private market investments for years.
For example, the Canada Pension Plan Investment Board
recently published its 2015 annual report showing that 52% of
its $264.6 billion pension fund (the CPP Fund) was allocated in
private market securities. The CPP Fund posted an 18.3% return
in 2015 and has a 10-year annualized rate of return of 8.0% which
illustrates not only that it is well managed but that institutional
investors are substantially investing in private market securities in
order to diversify their portfolio and generate higher returns.
3. How has the private market changed in the past few
months? Why did it change?
The private markets have fundamentally changed in Ontario
with the introduction of new prospectus exemptions that were
One major new prospectus exemption that came into effect
in Ontario on January 13, 2016 is the Offering Memorandum
Prospectus Exemption (the OM Exemption). The introduction of
the OM Exemption means that retail investors (i.e., non-accredited
investors) can now finally access and invest in private markets
opportunities just like accredited investors.
This is a ‘game changer’ since we believe it will
stimulate capital raising in Ontario and provide investors with
opportunities to invest that generally were unavailable to less
wealthy Ontario investors.
The reason for the change is the awareness that Ontario had
a funding gap for small and medium-sized enterprises. Ontario
needed to find new ways to raise capital for companies since
existing prospectus exemptions were not working. There was also
a strong desire to further open up private investment opportunities
to a greater number of Ontario investors.
In the fall of 2012, the Ontario Securities Commission (OSC)
struck an Exempt Market Advisory Committee (the Committee) to
investigate how to help companies raise capital while protecting
investors. Brian Koscak, at the time, the Chair of the PCMA and
now Pinnacle’s President and General Counsel, was appointed to
the Committee in 2012 and remains a member.
Kudos to the OSC for creating the Committee and coming
out with tangible results by introducing various new prospectus
exemptions in 2015, including the OM Exemption.
4. What is the OM Exemption and how does it work?
Although the OM Exemption is now available across Canada,
the rules are not the same in all Provinces, however, in this
article we only address Ontario’s OM Exemption. The new OM
Exemption is designed to facilitate capital raising from a wider
range of investors than accredited investors provided that certain
conditions are satisfied.
Below is a description of some of the key features of Ontario’s
new OM Exemption.
a. What types of issuers and types of securities cannot be
sold under the OM Exemption? Issuers that are “investment
funds” or companies selling securities that are “specified
derivatives” or “structured finance products” cannot raise
capital under the OM Exemption in Ontario.
b. What is an offering memorandum? A company relying
on the OM Exemption is required to provide a disclosure
document at the point of sale to an investor which is called an
“offering memorandum” or “OM”. Securities law regulates the
content of an OM and requires information about the issuer, its
business, the securities being offered, officers and directors,
risk factors and other information. As a matter of law, an OM
cannot contain a misrepresentation, which means an untrue
statement of material fact or an omission to state a material
fact that is required to be stated in the OM so the statement is
not misleading. For example, providing incorrect share capital
information in an OM is a misrepresentation since it would
be an untrue statement. Omitting information about a director
or officer of the company and their criminal record would be
a misrepresentation since it was omitted from an officer’s or
director’s required biography in the OM.
c. Audited financial statements An OM under the OM
Exemption must also include audited financial statements of
the company. This provides investors with more information
and comfort regarding the financial condition of a company
and some independent verification of that financial condition
by external auditors.
d. Eligible and non-eligible investors and investment limits
Under the OM Exemption, generally any retail investor over
the age of 18 can invest, however, there are investment
limits that may be imposed based on whether an investor is
classified as an “eligible” or “non-eligible” investor. This is a
key distinction under the OM Exemption.
An “eligible investor” includes an investor who is an individual
• net assets, alone or with a spouse, exceed $400,000;
• net income before taxes exceeded $75,000 in each of the 2
most recent calendar years and who reasonably expects to
exceed that income level in the current calendar year; or
• net income before taxes combined with a spouse, exceeded
$125,000 in each of the 2 most recent calendar years and
who reasonably expects to exceed that income level in the
current calendar year.
An investor who is not an eligible investor is called a
“non-eligible investor”. The investment limits under the OM
Exemption for eligible and non-eligible investors are as follows:
• non-eligible investors are limited to $10,000 in all securities
acquired under the OM Exemption in the preceding
• eligible investors are limited to $30,000 in all securities
acquired under the OM Exemption in the preceding 12 months,
UNLESS the individual receives advice from a portfolio
manager, investment dealer or exempt market dealer (EMD)