CSA Ready to Add New Disclosure Requirements for Issuers Using the OM Prospectus Exemption

Published on: March 2023 | What's Trending

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The Canadian Securities Administrators (CSA) are amending National Instrument 45-106 Prospectus Exemptions (NI 45-106) to add new disclosure requirements (the “Amendments”) for real estate issuers and others considered “collective investment vehicles” when raising funds pursuant to the offering memorandum exemption.

The Amendments also make some general changes to improve disclosure for investors, to “streamline” parts of NI 45-106. Provided that the CSA receives ministerial approvals, the changes will take effect on March 8, 2023. When relying on the offering memorandum (OM) prospectus exemption, issuers will need to follow the additional disclosure requirements, so they may want to consult a securities lawyer to ensure they are operating in compliance with the Amendments.

Clarified Disclosure Framework

The CSA announced the amendments as part of a scheme to develop a “clear disclosure framework” for issuers in the real estate and collective investment (CIV) categories. The goal is to provide greater certainty regarding what information must be disclosed to investors.

One reason for the Amendments is that the OM exemption was initially intended as a financing tool for “early stage and small businesses” – who cannot otherwise afford the cost of compliance on larger prospectus offerings – to raise “relatively small amounts of capital”[1]. Instead, the exemption is being used by “larger and more complex issuers” (i.e. to whom the standard prospectus framework was intended to apply)  to raise capital from a broad pool of investors (i.e. the public) in circumvention of the more intricate and sophisticated  prospectus offering requirements.[2]

The CSA proposed the Amendments in 2020 and then reviewed submissions from commenters before issuing the revised Amendments. The expectation is that those purchasing securities under an OM – particularly those purchasing from real estate issuers and CIVs – will receive enhanced and more tailored disclosure.

Applicability of New Disclosure Requirements

Generally applicable additions to OM disclosure requirements will affect all issuers raising funds or otherwise relying on the OM exemption. However, much of the focus is on the additional specific requirements for issuers involved in “real estate activities” and those considered CIVs. A CIV is an investment fund or an issuer having a primary purpose of investing the money of its security holders in security portfolios that don’t include securities of the issuer’s subsidiaries. “Real estate activities” is defined as actions with the primary purpose of generating income or gain for security holders from the sale, lease, or other disposition of real property (but do exclude activities such as oil and gas activities with a real estate component, activities in respect of a “mineral project”, and activities in Quebec relating to Regulation Respecting Real Estate Prospectus and Registration Exemptions).

Assistance with Enhanced Disclosure Requirements

The specific wording of the new requirements is available in Annex B of the CSA’s Notice of Amendments. For assistance in understanding and developing plans for compliance with the new requirements, issuers who plan to rely on the OM prospectus exemption should consider consulting experienced securities counsel.

The CSA appears to suggest that the prospectus exemption is currently being abused in ways that fail to provide fair information to investors. As a result, they are likely to begin enforcing strict compliance as soon as the terms take effect.

If you would like to speak to us about disclosure obligations, or have any questions as an issuer or investor, contact a member of the Business Law group at Pallett Valo.

[1] CSA Notice of Amendment – (2022), 45 OSCB 10161 page 1

[2] CSA Notice of Amendment – (2022), 45 OSCB 10161 page 1