An “offering memorandum” (“OM”) is a disclosure document intended to provide investors with the ability to make an informed investment decision.
A client recently approached us wanting to use an offering memorandum to raise money in Ontario. Our advice was to suggest the company use a term sheet, which is a bare bones description of the financing and use of proceeds, and a subscription agreement and not to use an offering memorandum. Here’s why:
First, all Canadian provinces except Ontario have an “offering memorandum” prospectus exemption. In Ontario, a company can provide its potential investors with an offering memorandum, but there is no offering memorandum exemption. Even if the company prepares and provides investors with an offering memorandum, the client would need to rely on prospectus exemption to offer and sell its securities – typically, the “accredited investor” exemption.
Generally, for individual investors to qualify as an accredited investor, the individual must be:
- an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1 000 000,
- an individual whose net income before taxes exceeded $200 000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300 000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year, Unofficial consolidation for financial years beginning on or after January 1, 2011,
- an individual who, either alone or with a spouse, has net assets of at least $5 000 000.
Second, although the level of disclosure in an OM is less than that required in a prospectus offering, preparing an OM is onerous. The format and contents of the offering are set out in Form 45-106F3. As the April 26, 2012, Canadian Securities Administrators’ guidance demonstrates, the expectations are high for an issuer’s disclosure included in an offering memorandum. See Form 45-106F3 and also see Multilateral CSA Staff Notice 45-309 Guidance for Preparing and Filing an Offering Memorandum under National Instrument 45-106 Prospectus and Registration Exemptions; and CSA Staff Notice 45-308 Guidance for Preparing and Filing Reports of Exempt Distribution under National Instrument 45-106 Prospectus and Registration Exemptions.
Third, under the offering memorandum exemption, subscribers in Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island and Saskatchewan have statutory rights of action that must be described in the offering memorandum distributed to them. Subscribers in Alberta, British Columbia, and Québec will be entitled to contractual rights of action for damages or rescission similar to the statutory rights provided to purchasers in Ontario. These rights are in addition to, and do not derogate from, any other right or remedy that purchasers may have at law.
Section 5.2 of Ontario Securities Commission Rule 45-501 – Ontario Prospectus and Registration Exemptions provides such investors who purchase securities offered by an OM with a statutory right of action against the issuer of securities for rescission or damages in the event that the offering memorandum and any amendment to it contains a “misrepresentation”. The term misrepresentation” is defined to mean an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make any statement not misleading in the light of the circumstances in which it was made. These remedies, or notice with respect to these remedies, must be exercised or delivered, as the case may be, by the purchaser within the time limits prescribed by applicable securities laws. If the purchaser elects to exercise the right of rescission, he must do so not more than 180 days after the date of the transaction; or, in the case of any action other than an action for rescission, the earlier of: (i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, or (ii) three years after the date of the transaction that gave rise to the cause of action.
The bottom line for clients is that preparing an offering memorandum is costly and increases their liability exposure and they will still need to rely on another prospectus exemption if they wish to accept investment from Ontario residents.