Pssst…want to offer
your securities to the largest number of people possible in Canada without
filing a prospectus? Want control
and certainty over what information prospective investors are relying on when
purchasing securities of your company?
Want a simplified one page subscription agreement with no investor
questionnaire? Look no further then
the offering memorandum exemption in National Instrument 45-106 Prospectus and Registration
Exemptions (“NI 45-106”). The offering memorandum exemption is
available in all jurisdictions across Canada except Ontario.
Yes, I know Ontario is a
big market but apparently the Ontario Securities Commission does not believe
its residents are as advanced as the residents in the rest of Canada in
assessing opportunities set out in an offering memorandum. You can use an offering memorandum in
Ontario but there is no offering memorandum exemption in Ontario. You must instead rely on a registration
and prospectus exemption that is recognized in Ontario to sell securities to
Ontario residents. The
exclusion of Ontario is a small hiccup but still does not take away from the
usefulness of the offering memorandum exemption. After all Ontario is not the center of
the universe or Canada.
In part three of this
three part series, I will discuss the offering memorandum exemption. First I will discuss the form an
offering memorandum is required to take if an issuer wants to rely on the
offering memorandum exemption. I
will then cover a few of the provincial differences that seem to trip up issuers
and sometimes even their legal counsel.
In closing I will discuss offering memorandum hot spots and how to stay
away from trouble when putting together an offering memorandum.
Form is Everything
The offering memorandum
exemption in NI 45-106 allows an issuer to sell its securities to anyone,
regardless of their relationship, wealth or a minimum value of securities
being purchased. Preparing an offering memorandum requires a bit more input by management and its
professional advisors to put together than just a subscription agreement and
investor questionnaire (which is the main reason why issuers are reluctant to
use the offering memorandum exemption).
The added time and associated cost however can be well worth the effort,
particularly when an issuer
is looking to raise over $100,000.
In Canada an offering
memorandum is required to be prepared and delivered in the required
form to prospective investors. There are two versions of the required form:
(1) is for qualifying issuers (Form 45-106F3); and (2) the other is for non-qualifying issuers (Form 45-106F2).
Qualifying issuers are issuers listed on the TSX or TSX Venture
Exchange. Non-qualifying issuers
are all other issuers. The form for
qualifying issuers allows certain information that is already posted on SEDAR
to be incorporated by reference into the offering memorandum.
The disclosure required
in an offering memorandum is much less than that required in a prospectus. A Canadian offering memorandum in the
required form includes the following sections:
Item 1: Use of Available Funds (as
set out in tables in form);
Item 2: Description of Business
(no more than 2-15 pages);
Item 3: Interests of Directors,
Management, Promoters and Principal Holders (as set out in tables in form);
Item 4: Capital Structure (as set
out in tables in form);
Item 5: Securities Offered (very
basic description required);
Item 6: Income Tax Consequences
and RRSP Eligibility (simplified disclosure other than for flow-through shares
or special income tax vehicle securities);
Item 7: Compensation Paid to
Sellers and Finders (basic disclosure – cannot pay finder’s fee in Northwest
Territories, Nunavut, Saskatchewan and Yukon);
Item 8: Risk Factors (no more than
Item 9: Reporting Obligations
(very basic description required);
Item 10: Resale Restrictions (text
required as set out in section);
Item 11: Purchasers' Rights (2 day
cancellation right as set out in section and statutory and contractual right of
action disclosure as required by each province securities are offered);
Item 12: Financial Statements
(audited annual; unaudited interim);
Item 13: Date and Certificate
(certificate as of date of offering memorandum stating no misrepresentation in
Risk Acknowledgement Form (to be signed by all investors).
Much of the information required in an offering
memorandum is set-up in tables and can be pulled from an issuer’s business plan,
corporate record book and financial statements. The disclosure sections
are meant to be short and concise with sufficient information to allow investors
to make an informed investment decision about the issuer and its business.
