Ontario Securities Commission introduces new early-stage capital exemptions

The Ontario Securities Commission recently made three time-limited class orders intended to support early-stage capital raising in the province:

• a dealer registration exemption for not-for-profit angel investor groups under Ontario Instrument 32-508 (OI 32-508) (the Angel Investor Group Registration Exemption);
• a dealer registration exemption for eligible early-stage businesses under Ontario Instrument 32-509 (OI 32-509) (the Early-Stage Business Registration Exemption); and
• an exemption from the distribution reporting requirement, when relying on the self-certified prospectus exemption, under Ontario Instrument 45-509 (OI 45-509) (the Self-Certified Investor Reporting Exemption).

Each of the orders was effective on May 9, 2024, and will remain in effect until October 25, 2025, unless extended.

Angel Investor Group Registration Exemption

Under the Securities Act (Ontario), persons or companies are prohibited from engaging in or holding themselves out as engaging in the business of trading in securities unless they are registered as dealers (or a representative of a dealer) or are exempt from the registration requirement. Since the definition of trading is broad, angel investor groups who are involved in activities such as introducing their members to investment opportunities may be required to register as dealers. Subject to compliance with all of the conditions set out in OI 32-508, an angel investor group is exempt from the dealer registration requirement in relation to certain trading activities including:

• identifying Ontario early-stage businesses,
• making information on these businesses available to its members,
• holding meetings for Ontario early-stage businesses to present to its members,
• facilitating due diligence; and
• providing educational resources.

To rely on this exemption, the angel investor group must, among other things, be organized primarily for not-for-profit purposes, operate in Ontario and have its head office in Ontario and have no more than 500 members, each of whom is either an accredited investor or eligible to be a self-certified investor under Ontario Instrument 45-507 – Self-Certified Investor Prospectus Exemption. The group may not be registered as a dealer under securities legislation in Canada or in any foreign jurisdiction and it must limit any transaction-based compensation it receives to a maximum of 5% of the value of the securities invested by its members.

Early-Stage Business Registration Exemption

Early-stage businesses seeking to raise capital may also be considered to be in the business of trading and therefore subject to registration requirements. Under the Early-Stage Business Registration Exemption, an “eligible business” is exempt from the dealer registration requirement for a trade in an eligible security if all of the conditions in OI 32-509 are met.

Eligible businesses may distribute eligible securities to investors with or without a dealer. An “eligible business” means an issuer that (i) has its head office and business operations located in Ontario, (ii) is in the early or development stages of its business and is seeking capital to start, grow or scale, (iii) has fewer 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 complete a significant transaction, (vi) is not involved in crypto assets or a gaming or betting business, (vii) is not a reporting issuer, (viii) is not registered under securities legislation, and (ix) is not an investment fund.

Where an issuer is relying on the exemption and distributes its own securities without a dealer, the issuer may only distribute to residents in Ontario who are either accredited investors or self-certified investors. The aggregate funds raised by an issuer and its affiliates under this exemption where no dealer is involved may not exceed $3 million and the issuer may not pay any finders fees or any transaction-based compensation in connection with the distribution.

Where an issuer is relying on the exemption and uses a dealer, the issuer must distribute eligible securities through a person or company that is either registered as an exempt market dealer, is relying on the Angel Investor Group Registration Exemption discussed above, is relying on the exemption from dealer registration set out in National Instrument 45-110 – Start-up Crowdfunding Registration and Prospectus Exemptions, or is a funding portal as defined in Multilateral Instrument 45-108 – Crowdfunding. Where a dealer is used in the distribution there is no limit on the funds that the issuer may raise, although there may be limits under the prospectus exemption(s) on which the issuer is relying.

Regardless of whether an eligible business uses a dealer to distribute eligible securities, it may only advertise a distribution of eligible securities by posting the terms of the offering on its website, announcing the distribution on social media with a link to its website where the terms of the offering are located, or participating in a demo day (subject to the rules set out in OI 32-509 relating to demo days) and it may not contact a prospective investor unless it has a pre-existing relationship with the person, or the person has consented to receiving the message.

Self-Certified Investor Reporting Exemption (OI 45-509)

On October 25, 2022, the OSC adopted Ontario Instrument 45-507 – Self-Certified Investor Prospectus Exemption (OI 45-507), which creates a time-limited prospectus exemption (extended on April 11, 2024)  allowing Ontario purchasers who may not meet the accredited investor criteria to invest in issuers provided they meet other criteria to demonstrate financial, investment or industry-specific knowledge. Issuers distributing securities under OI 45-507 were required to file a Form 45-106F1 – Report of Exempt Distribution together with a completed Confirmation of Qualifying Criteria and the applicable filing fee within 10 days of the distribution.

Under the Self-Certified Investor Reporting Exemption, issuers distributing under OI 45-507 will  be required to file a Form 45-509F1 – Alternative Report of Exempt Distribution within 30 days of the end of specified quarterly reporting periods. There is no fee associated with filing Form 45-509F1.