Many businesses rely on a set of prospectus exemptions under Alberta’s securities law to raise capital. These exemptions are meant to ease the burden of meeting strict prospectus requirements, which can be especially challenging for small businesses to satisfy. One of these exemptions — the offering memorandum exemption — is being amended this spring. The result: stricter disclosure requirements for businesses seeking to rely on the exemption. We’ll explore what this amendment means in practice and identify who will be impacted.
Most businesses looking to go public must file a prospectus
In Alberta, a common way for a business to go public is through an initial public offering. This involves the business offering securities to the public by filing a prospectus. A prospectus is a detailed document describing the business, its management, its plans, and any risks associated with the investment. It contains “full, true and plain” disclosure of material facts relating to the securities.
Once the business has prepared its prospectus, it gets filed with a securities regulator. (If the business will operate in Alberta, the prospectus must be filed with the Alberta Securities Commission.) If the prospectus is approved by the regulator, the business can offer its securities to the general public. The business becomes what is called a “reporting issuer.”
There are exemptions to the prospectus requirement
Under Alberta’s securities law, there are exemptions to the prospectus rule for businesses looking to raise capital. A business that fits the criteria for an exemption can bypass the onerous requirement to prepare and file a prospectus. Many small businesses rely on these exemptions, as they may lack the resources necessary to put together a regular prospectus. One of the exemptions originally targeted toward small, early-stage businesses is the offering memorandum exemption.
What’s the “offering memorandum exemption”?
The offering memorandum exemption is set out in section 2.9 of National Instrument 45-106 Prospectus Exemptions. This exemption allows a business to sell its securities to the general public without having to file a prospectus. Instead, the business must provide investors with a different type of disclosure document, called an offering memorandum.
Key differences between a prospectus and an offering memorandum
So, what distinguishes an offering memorandum from a prospectus? Here are some of the key differences:
A prospectus typically involves more extensive disclosure. For example, it usually includes audited financial statements.
More supporting documentation is required for a prospectus. This might include things like material contracts, or consents from experts to use their opinions or reports.
A prospectus can’t be used by a business to sell securities until it has been reviewed and approved by a securities regulator. An offering memorandum usually doesn’t need to be reviewed in advance by a regulator before the business can start selling securities.
Why is the offering memorandum exemption being amended?
Data collected by the Canadian Securities Administrators have shown that the offering memorandum exemption is being used more broadly than intended. They found that the exemption was often being used by large companies with significant assets and complex business models. As the exemption was originally meant for small businesses, the disclosure requirements didn’t necessarily make sense from the perspective of a large organization. This led to confusion on the part of these larger organizations, and less rigorous disclosure to investors.
The amendments will require greater disclosure from certain entities
To address the above concerns, the offering memorandum exemption is being amended to introduce tailored disclosure requirements for certain entities. Some of the amendments are also intended to clarify or streamline the exemption process. If all necessary approvals are obtained, the amendments will come into force on March 8, 2023.
The amendments apply to two types of reporting issuers: those engaged in “real estate activities” and those that are “collective investment vehicles.”
When is an issuer said to be engaged in “real estate activities”?
An issuer is said to be engaged in “real estate activities” where its business purpose is primarily to generate income or gain for security holders from the lease, sale, or other disposition of real property. (There’s an exception for issuers engaged in mining and oil and gas activities.)
What are the new requirements for issuers engaged in real estate activities?
Among other changes, there are new and expanded disclosure requirements. For example, issuers engaged in real estate activities are required to disclose:
- prescribed information respecting each interest in real property
- for real property developers, a description of approvals required, estimated costs of completion for projects, and project milestones
- for owners or operators of developed real property, the age, condition, and occupancy level of the real property
In some circumstances, an issuer engaged in real estate activities may also need to get an independent appraisal of its interest in real property.
What’s a “collective investment vehicle”?
A “collective investment vehicle” is an issuer whose primary purpose is to invest money provided by security holders in a portfolio of securities. To a limited extent, the term also captures investment funds. Accordingly, it’s expected to have the greatest impact on businesses that invest in mortgage securities.
What are the new requirements for collective investment vehicles?
The amendments call for greater disclosure by collective investment vehicles. Among other things, they require disclosure of:
- the issuer’s investment objectives, strategy, and any restrictions
- penalties, sanctions, bankruptcy, and any criminal convictions of those involved in investment objectives
- the performance of the portfolio
Contact the business and real estate lawyers at DBH Law in Calgary for help navigating these new amendments
The knowledgeable business and real estate lawyers at DBH Law have a wealth of experience in assisting clients with securities, financing, and commercial real estate issues. Our team works with clients to understand their business needs and come up with innovative and effective solutions. Contact us online to speak with one of our lawyers or call 403-252-9937.