Ontario Commission des FOR IMMEDIATE RELEASE. Commission de l Ontario November 5, 2015 EXEMPT MARKET REVIEW

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1 Backgrunder Ontari Cmmissin des FOR IMMEDIATE RELEASE Securities valeurs mbilières Cmmissin de l Ontari Nvember 5, Queen Street West 22 nd Flr Trnt, ON M5H 3S8 EXEMPT MARKET REVIEW As part f its exempt market review, the Ontari Securities Cmmissin (the OSC r we) is invlved in several initiatives. On August 28, 2013, we published OSC Ntice Prgress Reprt n Review f Prspectus Exemptins t Facilitate Capital Raising (the Prgress Reprt). The Prgress Reprt stated that the OSC was directing staff t undertake further wrk n develping fur new capital raising prspectus exemptins fr issuers ther than investment funds, which included the fllwing: a crwdfunding exemptin alng with regulatry requirements applicable t an nline crwdfunding prtal (cllectively, the crwdfunding regime), an ffering memrandum exemptin (the OM exemptin), a family, friends and business assciates exemptin (the FFBA exemptin), and an exemptin that wuld permit a reprting issuer t issue securities t its existing security hlders in reliance n the issuer s cntinuus disclsure recrd (the ESH exemptin). The Prgress Reprt als indicated that the OSC wuld wrk with ther Canadian Securities Administratrs (CSA) members t see if the existing rights ffering exemptin available acrss Canada culd be streamlined t imprve its efficiency and effectiveness fr reprting issuers. Finally, the Prgress Reprt indicated that we intended t pursue further imprvements t ur data cllectin n exempt market activity, and planned t publish prpsed amendments t Frm F1 Reprt f Exempt Distributin (Frm F1). The purpse f this backgrunder is t prvide an update n the current status f each f these initiatives. 1. New capital raising prspectus exemptins Overview f new exemptins On March 20, 2014, we published fr cmment rules that wuld intrduce fur new capital raising prspectus exemptins in Ontari: the ESH exemptin, the FFBA exemptin, the OM exemptin, and the crwdfunding regime. The ESH exemptin came int frce n February 11, It allws publicly listed issuers n specified Canadian exchanges t cst-effectively raise capital frm their existing investrs in reliance n the issuer s cntinuus disclsure recrd. The FFBA exemptin came int frce in Ontari n May 5, It allws issuers t raise capital frm a brader netwrk f clse persnal friends, family and clse business assciates. We have wrked clsely with staff in ther CSA jurisdictins in frmulating the OM exemptin and the crwdfunding regime. The securities regulatry authrities in Alberta, New Brunswick, Quebec and Saskatchewan published fr cmment prpsed amendments t the OM exemptin that were similar t the OM exemptin that we published fr 1

2 cmment. The securities regulatry authrities in Manitba, New Brunswick, Nva Sctia, Quebec and Saskatchewan als published fr cmment the crwdfunding regime. The cmment perid ended n June 18, 2014 and the participating CSA jurisdictins cllectively received apprximately 1,000 cmment letters regarding the OM exemptin and apprximately 70 cmment letters regarding the crwdfunding regime. On Octber 29, 2015, we published final amendments that wuld intrduce the OM exemptin in Ontari and mdify the OM exemptin that exists in the ther participating CSA jurisdictins. Subject t Ministerial apprval, the amendments will cme int frce in Ontari n January 13, Tday, we published final amendments that wuld intrduce the crwdfunding regime in Ontari and the ther participating CSA jurisdictins. Subject t Ministerial apprval, the amendments will cme int frce n January 25, The key elements f the OM exemptin and the crwdfunding regime are described belw. Exemptin Descriptin OM exemptin The OM exemptin will allw businesses t raise capital based n an ffering memrandum being made available t investrs. The OM exemptin will be available fr a wide range f businesses at different stages f develpment. The OM exemptin incrprates imprtant investr prtectin measures, including: requirement that a cmprehensive disclsure dcument, that is subject t statutry liability if it cntains a misrepresentatin, be delivered t investrs at the pint f sale, investment limits fr investrs wh are individuals, ther than thse wh wuld qualify as accredited investrs r investrs wh wuld qualify t invest under the FFBA exemptin, as fllws: in the case f a purchaser that is nt an eligible investr, $10,000 in a 12 mnth perid, in the case f a purchaser that is an eligible investr, $30,000 in a 12 mnth perid, and in the case f a purchaser that is an eligible investr and that receives advice frm a prtfli manager, investment dealer r exempt market dealer that an investment abve $30,000 is suitable, up t $100,000 in a 12 mnth perid, requirements t prvide investrs with audited annual financial statements, annual ntice regarding the use f the prceeds raised under the exemptin and ntice in the event f a discntinuatin f the issuer s business, a change in the issuer s industry r a change f cntrl f the issuer, and requirement fr investrs t sign a risk acknwledgement frm highlighting the key risks assciated with the investment, which includes schedules t be cmpleted by individual investrs that require them t cnfirm they are investing within the investment limits, where applicable. 2