United States and other foreign issuers often use what is called an offering
memorandum wrap which references where in a prospectus filed in their home
jurisdiction Canadian private placement investors can find the information
required in a Form 45-106F2 offering memorandum.
on completing each form are included behind the basic form template provided by
the regulators. Mining development
and exploration companies need to file
Form 43-101 technical report as required by subsection
Instrument 43-101 Standards of
Disclosure for Mineral Projects to support any scientific
or technical information describing a mineral project on a property disclosed in
an offering memorandum. Similarly, oil
and gas issuers must ensure information they include about their oil and gas
activities in their offering memorandum conforms to
National Instrument 51-101
Standards of Disclosure for Oil
and Gas Activities.
The offering memorandum, and if applicable the Form
43-101 technical report, is required to be filed at the same time as the first
Form 45-106F1 Report of Exempt Distribution is filed (10
days after the accepting the first subscription). The offering memorandum only
needs to be filed the first time unless it is updated. If a material change occurs in the
business of the issuer after delivery of an offering memorandum to a potential investor,
the issuer must give the potential investor an update to the offering
memorandum with a newly signed certificate before the issuer accepts an agreement
to purchase securities.
Issuers who fail to prepare and file
their offering memorandum in the required form can be expected to be cease traded (see: Peace Summit Technologies (VCC) Inc. (11/05/2010); GDC Investments Inc. (08/31/2010); Turkanda Coal Corp. (08/26/2010); Living Forest One Limited Partnership (08/17/2010); ACIC Marketing Limited Partnership (08/12/2010); Pioneer West Mortgage Investment Corporation (07/20/2010); All Canadian Investment Corporation (07/13/2010); Western Liquid Funding Limited Partnership (04/30/2010); Antrim Balanced Mortgage Fund Ltd. (04/13/2010); Kensington Realfund Corporation (03/03/2010); Eagle Peak Resources Inc. (02/15/2010); Metal Mountain Resources Inc. (02/16/2010); Black Sand Equity Management Ltd. (12/30/2009);
Bridgeport Capital Inc.
Financial Corporation (10/22/2008); and
Rockport Homes Int’l, Inc. (12/31/2008)) or find themselves and/or
their management with regulatory bans and penalties (see:
Clark Carrington (02/07/2011); and
Dragon Fund Ltd, et al. (07/04/2007)).
Issuers may also be required to refund investors funds received and may
face civil action in addition to regulatory action in Canada (see:
Fiorillo v. Krispy Kreme Doughnuts
Inc., 2009 CanLII
29902 (ON S.C.)). Sections
in the form are not optional items.
Each section of the required form must be included and all tables and
required statements must be set out exactly as in the form.
The only offering memorandum format or template
issuers should be following in Canada are those set-out in
Form 45-106F2 and
of NI 45-106. Unfortunately, some issuers we have talked to have cited a couple of
Ontario based law firm articles online which state there is no required form
for an offering memorandum. When
checking these articles it is obvious the authors are referring to Ontario only. It
is a correct statement that there is no required form for an offering
memorandum in Ontario as Ontario does not recognize the offering memorandum
exemption. If, however,
an issuer wants to rely on the offering memorandum exemption in any other
province or territory in Canada the offering
memorandum must be in the required form.
mind issuers can rely on different exemptions in different jurisdictions. For instance, an issuer may rely on the
offering memorandum in British Columbia and the accredited investor exemption
in Ontario. The British Columbia
resident investor would receive the offering memorandum, one page subscription
agreement and risk acknowledgement.
The Ontario resident would receive the offering memorandum, traditional
long form subscription agreement, investor questionnaire, certificate and
accredited investor verification request form. The offering memorandum in both
instances should be identical and in the required form under NI 45-106F1. The issuer would file the offering
memorandum in both provinces at the same time as filing its
Form 45-106F1 Report of Exempt Distribution.
The foregoing covers 99% of all issuers relying on
the offering memorandum exemption. Issuers should be aware that British
Columbia requires a different offering memorandum form be used for syndicated
mortgages (BC Form 45-901F) and real estate securities (BC Form
45-906F). Alberta also requires
a different offering memorandum form be used for real estate securities (Alberta Form 45-509F).
