Part Three: Relying on the Offering Memorandum Exemption to Raise Private Placement Capital

– *updated March 24, 2022 –

Pssst…want to offer your securities to the largest number of people possible in Canada without filing a prospectus? Want control and certainty over what information prospective investors are relying on when purchasing securities of your company? Want a simplified subscription agreement? Are you OK with preparing and filing audited financial statements for the rest of the life of your company if you sell securities outside or BC and Newfoundland Labrador in Canada? If you answered yes to these questions, the offering memorandum exemption under National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”) may be the perfect exemption for you.

The offering memorandum exemption is available in all jurisdictions across Canada, including Ontario. The offering memorandum exemption officially became available in Ontario on January 13, 2016. The Ontario securities regulators added several new requirements and limitations on the use of the offering memorandum in its jurisdiction. Prior to Ontario’s introduction of the offering memorandum, there were two basic versions of this exemption in Canada. There are now three versions of the exemption, with complicated and expensive continuous disclosure requirements imposed on issuers using the exemption and new forms and investment cap amounts for Canadian investors resident outside of British Columbia and Newfoundland Labrador. On April 30, 2016, Alberta, New Brunswick, Nova Scotia, Québec and Saskatchewan joined Ontario in adopting this more complicated and restrictive offering memorandum exemption. To be honest with you, it is an ugly patchwork of regulations applying to the same exemption across Canada. We advise small private companies to avoid the offering memorandum exemption at all costs outside of British Columbia and Newfoundland Labrador. The offering memorandum exemption, in the form it is today, is only suitable for reporting issuers, private issuers planning on becoming reporting issuers, and real estate related entities and limited partnerships (with a limited projected lifespan) in need of significant amounts of capital.

In part three of this series, I will discuss the offering memorandum exemption, the good and the bad. First, I will discuss the form an offering memorandum is required to take if an issuer wants to rely on the offering memorandum exemption. I will then cover the different rules that apply in the various provinces and territories in Canada. In closing, for those brave souls still interested in learning more about the offering memorandum exemption, I will discuss common errors issuers make when using this exemption and how to stay away from trouble when putting together an offering memorandum.

Form is everything.

The offering memorandum exemption in NI 45-106 allows an issuer to sell its securities to anyone, regardless of their relationship, wealth or knowledge level. The key to this exemption is the offering memorandum whose job is to provide investors with the information they need to evaluate the investment and to provide investors with certain statutory and non-statutory protections. Preparing an offering memorandum requires a bit more input by management and its professional advisors to put together than just a subscription agreement and investor questionnaire (which is one of the reason private and public issuers are reluctant to use the offering memorandum exemption).

In Canada, an offering memorandum is required to be prepared and delivered in the required form to prospective investors. There are two versions of the required form: (1) is for qualifying issuers (Form 45-106F3); and (2) the other is for non-qualifying issuers (Form 45-106F2). Qualifying issuers are issuers listed on the TSX or TSX Venture Exchange. Non-qualifying issuers are all other issuers. The form for qualifying issuers allows certain information that is already posted on SEDAR to be incorporated by reference into the offering memorandum.

The disclosure required in an offering memorandum is much less than that required in a prospectus. A Canadian offering memorandum in the required form includes the following sections:

Item 1: Use of Available Funds (as set out in tables in form);
Item 2: Description of Business (2-15 pages – the more complicated your business the more disclosure is required);
Item 3: Interests of Directors, Management, Promoters and Principal Holders (as set out in tables in form);
Item 4: Capital Structure (as set out in tables in form);
Item 5: Securities Offered (very basic description required);
Item 6: Income Tax Consequences and RRSP Eligibility (simplified disclosure other than for flow-through shares or special income tax vehicle securities);
Item 7: Compensation Paid to Sellers and Finders (the Northwest Territories, Nunavut, Saskatchewan and Yukon have an explicit rule that only registered agents can );
Item 8: Risk Factors (2 to 5 pages);
Item 9: Reporting Obligations (very basic description required);
Item 10: Resale Restrictions (text required as set out in section);
Item 11: Purchasers’ Rights (2 day cancellation right as set out in section and statutory and contractual right of action disclosure as required by each province securities are offered);
Item 12: Financial Statements (audited annual*; unaudited interim);
Item 13: Date and Certificate (certificate as of date of offering memorandum stating no misrepresentation in document); and
Risk Acknowledgement Form (to be signed by all investors).

