On May 9, 2024, the Ontario Securities Commission (“OSC”) announced three new exemptions designed to support capital raising for early-stage businesses in Ontario through the OSC TestLab program. The initiatives include the introduction of dealer registration exemptions for not-for-profit angel investor groups and eligible early-stage businesses and the simplified reporting of distributions to purchasers relying on the self-certified investor prospectus exemption.

Background

As we discussed in a previous post, the OSC recently released its 2024-2030 strategic plan (the “Strategic Plan”), which sets out six strategic goals that the OSC intends to pursue over the next six years to deliver on its mandate. One of these goals is to foster conditions for capital formation and innovation in both the public and private markets.

In connection with this goal, the OSC approved an extension of the self-certified investor prospectus exemption, which allows certain investors who may not qualify as accredited investors but demonstrate that they possess sufficient financial knowledge, investment knowledge or relevant industry-specific experience to access the private markets.

The Ontario government’s Capital Markets Modernization Taskforce (the “Taskforce”) also made a number of recommendations to support access to capital for early-stage businesses in its final report that was published in January 2021.

Consistent with both the Strategic Plan and the Taskforce recommendations, the OSC has announced three new time-limited orders that are intended to support early-stage capital raising in Ontario (the “Early-Stage Capital Exemptions”).

Early-Stage Capital Exemptions

Angel Investor Group Registration Exemption

An entity that is in the business of trading securities is required to register as a dealer or qualify for an exemption from the dealer registration requirement. Angel investors play an important role in funding early-stage businesses. As angel investor groups provide their members with investment opportunities, their activities may trigger the dealer registration requirement. Following a Taskforce recommendation, the OSC has introduced a dealer registration exemption for not-for-profit angel investor groups that meet certain conditions (the “Angel Investor Group Registration Exemption”).

The Angel Investor Group Registration Exemption will allow eligible groups to:

• identify and introduce Ontario early-stage businesses seeking capital to their members;
• make information on Ontario early-stage businesses seeking capital available to their members;
• hold regular meetings for Ontario early-stage businesses to present their business to their members;
• facilitate their members’ due diligence in Ontario early-stage businesses;
• keep their members up-to-date on Ontario early-stage businesses that members have invested in; and
• provide educational resources.

To qualify for the exemption, the angel investor group must, among other things: (i) be organized and conduct its activities primarily for not-for-profit purposes; (ii) operate from and have its head office located in Ontario; and (iii) have no more than 500 members each of whom qualifies as an accredited investor or self-certified investor. Eligible groups must also limit any compensation received in connection with an investment to a maximum of 5% of the value of the securities invested.

For more information on the conditions that must be satisfied to qualify for the exemption as well as the applicable reporting requirements, see Ontario Instrument 32-508 Not-For-Profit Angel Investor Group Registration Exemption (Interim Class Order).

The Angel Investor Group Registration Exemption will remain in effect until October 25, 2025, unless extended by the OSC.

Early-Stage Business Registration Exemption

As early-stage businesses seek to raise capital from investors, they may be considered to be in the business of trading securities. To promote capital formation, the OSC has introduced a new exemption from the dealer registration requirement to allow eligible early-stage businesses in Ontario to engage in limited capital raising and marketing activities (the “Early-Stage Business Registration Exemption”).

To be considered an “eligible business”, an issuer must meet a number of criteria, which include, among other things: (i) having its head office and business operations located in Ontario; (ii) being in the early or development stage of its business and seeking capital to start, grow or scale; (iii) having fewer than 100 employees; (iv) having a primary business purpose that is not investing in real estate, mortgages, other businesses or other assets; (v) having a business purpose other than to identify and evaluate assets or a business with a view to completing a merger with, amalgamation with or purchase of the securities of an issuer or the acquisition of a business; and (vi) not engaging, directly or indirectly, in any of the following: holding, investing in or trading crypto assets, on the issuer’s own behalf or on behalf of its clients; or the operation of a gaming or betting business.

Certain conditions must be satisfied in order to rely on the Early-Stage Business Registration Exemption that vary depending on whether the issuer is distributing eligible securities with or without the assistance of a dealer. Where a dealer is not involved, aggregate funds of up to $3,000,000 may be raised. Where a dealer is used, distributions must be made through a person or company that is: (i) registered as an exempt market dealer; (ii) relying on the exemption from dealer registration set out in Ontario Instrument 32-508 Not-For-Profit Angel Investor Group Registration Exemption (Interim Class Order); (iii) relying on the exemption from dealer registration set out in National Instrument 45-110 Start-up Crowdfunding Registration and Prospectus Exemptions; or (iv) a funding portal as defined in Multilateral Instrument 45-108 Crowdfunding.

Permitted marketing activities include posting the terms of an offering on the issuer’s website, announcing the distribution on social media and sharing the terms of an offering in a demo day hosted by an academic institution, government body, not-for-profit group, angel investor group, incubator, accelerator or innovation hub. An issuer may not contact prospective investors to solicit investments unless the issuer has a pre-existing relationship with the person or the person to whom the message is sent has consented to receiving it.

For more information on the conditions that must be satisfied to qualify for the exemption as well as the applicable reporting requirements, see Ontario Instrument 32-509 Early-Stage Business Registration Exemption (Interim Class Order).

The Early-Stage Business Registration Exemption will remain in effect until October 25, 2025, unless extended by the OSC.

Self-Certified Investor Reporting Exemption

Issuers that distribute securities under applicable prospectus exemptions are required to file a report of exempt distribution on Form 45-106F1 Report of Exempt Distribution within 10 days of the distribution. To further reduce regulatory burden, the OSC has introduced Ontario Instrument 45-509 Report of Distributions under the Self-Certified Investor Prospectus Exemption (Interim Class Order), which provides an exemption from such reporting requirement (and related fee payment) for businesses that raise capital under the self-certified investor prospectus exemption, provided that the issuer reports distributions on a quarterly basis using Form 45-509F1 Alternative Report of Exempt Distribution (the “Self-Certified Investor Reporting Exemption”).

The Self-Certified Investor Reporting 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.

OSC TestLab

The Early-Stage Capital Exemptions are being introduced as part of the OSC TestLab, a program that uses testing to accelerate the evaluation of capital market innovations and new approaches to regulation to advance responsible innovation and economic growth in Ontario. The OSC will collect data on the use of the exemptions through associated filings and will contact key stakeholders to discuss their perspectives on these initiatives. The information that is collected will be used to evaluate the Early-Stage Capital Exemptions and provide the OSC with insights into future policy-making.

For more information, see Notice of General Orders: Ontario Instrument 32-508 Not-For-Profit Angel Investor Group Registration Exemption (Interim Class Order), Ontario Instrument 32-509 Early-Stage Business Registration Exemption (Interim Class Order), Ontario Instrument 45-509 Report of Distributions under the Self-Certified Investor Prospectus Exemption (Interim Class Order).

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