
capital raised or lead to circumstances when an investment by an
eligible investor may well have been a suitable investment.
e. Excluding principal residence from the net asset test for
Only Ontario is proposing to exclude the value of a principal
residence from the net asset test for eligible investors. The OSC
has not provided supporting arguments for this change although
Alberta, Quebec and Saskatchewan have proposed conducting
further research and analysis in respect of the implications of
excluding the principal residence.
The Ontario model and proposed changes to the OM
Exemption by the Participating Jurisdictions are a cause for
excitement but also a measure of concern in the private capital
markets. The occasion of Ontario’s entry into the OM Exemption
should be a time for celebration, yet we still find ourselves unsure
about the disconnected approach to these fundamental capital
raising tools from one end of the country to the other.
The OSC is accepting comments on their proposed OM model
of the OM Exemption and other capital raising exemptions they are
considering until June 18, 2014. Your comments and views are
important and you are strongly encouraged to submit a comment letter.
What do you think of the proposed changes to the OM
Exemption? Please stay tuned to PCMA Canada’s website for
on-line surveys and in-person opportunities to share your views
on the proposed changes.
For more information contact:
firstname.lastname@example.org | 416.860.2955
The contents of this article do not constitute legal advice and is provided for
information purposes only. This article does not necessarily reflect the opinions of
Cassels Brock & Blackwell LLP or any of its lawyers or clients. The content of this
article is not intended to be used as a substitute for specific legal advice or opinions.