Manitoba also has a Made in Manitoba
private placement exemption (section
91(b) of the Manitoba Securities Regulation) for sales to related
purchasers and no more than 50 sophisticated purchasers in all jurisdictions
which requires a different offering memorandum be used (MB Form 26). Issuers
in these categories should check the corresponding policy statement in each
jurisdiction they intend to offer securities before preparing one of these
alternate offering memorandums.
Differences in Using the Offering Memorandum Exemption
British Columbia, New
Brunswick, Nova Scotia and Newfoundland and Labrador have adopted a basic
version of the offering memorandum exemption (“Basic OM”)
while Alberta, Saskatchewan, Manitoba, Québec, Prince Edward Island,
Northwest Territories, Nunavut and Yukon have adopted a slightly enhanced
version of the exemption (“Enhanced OM”).
Ontario, as mentioned previously, does
not recognize the offering memorandum exemption.
The Basic OM requirements
are that (1) the investor purchases the securities offered as principal; (2) that
the issuer deliver the offering memorandum in the required form to the investor
prior to the subscription agreement being signed; and (3) that the issuer
obtain a signed risk acknowledgment from the investor.
The Enhanced OM in
addition to the Basic OM requirements restricts the acquisition cost of an
investor to $10,000 or less unless the investor is an “eligible
investor” as defined in NI 45-106. An eligible investor is not subject to a
maximum investment cap. The
eligible investor, however, must not have been created solely for the purpose
of investing under the offering memorandum. Also, if the issuer is an investment
fund, the investment fund is required be a non-redeemable investment fund, or a
mutual fund that is a reporting issuer.
In addition to the
Enhanced OM requirements Northwest Territories, Nunavut and
Yukon do not allow any commissions or finder’s fees to be paid to any
person, other than to a registered dealer, in connection with the offering
memorandum exemption. Saskatchewan had a similar ban until March 23, 2010
when it adopted General
Order 45-919 ** removing this limitation. This
provision is taken very seriously by the regulators that have it in place and can result
in an immediate cease trade order. (see:
Diversified Income Trust (10/27/2009);
Mortgage Investment Corporation (02/16/2010);
Capital Corporation (03/08/2010); and
Seniors Housing Corp. (01/27/2010)).
Surprisingly, other than
the no commission or finder’s fee ban, the additional provisions of the
Enhanced OM have caused few if any regulatory actions on their own.
Hot Spots and Reoccurring Problem Areas
Saskatchewan Securities Division publishes its review findings of offering memorandums filed in Saskatchewan. They have identified several hot spots
and reoccurring problem areas in offering memorandums. Frankly, I found it disheartening to read
that almost all offering memorandums filed in Saskatchewan were non-compliant. A good portion of these offering
memorandums must have had some input by legal professionals, but obviously not
enough input to make a real difference.
Here is a quick list of what to check before filing your offering
memorandum (“OM”) as based
on the Saskatchewan Securities Divisions findings:
Remedy and Check
Attachments to the OM
financial statements must be
placed just before the certificate and not included as an attachment;
all information considered
material should be provided in the body of the OM;
only attach a document if it is
material to understanding the issuer or the proposed investment (ie., a copy
of a limited partnership agreement);
any necessary attachments to an
OM must be incorporate by reference in the OM; and
information contained in the OM
and in the attachment should be reconciled and not contradict one another.
provide accurate summary of all
material agreements with related parties;
provide an accurate summary of
all other material agreements;
disclose relationship with
provide cost of asset to related
party and cost of asset to issuer if sale of asset has occurred;
disclose all finder’s fees
and commissions paid or to be paid to related parties;
dates of all agreements, closing dates and
termination dates are required;
disclose material outstanding obligation under
material agreements; and
where an agreement relates to a debenture or
loan you must include information about the principal amount, repayment
terms, security pledged, due date and interest rate.
OM with projections on business and financial assumptions that were not
considered reasonable under the circumstances.