3 Exemptin Descriptin Crwdfunding regime The crwdfunding regime will allw businesses t raise capital frm a ptentially large number f investrs thrugh an nline prtal registered with the securities regulatry authrities. Businesses culd raise up t $1.5 millin during a 12 mnth perid. The crwdfunding regime is aimed primarily at start-ups and small- and medium-sized enterprises based in Canada. The crwdfunding regime incrprates imprtant investr prtectin measures, including: investrs will be subject t the fllwing limits: in the case f an investr that des nt qualify as an accredited investr: $2,500 per investment, and in Ontari nly, an annual limit f $10,000, and in the case f an accredited investr: $25,000 per investment, in Ontari nly, an annual limit f $50,000, and in Ontari nly, n investment limits fr a permitted client (e.g., an individual with net financial assets exceeding $5 millin). requirements t prvide investrs with annual financial statements, annual ntice regarding the use f the prceeds raised under the exemptin and ntice in the event f a discntinuatin f the issuer s business, a change in the issuer s industry r a change f cntrl f the issuer, requirement fr investrs t sign a risk acknwledgement frm highlighting the key risks assciated with the investment and which requires investrs t cnfirm that they have understd the risk warnings and the infrmatin in the crwdfunding ffering dcument, requirement that all investments be made thrugh a single registered crwdfunding prtal that is unrelated t the issuer, funding prtals must fulfill certain gatekeeper respnsibilities prir t allwing an issuer access t its nline platfrm, including reviewing the issuer s disclsure in the crwdfunding ffering dcument and ther permitted materials fr cmpleteness, accuracy and any misleading statements, and funding prtals must review infrmatin and btain backgrund checks n the issuer and its principals, and deny an issuer access t the funding prtal in certain circumstances. Fr further infrmatin n the OM exemptin, please see the Ntice f Amendments published n Octber 29, 2015: Fr further infrmatin n the crwdfunding regime, please see the Ntice f Amendments published n Nvember 5, 2015: Intermediaries in the exempt market We have seen a number f intermediaries applying t register as dealers that plan t perate nline platfrms in reliance n the new prspectus exemptins in Ontari. These nline platfrms can vary frm platfrms that facilitate private placements t accredited investrs, t platfrms that ffer secndary market trading and c-investing 3

4 pprtunities. We cntinue t supprt innvative technlgy develped by industry that can benefit bth issuers and investrs. We remind intermediaries that plan t perate an nline prtal in Ontari that they must cmply with applicable securities legislatin, including registratin prir t cnducting business in Ontari. It is imprtant t remember that registratin is a separate requirement and the availability f a prspectus exemptin t distribute securities des nt mean there is a crrespnding registratin exemptin. Cmpliance and versight prgram As a brader grup f retail investrs will be able t access the exempt market thrugh the OM exemptin and the crwdfunding regime, the OSC is develping a cmpliance and versight prgram t mnitr distributins under these new capital raising tls. This prgram will have three main elements: assessing cmpliance, enhancing awareness, and gathering data t supprt the first tw activities. 2. Mdificatin t existing rights ffering prspectus exemptin On Nvember 27, 2014, the CSA published prpsed amendments intended t streamline the existing rights ffering prspectus exemptin fr nn-investment fund reprting issuers and reduce the time and cst that have been nted as barriers t the use f this exemptin. The cmment perid ended n February 25, Final amendments were published n September 24, 2015 and subject t Ministerial apprval, will cme int frce n December 8, The amendments address investr prtectin cncerns as well as cncerns regarding cmpliance. The amendments include: remving the current regulatry review prcess prir t the use f the exemptin, increasing investr prtectin thrugh the additin f civil liability fr secndary market disclsure, intrducing a user-friendly frm f rights ffering circular, intrducing a new ntice that reprting issuers must file n SEDAR and send t security hlders infrming them abut hw t access the rights ffering circular electrnically, and increasing the dilutin limit frm 25% t 100%. The amendments als repeal the exemptin fr nn-reprting issuers. Fr further infrmatin, please see the Ntice f Amendments published n September 24, 2015: 3. Prpsed reprt f exempt distributin On March 20, 2014, we published tw prpsed new reprts f exempt distributin fr use in Ontari and certain ther jurisdictins. The cmment perid ended n June 18, We received several cmments regarding the need t harmnize the reprt f exempt distributin acrss the CSA. The reprt f exempt distributin is nw being cnsidered as a separate CSA initiative and we are wrking with CSA members t harmnize exempt distributin reprting requirements. This initiative aims t: reduce the cmpliance burden fr issuers and underwriters by having a harmnized reprt f exempt distributin, and prvide securities regulatrs with the necessary infrmatin t facilitate mre effective regulatry versight f the exempt market and imprve analysis fr plicy develpment purpses. As part f this initiative, the CSA published fr cmment a prpsed harmnized reprt f exempt distributin n August 13, The cmment perid ended n Octber 13, 2015 and we received 18 cmment letters. We are 4

