The State of Private Placements in Canada: OSC Publishes Update on Exempt Financings Market
The Ontario Securities Commission recently published a report summarizing capital raising activity by issuers in Ontario’s exempt market. Findings from the report include:
- increased activity in 2016
- significant participation from foreign issuers, including the U.S.
- no reported use of Ontario’s new crowdfunding rule
In June 2017, the Ontario Securities Commission (the “OSC”) published OSC Staff Notice 45-715 2017 Ontario Exempt Market Report (the “Report”), which summarizes capital raising activity in Ontario’s exempt market (i.e. financings made other than by way of a prospectus).
The Report is a useful resource for businesses looking to raise capital from Canadian investors, including businesses located outside of Canada, particularly in the United States.
ONTARIO’S EXEMPT MARKET REGIME
Generally, securities offered to the public in Ontario must be offered under a “prospectus”, similar to a U.S. registration statement, which provides details of the company and securities being offered and is filed with the relevant securities commissions. However, there are some exceptions to this rule that allow securities to be offered without a prospectus, called prospectus exemptions. These prospectus exemptions can help an issuer raise money from investors without the time and expense of preparing a prospectus.
The “exempt market” refers to the subset of Canada’s capital markets where securities can be sold without a prospectus (private placements). One of the most commonly relied upon exemptions for private placements is the “accreditor investor” exemption, which allows issuers to distribute securities to individuals and organizations that meet certain asset or income thresholds or other prescribed characteristics. Investors who buy securities in the exempt market are then limited in their ability to resell the securities.
Unlike the federal SEC in the U.S., each province and territory in Canada has its own securities laws and regulator, although the laws are largely harmonized. The Report focuses primarily on activity in Ontario.
More information on Ontario’s exempt market can be found here.
A summary of the key capital raising prospectus exemptions in Ontario can be found here.
ONTARIO’S RECENT EXEMPT MARKET ACTIVITY
The Report includes the following statistics regarding capital raising activity in Ontario over the last two years:
- Market size. The money raised from Ontario investors grew by 40% in 2015 to reach $67 billion, and an additional 9% in 2016 to a total of $72 billion.
- Issuer location. Two-thirds of the issuers were headquartered in Canada, with U.S.-based issuers representing the second largest group. However, foreign issuers raised the most money, with U.S.-based issuers accounting for the largest share.
- Reporting issuers. Even though most Canadian public companies are listed on a stock exchange and, as “reporting issuers” (the equivalent of a U.S. registrant), can access capital through prospectus offerings, Canadian public companies accounted for 60% of exempt market activity by domestic issuers.
- Prospectus exemption relied on. In 2016, 30% of Canadian issuers relied on multiple prospectus exemptions. Among these issuers, the accredited investor exemption was predominately used and also accounted for most of the capital raised under multiple prospectus exemptions. Accredited investors, mainly institutional investors, contributed over 90% of the total capital invested in the Ontario exempt market, with most of this capital being invested in large issuers, primarily foreign-based and consisting of financial entities such as private equity funds.
- Type of securities offered. Debt offerings raised more capital than equity offerings, which was true for both Canadian and foreign issuers.
- Financing size. Foreign issuers in the exempt market raised more capital than Canadian issuers, with 65% of foreign issuers raising an annual average of at least $5 million. Only 22% of Canadian issuers raised aggregate funds over this threshold.
- Comparisons with broader Canadian capital market. In 2016, Canadian corporations issued $309 billion in securities through both private and public market offerings, with Canadian investors accounting for less than half of that amount. The balance was raised from foreign investors.
- Small Canadian issuers. Approximately 57% of Canadian issuers in Ontario’s exempt market were small issuers (i.e. issuers that raised less than $1 million annually). Small issuers, however, represented less than 1% of gross proceeds raised in Ontario’s exempt market by Canadian issuers annually. In 2016, there was a notable increase in both the number of small Canadian issuers (30%) and the gross proceeds raised by these issuers (40%).
IMPACT OF NEW EXEMPTIONS
In recent years, the OSC introduced four new prospectus exemptions in Ontario (the “New Exemptions”) aimed at facilitating greater access to capital for small to medium sized businesses:
- existing security holder exemption, introduced on February 11, 2015;
- family, friends and business associates exemption, introduced on May 5, 2015;
- offering memorandum exemption, introduced on January 13, 2016; and
- crowdfunding exemption, introduced on January 25, 2016.
The Report indicates that the New Exemptions have gained traction among 25% of all Canadian issuers, with 400 such issuers making use of the New Exemptions in 2016, raising $133 million in aggregate. The Report includes the following additional statistics broken down by exemption type:
- Family, friends and business associates exemption. This was used by 302 issuers to raise gross proceeds of $63 million. Most issuers relying on this exemption also raised capital under others, particularly the accredited investor exemption. About 70% of issuers that relied on it raised average gross proceeds of under $1 million, and most were smaller issuers.
- Offering memorandum exemption. This was used by 103 issuers to raise gross proceeds of $68 million. Most issuers relying on this exemption also raised capital under the accredited investor exemption. About 60% of issuers that relied on it raised average gross proceeds of $1 million or higher, and most were larger issuers.
- Existing security holder exemption. This was used by 24 issuers to raise gross proceeds of $2 million in 2016.
- Crowdfunding exemption. Notably, the Report confirms that there has been no reported use of the crowdfunding exemption. However, “crowdfunding” in the broader sense has occurred with issuers using online funding portals to raise proceeds under the accredited investor or offering memorandum exemption.
accredited investor crowdfunding exempt market Existing Holders Exemption offering memorandum exemption OSC prospectus exemptions