Canadian Rockport Homes Int’l Inc.; Malone, William; and Riis, Nelson (BC)
avoid providing projections
unless absolutely necessary;
provide underlying assumption and hypothesis to
any projections or financial forecasts included;
clearly and correctly identify any projections as
audited or unaudited;
any audit report on projections must be clearly
projections, information in the OM, financial
statements, and audit report must reconcile and not contradict one another;
confirm arithmetic is correct in all projections
or financial forecasts based on assumptions and calculation methodology
limit the period covered of projections
or the financial forecasts to one that can be reasonably estimated (six
months/one year?); and
all projections and financial
forecasts must be compliance with parts 4A and 4B of National Instrument 51-102 – Continuous Disclosure
Obligations and be approved by management.
financial statements must be
placed just before the certificate and not included as an attachment;
financial statements must be prepared
in compliance with National Instrument 52-107 Acceptable Accounting Principles
and Auditing Standards and its companion policy;
you must include financial statements
for any business acquisitions or proposed business acquisitions;
financial statements of a
general partner are required to be included along with the financial
statements of the limited liability partnership;
financial statements must be
current and not stale dated at time of investment;
Financial statements must now conform
to IFRS versus Canada GAAP; and
Signature on any audit reports
enclosed must be dated prior to the OM date.
request legal assistance to
draft correct language in statutory right of action section to conform with
each provinces requirements;
limited partnerships must include
Item 13 certificates signed by issuer, general partner and promoters; and
Item 13certificate must be
signed by the chief executive officer, chief financial officer, and any two
directors of the issuer and each promoter of the issuer (see subsection 2.9
of NI 45-106).
a venture capital corporation (or similar
issuer) formed to invest in a another business must include sufficient
details, including financial statements and share structure, about that other
business to enable investors to make an informed decision; and
the indirect investment must be sufficiently
disclosed to enable investors to understand how their funds will be invested
and how returns will be calculated on that investment.
clearly identify the material terms of the securities being offered; and
if the securities are redeemable provide disclosure on how the redemption
will be funded and the possible effect on the overall business of issuer.
Stale Dated OM
issuers must update the OM each and every time there is a material change or
create and deliver a new OM prior to any sales; and
any time an OM is updated or amended it must include a newly dated and signed
Item 13 certificate(s).
Use of Proceeds
if 10% or more of proceeds raised will be used to
pay down debt incurred in last two years issuers must disclose this intent and
provide information as to when this debt was incurred and for what purpose or
benefit to the issuer.
clearly identify funds from
other sources required by issuer to proceed with business plans;
provide enough detail in use of
proceeds section to enable prospective investors to understand how funds
raised will be used;
identify any existing working
capital deficiency and whether use or proceeds will be used to remedy this
deficiency or how the issuer intends to remedy or manage its working capital
provide details in use of
proceeds and in description of business about any proposed investment in a
related operation. Details should
include purpose and role of entity to the operations of issuer, how investment
will be funded, and ownership percentages and rights attached to investment
(ie., subsidiary or joint venture).
properly identify and provide
all required information for all directors, officers and promoters in Item 3
of the OM;
provide information about the
business and management experience of all directors and officer who will
manage the business;
identify all compensation (cash,
share, options and warrants etc.) paid to promoters in the most recently
completed financial year and anticipated to be paid in the upcoming financial
fraudulent misrepresentations: Ali,
Cem; Horizon FX Investments Limited Partnership, Horizon FX Investments
Incorporated; and HFX Management Services Inc. (BC)
provide sufficient detail about
business, products, services, properties, operations, market, marketing plans
and business strategies to enable prospective investors to understand your
business and evaluate its prospects;
identify all business risks in
OM using full sentences and paragraphs;
provide a chart of subsidiary
and related companies to issuer.
Provide sufficient disclosure of each entities role and organization
to provide a clear understanding of that entity and its relationship to the
avoid promotional words and statements that
cannot be supported by an independent reputable third party;
obtain permission in writing before including a
third party's name in the OM or quoting or attributing certain information
contained in the OM to them (trustees, transfer agents, qualified person,
industry expert; tax specialist, valuation report writer etc.); and
provide any additional
disclosure outside what is requested in the required form to ensure a
misrepresentation does not occur by omission. “Misrepresentation includes an
omission to state a material fact that is required to be stated or that is
necessary to make a statement not misleading in the light of the
circumstances in which it was made.”