5 currently reviewing the cmments and wrking with the CSA t develp final amendments t the reprt f exempt distributin. We cntinue t require issuers t file a Frm F1 Reprt f Exempt Distributin, as is currently required fr distributins in CSA jurisdictins ther than British Clumbia. In British Clumbia, issuers are generally required t file Frm F6 British Clumbia Reprt f Exempt Distributin. Fr further infrmatin, please see the Ntice and Request fr Cmment published n August 13, 2015: 4. Exempt market activity in Ontari The exempt market cntinues t be an imprtant part f Ontari s capital markets. In 2014, nn-investment fund issuers raised apprximately $41 billin thrugh prspectus-exempt distributins in Ontari thrugh apprximately 22,000 purchases made by Ontari residents. Fr these nn-investment fund issuers: The accredited investr exemptin was the mst widely used prspectus exemptin in Ontari. In 2014 it represented 92% f the capital raised, 74% f filings and almst tw thirds f purchases. The minimum amunt investment exemptin was the secnd mst used prspectus exemptin by number f filings and amunt raised. Althugh equity securities represented clse t tw thirds f purchases and filings, debt-related securities raised a larger prprtin f capital (apprximately 68%). While the majrity f issuers that participate in the exempt market are nn-financial issuers, n average financial issuers raised significantly mre per ffering frm a smaller pl f investrs. Examples f financial issuers include private equity firms, cnsumer credit securitizatin vehicles, banks, mrtgage investment entities and insurance firms. Issuers in the energy and materials industry grup were the mst active grup f nn-financial issuers in the exempt market. Only abut a quarter f the capital raised was by reprting issuers. Amng filings by nn-reprting issuers, nly abut half were frm issuers that were headquartered in Canada. A large prprtin f exempt market activity by number f filings and purchases invlved issuers that raised under $1.5 millin. Hwever, these accunted fr less than 2% f the ttal capital raised. A mre detailed verview f exempt market activity in Ontari can be fund at Appendix A. 5

6 APPENDIX A 2014 EXEMPT MARKET ACTIVITY Overview This appendix prvides a snapsht f 2014 activity in Ontari s prspectus-exempt market (the exempt market). The data cntained in this appendix is based n infrmatin cllected frm reprts filed with the OSC n Frm F1 Reprt f Exempt Distributins (Frm F1), 1 which must be filed by issuers wh rely n certain prspectus exemptins t distribute securities and includes infrmatin abut the issuer and details f the distributin. 2 Prspectus exemptins are available t a wide range f issuers, including reprting and nn-reprting issuers and issuers at varying stages f develpment, prvided they meet the requirements f the exemptin they are seeking t rely n Exempt Market Activity in Ontari During 2014, issuers raised a ttal f $121 billin thrugh prspectus-exempt distributins in Ontari. Apprximately 67% r $80 billin f this ttal represented grss flws t investment cmpanies and funds. 3 The remaining $41 billin represented capital raised by nn-investment fund issuers ver 3,800 filings and invlving 22,000 purchases by Ontari investrs. 4 Figure 1 Cmparisn f Nn-Investment Fund Flws with Previus Years Overall activity fr nn-investment fund issuers in 2014 drpped slightly cmpared t the previus tw years. We nte that cmparisns at this aggregate level are challenging given that bth exgenus (e.g., lcal and freign macrecnmic climate) and endgenus (e.g., industry r plicy specific) factrs influence capital raising activity. Figure 2 1 The data nly cvers reprts n Frm F1 that were electrnically submitted thrugh the OSC s e-frm frm January 1, 2014 t August 31, As nly specified prspectus exemptins trigger a requirement t file a reprt, the data presented in this appendix des nt capture all exempt market activity. See Part 6 f Natinal Instrument Prspectus Exemptins fr mre infrmatin n which exemptins must be reprted n Frm F1. We als nte that this data reflects distributins t bth individual and institutinal investrs under the applicable exemptins. 3 Issuers are nly required t reprt grss inflws/sales and nt redemptins. As mst investment fund issuers are in cntinuus distributin and redemptin thrughut the year, the net flws r net sales fr investment fund issuers will be lwer than the amunt indicated and culd be negative if redemptins exceed sales ver the same perid. 4 The aggregated purchases figure nly reflects ttal transactins by Ontari investrs and des nt represent the ttal number f unique investrs that participated. 6

