Additional disclosure requirements when relying on the offering memorandum prospectus exemption

Most issuers that utilize the offering memorandum (OM) prospectus exemption under National Instrument 45-106 Prospectus Exemptions (NI 45-106) prepare a new OM to include audited annual financial statements dated within 120 days of the financial year end. As we approach “OM season,” issuers should begin to consider how the amendments to NI 45-106 described below will impact disclosure in their OMs.

Subject to ministerial approval, amendments to NI 45-106 will be effective on March 8, 2023, that will require issuers to provide additional disclosure to purchasers when relying on the offering memorandum prospectus exemption in NI 45-106. The amendments were originally proposed in September 2020 (the 2020 proposed amendments) and were subject to public comment. Norton Rose Fulbright Canada commented on such 2020 proposed amendments. Many of these comments were acknowledged by the Canadian Securities Administrators, and certain particularly burdensome disclosure requirements were scaled back or tailored to specific circumstances.

The amendments include generally applicable additions to OM disclosure requirements and specific requirements for issuers involved in real estate activities (real estate issuers) and collective investment vehicles (CIVs). 

The term “real estate activities” excludes activities concerning “mineral projects” and “oil and gas activities” (as defined under securities law), and in Quebec, activities relating to the forms of investments subject to the Regulation Respecting Real Estate Prospectus and Registration Exemptions (Québec). CIV means either an investment fund or an issuer whose primary purpose is to invest money provided by its security holders in a portfolio of securities other than securities of subsidiaries of the issuer.

As discussed in the notice of amendments dated December 8, 2022 (see here), the OM prospectus exemption was designed as a small business financing tool and was expected to be used by simple issuers for relatively small investments. In practice, however, the OM exemption has been used by larger and more complex issuers than were initially envisioned, many of whom are real estate issuers and CIVs engaged in mortgage lending. The amendments are intended to provide purchasers purchasing securities under an OM with enhanced disclosure and, in relation to real estate issuers and CIVs, more tailored disclosure.

The new disclosure requirements under the OM prospectus exemption are summarized below.

General amendments

Regarding Form 45-106F2, which is the required form of OM for non-qualifying issuers, the following will be required:

• more disclosure on the cover page to highlight certain matters for purchasers;
• enhanced disclosure where a material amount of the offering’s proceeds will be transferred to or a material amount of the issuer’s business will be carried out by, another issuer that is not the issuer’s subsidiary;
• disclosure of any purchase or sale history of any business or asset with a “related party” (a new defined term);
• disclosure of any compensation paid to related parties;
• disclosure of criminal or quasi-criminal convictions for directors, executive officers or control persons;
• disclosure regarding redemption or retraction fees and limitations and, for redemptions and retractions, information about requests made to the issuer, requests fulfilled by the issuer, including the price paid and the source of funds, and outstanding requests;
• disclosure of the source of funds for dividends or distributions paid that exceeded cash flow from operations;
• cautionary disclosure for instances where expert reports, statements or opinions are included in an OM and there is no statutory liability against the expert; and
• in Ontario only, a requirement to amend an OM to include interim financials for the most recently completed six-month period when a distribution is ongoing, subject to an exemption if the issuer appends an additional certificate certifying that:
  • the OM does not include a misrepresentation when read as of the date of the additional certificate;
  • there has been no material change in relation to the issuer that is not disclosed in the OM; and
  • the OM, when read as of the date of the additional certificate, provides a reasonable purchaser with sufficient information to make an informed investment decision.

Real estate issuers

Real estate issuers will be required to provide an independent appraisal of an interest in real property to the purchaser if such an interest will be acquired from a related party, or a value for such an interest is disclosed in the OM.

In addition to the general changes to Form 45-106F2, real estate issuers must now complete a new Schedule 1 to Form 45-106F2, which includes:

• disclosure relevant to issuers that are developing real property, such as a description of the approvals or permissions required, and project milestones;
• disclosure relevant to issuers that own and operate developed real property, such as the age, condition and occupancy level of the real property;
• disclosure of penalties, sanctions, bankruptcy, insolvency and criminal or quasi-criminal convictions for parties other than the issuer, such as a party acting as developer; and
• disclosure of any purchase and sale history of the issuer’s real property with a related party.

Collective investment vehicles

In addition to the general changes to Form 45-106F2, CIVs must now complete a new Schedule 2 to Form 45-106F2, which includes:

• a description of the issuer’s investment objectives;
• disclosure of penalties, sanctions, bankruptcy, insolvency and criminal or quasi-criminal convictions for persons involved in selecting and managing the investments; and
• disclosure of information regarding the portfolio and its performance.

While certain amendments were scaled back from the 2020 proposed amendments, specifically for appraisal requirements and the requirement to amend an OM with interim financial statements, these amendments will increase disclosure obligations and related liabilities for entities distributing securities under an offering memorandum prospectus exemption.