OSC Introduces Initiatives to Support Capital Raising for Early-Stage Businesses in Ontario

June 20, 2024

As part of its mandate to foster capital formation and competitive capital markets, the Ontario Securities Commission (OSC) has recently introduced certain time-limited initiatives to improve access to capital for early-stage businesses in Ontario. These initiatives include creating new dealer registration exemptions for early-stage businesses and not-for-profit angel investor groups and extending the self-certified investor prospectus exemption pilot program. The OSC is implementing these initiatives through its TestLab program, which it uses to evaluate capital market innovations and new approaches to regulation in Ontario’s capital markets.

Early-Stage Business Registration Exemption

Dealer registration requirements apply where an entity is “in the business” of trading in securities. While many businesses engage in periodic fundraising activities without being considered “in the business” of trading, several factors go into this assessment, including the frequency and nature of activities. An early-stage business that seeks to raise capital regularly, compared to the fundraising activities of more mature businesses, may be at risk of being considered “in the business” of trading and subject to registration requirements.

Ontario Instrument 32-509 – Early-Stage Business Registration Exemption addresses this risk by creating an exemption from the dealer registration requirements that allows an “eligible business” to engage in permitted marketing activities, including posting the terms of an offering on its website, announcing the offering on social media and participating in a demo day. An “eligible business” is one that, among other things:

(i) has its head office and operations in Ontario;

(ii) is seeking capital to start, grow or scale;

(iii) has less than 100 employees;

(iv) has a primary business purpose that is not investing in real estate, mortgages, other businesses, or other assets;

(v) has a business purpose other than to identify and evaluate assets or a business with a view to completing a significant transaction; and

(vi) is not engaged in the business of holding, investing in or trading crypto assets, or the operation of a gaming or betting business.

This exemption can be used with or without a dealer, although there are some differences in application between the two scenarios. Notably, where an eligible business relies on this exemption and uses a registered dealer (or other intermediary relying on an exemption from dealer registration), the exemption imposes no limits on the amount of capital that can be raised. An eligible business (together with certain related entities) that relies on this exemption without a dealer is only permitted to raise a maximum of C$3-million in funds from Ontario residents who must be either accredited investors or self-certified investors (discussed below).

The OSC has also implemented streamlined reporting rules for early-stage businesses relying on this exemption.

This exemption will remain in effect until October 25, 2025, unless extended.

Not-for-Profit Angel Investor Group Registration Exemption

Angel investor groups bring together investors interested in supporting early-stage businesses. In doing so, their activities may also be labelled as “in the business” of trading in securities and subject to dealer registration requirements. Ontario Instrument 32-508 – Not-for-Profit Angel Investor Group Registration Exemption allows an angel investor group to be exempt from these registration requirements if, among other things, the group:

(i) is a not-for-profit;

(ii) operates from Ontario and its head office is in Ontario;

(iii) has no more than 500 members and each is an accredited investor or eligible to be a self-certified investor (discussed below);

(iv) engages in one or more prescribed activities, such as identifying Ontario early-stage businesses seeking capital to introduce to its members; and

(v) limits any transaction-based compensation it receives to a maximum of 5% of the value of the securities invested by its members.

This exemption will remain in effect until October 25, 2025, unless extended.

Self-Certified Investor Prospectus Exemption

A person or company that distributes securities to an investor in Ontario is generally required to prepare and file a prospectus, which must be approved by securities regulators, unless an exemption from the prospectus requirement is available to allow the securities to be distributed on a “private placement” basis. For example, one of the most commonly used prospectus exemptions is the “accredited investor” exemption, which allows an issuer to distribute securities on a private placement basis to an “accredited investor,” which is an investor that meets certain financial criteria, such as an individual having a net income before taxes that exceeded C$200,000 in each of the two most recent calendar years or who, either alone or with a spouse, has net assets of at least C$5-million.

Effective October 25, 2022, the OSC began piloting Ontario Instrument 45-507 – Self-Certified Investor Prospectus Exemption, which expands the list of potential private placement investors for eligible Ontario businesses. The expanded list includes certain individual self-certified investors who may not have previously qualified under existing prospectus exemptions (e.g., the accredited investor exemption) but possess the necessary business knowledge to make an informed investment decision. As of April 25, 2024, the Self-Certified Investor Prospectus Exemption was extended by OSC Rule 45-508 – Extension to Ontario Instrument 45-507 Self-Certified Investor Prospectus Exemption.

In order to rely on the Self-Certified Investor Prospectus Exemption, investors must certify to meeting at least one of the prescribed qualifications, such as:

(i) holding certain designations (e.g., CFA, CPA or CBV) or business degrees;

(ii) passing certain courses or exams; or

(iii) having relevant operational experience at a business that operates in the same industry or sector as the issuer and being able, as a result of this experience, to adequately assess and understand the risk of investment in the issuer.

The OSC has also implemented streamlined reporting rules for businesses distributing securities under the Self-Certified Investor Prospectus Exemption.

This exemption will remain in effect until the earlier of October 25, 2025, and the effective date of an amendment to National Instrument 45-106 – Prospectus Exemptions that addresses substantially the same subject matter.

Feedback

The OSC will be collecting data on the use of the initiatives through required forms. It will also be reaching out to stakeholders for their perspectives on the launch of these initiatives. The information received will be used by the OSC to evaluate the initiatives and consider future policymaking.