Misleading or deficient OM:
pre-offering filings and reviews
Offering memorandums are
not required to be pre-filed in any province or territory in Canada. In general, the first look a securities regulator
takes at an offering memorandum or its corresponding Form 43-101 technical report
is when these documents are filed with an issuer’s first Form 45-106F1 Report of Exempt Distribution after the first
sale of securities. Securities regulators go through a two check process when
reviewing these documents. This first check review is a relatively quick look to
make sure the offering memorandum, and if applicable technical report, are in
the required form, all sections have been addressed, the certificates are in
order and properly signed, and that the issuer has provided the regulator with
the correct filing fee. The second check review is detail oriented and
deliberate. The regulators on this go round look at the substance of the
information provided by an issuer. If the offering memorandum or technical
report is found to be deficient the regulator may issue a letter requesting the
deficiency be addressed and that the investors receive an updated document. If
the deficiencies are deemed significant the securities of the issuer may be
cease traded until an amended offering memorandum and or technical report in
compliance with the rules has been filed. If the deficiencies are deemed serious
or there is a suggestion of fraud or an intentional misrepresentation the file
is elevated to enforcement to handle.
Only two jurisdictions in Canada currently allows issuers
to pre-file their offering memorandum to confirm if it is in compliance with the
securities rules as viewed by that regulator. Issuers, resident in
Saskatchewan and New Brunswick, may file a draft offering memorandum with
staff of the Corporate Finance Branch of the Saskatchewan Financial Services Commission’s
Securities Division or the New Brunswick Securities Commission respectively. Securities Division staff will review the
draft document and return comments on how to improve the offering memorandum
for compliance purposes. It is something
for issuers to seriously consider in order to avoid any potential embarrassment
of having to re-file an offering memorandum due to deficiencies.
I should also mention in that in 2011, the New Brunswick Securities Commission launched its online
OM Tool to assist issuers
an offering memorandum. It is a PDF template
and not as useful as I would have hoped it would be for issuers, but there is a
lot of useful material on the New Brunswick Securities Commissions website for
all issuers considering an exempt offering of their securities.
The offering memorandum
exemption is a terrific way for issuers to expand their horizon as to who they
may approach to invest in their business.
As an issuer you will avoid unnecessary
regulatory problems if you carefully follow the required form and related instructions that
apply to you as either a
non-qualifying issuer or qualifying issuer. The key is to keep the information
factual and only include statements you can back-up or can prove are reasonable.
If you plan to go it
alone in preparing your offering memorandum, you should consider conducting
your own internal due
diligence review of your company prior to putting your document together.
If you engage legal counsel it is likely they will make such a review mandatory.
The reason I recommend a due diligence review is to make sure you don’t
inadvertently miss something. It is why lawyers and auditors insist on a
due diligence review when drafting a major disclosure document.
I also recommend you use
an offering memorandum checklist to confirm you have addressed each section or
that an item is not applicable to you. Using the wrong form or missing a
required section is the number one reason issuers get in trouble with
regulators when using the offering memorandum exemption (excluding those issuers who are
involved in blatant fraud).
You may also want to consider using a lawyer to prepare your offering memorandum or at a minimum
have a lawyer review the documents you have prepared. Alternatively,
if you chose to forego getting a lawyer involved, and you are an issuer resident
in Saskatchewan you should seriously consider requesting a pre-filing review of your
offering memorandum with the
Corporate Finance Branch of the Saskatchewan Financial Services
Commission’s Securities Division. It may be the best $500 you ever spent.
If you are resident in New Brunswick there is no cost to have the New Brunswick
Securities Commission review your offering memorandum prior to sending it to
This ends our three
part series entitled Anyone With Money is a Friend of Mine: Traps to Avoid
When Raising Private Capital. I hope you found the series useful or at
a minimum informative.
Links to the other articles in this series:
** Thank-you to
Bill Nickel from
McDougall Gauley LLP in Saskatchewan, for sending me a copy of Saskatchewan
Financial Service Commission General Order 45-919.