Note: The rules and law may have changed since this article was first published. It is provided for archival purposes but you should consult with your lawyer for the current state of the law
On June 1, 2006, securities regulators across Canada made a change to the definition of “offering memorandum”. While subtle, these changes require a greater understanding by issuers and advisors alike as to just what an offering memorandum is, and compliance with securities law.
To better understand this new landscape, let’s look back for a minute. Prior to June 1, 2006, an “offering memorandum” (or “OM”) meant a document that contained information about the business and affairs of an Issuer that was to be given to investors to help them decide whether or not to purchase securities. This definition was broad, including not only offering memoranda proper, but a whole range of selling documents, subscription agreements or other issuer-generated material.
Despite the breadth of the definition, its application was far more limited. Its use was triggered by the Securities Act (the “Act”) in only a limited number of exempt offerings. The most notable were the Offering Memorandum exemption, the Rights Offering exemption and the discretionary exemptions – none of which are among those most commonly used by corporations raising capital. As a result, an analysis of whether or not a document constituted an “offering memorandum” was rarely required, and largely ignored.
As of June 1, things have changed. The definition portion is similar: “…a document that provides information about the business or affairs of an Issuer and that has been prepared primarily for delivery to and review by a prospective purchaser to assist the prospective purchaser in making an investment decision…” What has been expanded is the scope to which this definition applies. Where the old definition was triggered in only a limited number of exempt offerings, the new definition applies to ALL exempt offerings, with only two classes of exceptions: (1) a list of prescribed or standard form documents such as information circulars, takeover bid circulars, issuer bid circulars, and the like; and (2) any documents specifically excluded by the Director.
The first class of exceptions offer little practical relief in the vast majority of private share offerings. As for the Directorial exclusions, in General Ruling/Order 11-906, the Saskatchewan Financial Services Commission once again listed types of exempt share offerings to which the OM definition would not apply. But this time, the exempt offerings includes not only the pre-June 1 list, but also the most commonly used non-private issuer exemptions, namely the Accredited Investor exemption, Family, friends and business associates exemption, and minimum amount exemption.
What does this mean to corporations planning to sell shares to raise capital? For private issuers (corporations that have less than 50 shareholders and contain the necessary restrictions in their articles), not much has changed, as the private issuer exemption remains outside of OM analysis. But for those corporations which, for instance, rely on the accredited investor or close friends exemption, selling documents are probably now offering memoranda, and are therefore subject to additional rules.
For example, every purchaser of shares pursuant to an OM has the right, within the time periods prescribed by the Act, to: (1) withdraw from an agreement of purchase and sale and (2) sue for rescission or damages in the event of a misrepresentation in the OM. Not only are purchasers granted these rights, but every OM must contain a statement detailing these rights. The absence of this notice is a breach of the Act, which can result in all sorts of nastiness, including fines and cease trade orders.
What this boils down to is an extra piece of diligence that must be performed by or on behalf of corporations planning to sell shares to raise capital. Corporations in this position can adequately protect themselves by remembering two simple rules of thumb: (1) speak to a trusted, knowledgeable advisor first. They can determine whether the planned share sale is one which is subject to the OM rules, and if so, whether their selling documents contain the necessary language concerning purchasers’ rights; and (2) don’t release any documentation to a prospective purchaser that has not first been reviewed by the advisor for OM compliance.
It’s the old ounce of prevention rule. Anything done beforehand to comply with the OM rules will be faster, easier and less costly than attempting to solve a compliance problem after the fact.