7 Nn-Investment Fund Issuers The fllwing charts and tables prvide a mre detailed analysis f exempt market activity in 2014 by nn-investment fund issuers. Use f Exemptins The accredited investr exemptin remained the mst relied upn prspectus exemptin by capital raised (92%), filings (74%) and purchases (64%) in The secnd mst cmmnly used exemptin by number f filings and amunt raised was the minimum amunt investment exemptin. Apprximately 21% f filings reprted distributins made in reliance n mre than ne prspectus exemptin and the majrity (99%) f these filings included the accredited investr exemptin in additin t ther prspectus exemptins. Figure 3 Types f Securities Distributed Althugh equity securities represented clse t tw thirds f all purchases and filings, debt securities raised a larger prprtin f capital (apprximately 68%). Debt fferings are typically larger in size than equity fferings in bth the private and public markets. Less than 5% f filings r amunts raised invlved the distributin f warrants, subscriptin receipts r ther types f securities. 6 Filings which reprted the distributin f mre than ne type f security represented nly 5% f filings. Figure 4 5 This number is likely higher given that amng filings that indicated the use f multiple exemptins, 99% f them relied n the accredited investr exemptin in additin t ther exemptins. 6 Warrants, ptins, subscriptin receipts, ther rights and securities that d nt represent an equity interest r debt bligatin f the issuer are categrized in the Other categry in Figure 4. 7

8 Financial Issuers vs Nn-Financial Issuers In clse t 40% f filings, issuers selected Other fr their industry categry and prvided a brief descriptin f their business. These descriptins were reviewed t assign issuers acrss several brad industry categries as indicated in the charts belw. 7 Nn-financial issuers represent the bulk f issuers that participate in the exempt market, hwever, n average financial issuers raised significantly mre per ffering frm a smaller pl f investrs than their nnfinancial peers. Figure 5 Nn-Financial Industry Grups Amng nn-financial issuers, issuers in the energy and materials grup were the mst active by amunt raised, filings and number f purchases. Figure 6 Reprting Issuer Status Only abut ne quarter f capital raised by nn-investment fund issuers in 2014 was raised by reprting issuers. Nnreprting issuers represented the majrity f issuers filing reprts f exempt distributin with the OSC but this was mre prminent amng financial issuers (84%) than nn-financial issuers (56%). Over half f the filings frm nnfinancial reprting issuers invlved issuers that were listed n the TSX Venture Exchange. Figure 7 7 Fr the purpses f this analysis, OSC staff made a best effrts attempt t assign apprpriate industry grupings t issuers that selected Other. It shuld be nted that the grupings were nt cnfirmed by issuers. 8

9 Issuer Cuntry Issuers headquartered utside f Canada represented 50% f filings by financial issuers in The majrity f these freign issuers are US-based. In 2014, US-based issuers accunted fr just ver 20% f filings and mre than ne third f the capital raised in Ontari. Figure 8 Amunt Raised Per Filing A large prprtin f exempt market activity invlved issuers that raised under $1.5 millin. Distributins f under $1.5 millin per filing represented ver 60% f filings and clse t 40% f purchases by Ontari investrs in Hwever, they nly accunted fr less than 2% f the ttal capital raised in Larger distributins (>$100 millin per filing) represented ver 50% f the ttal capital raised but included less than 3% f filings and invlved under 10% f purchases in Figure 9 9