The offering memorandum format relies on tables to order and present the required information about an issuer and its business. Issuers will find they already have most of his information in their business plan, corporate record book and financial statements. When originally drafted, the regulators intended that the disclosure sections for most issuers would be short and concise, with sufficient information to allow investors to make an informed investment decision about the issuer and its business. United States and other foreign issuers often use what is called an offering memorandum wrap (or wrapper) to sell securities qualified in an offering outside of Canada to Canadian investors. The wrap references content in this foreign prospectus, where Canadian private placement investors can find the information required in a Form 45-106F2 offering memorandum.

Form 45-106F2 and Form 45-106F3 both contain instructions on how to complete each section of the offering memorandum. Mining development and exploration companies need to file a Form 43-101 technical report as required by subsection 4.2(1)(d) of National Instrument 43-101 Standards of Disclosure for Mineral Projects to support any scientific or technical information describing a mineral project on a property disclosed in an offering memorandum. Similarly, oil and gas issuers must ensure information they include about their oil and gas activities in their offering memorandum conforms to National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities.

Issuers must file the offering memorandum, and if applicable, the Form 43-101 technical report, with the first Form 45-106F1 Report of Exempt Distribution filed in connection with a sale under the offering document (10 days after accepting the first investor’s subscription for securities). If the issuer updates the offering memorandum, it must file the updated offering memorandum with the next exempt distribution report filing. If a material change occurs in the issuer’s business, after delivery of an offering memorandum to a potential investor, the issuer must give the potential investor an update to the offering memorandum with a newly signed certificate before the issuer accepts an agreement to purchase securities.

The securities regulators across Canada will not hesitate to cease trade an Issuer who does not prepare and file an offering memorandum in the required form when relying on this exemption. (See: BLH Life Science Group Inc., Re 2019 BCSECCOM 11; Comstock Energy Inc. (Re), 2014 BCSECCOM 390; Howard Bond Corp., Re, 2013 ABASC 407; Howard Land Corp., 2013 ABASC 408; Howard Land Corp., 2013 BCSECCOM 220; Opes Joint Venture, Re, 2013 ABASC 77; DeLaet, Re, 2013 ABASC 42; Shire International Real Estate Investments Ltd., Re, 2011 ABASC 608; ReSol Securities Inc., Re, 2011 ABASC 572; Standard Resources Fund, Re, 2011 ABASC 498; Rogers Oil & Gas Inc., Re, 2011 ABASC 453; Cleanviro Limited Partnership (Re), 2011 BCSECCOM 291; Edgeworth Properties – Ellerslie Ridge Inc (Re), 2011 BCSECCOM 256; Evolution Fund (Re), 2010 BCSECCOM 643; Peace Summit Technologies (VCC) Inc. (11/05/2010); GDC Investments Inc. (08/31/2010); Turkanda Coal Corp. (08/26/2010); Living Forest One Limited Partnership (08/17/2010); ACIC Marketing Limited Partnership (08/12/2010); Pioneer West Mortgage Investment Corporation (07/20/2010); All Canadian Investment Corporation (07/13/2010); Western Liquid Funding Limited Partnership (04/30/2010); Antrim Balanced Mortgage Fund Ltd. (04/13/2010); Kensington Realfund Corporation (03/03/2010); Eagle Peak Resources Inc. (02/15/2010); Metal Mountain Resources Inc. (02/16/2010); Black Sand Equity Management Ltd. (12/30/2009); Bridgeport Capital Inc. (09/14/2006); Automoney Financial Corporation (10/22/2008); and Canadian Rockport Homes Int’l, Inc. (12/31/2008)

Canadian securities regulators will also impose regulatory bans and penalties on issuers and individuals raising capital using an offering memorandum that does not meet the form requirements or does not disclose the facts about the issuer and its management required by investors to make an informed decision. Dee Donald Bergman and others, Re, 2022 BCSECCOM 20 and Press Release; Narayan, Re, 2021 BCSECCOM 298; Lathigee (Re), 2015 BCSECCOM 78, Cinnabar Explorations Inc (Re), 2014 BCSECCOM 26; Black Gold Resources Ltd (Re),2014 BCSECCOM 197; Saafnet Canada Inc (Re), 2014 BCSECCOM 96; Kirkham, Re, 2013 ABASC 429; Cinnabar Explorations Inc (Re), 2013 BCSECCOM 361; Gregory Clark Carrington (02/07/2011); and China Dragon Fund Ltd, et al. (07/04/2007). In rare instances, criminal charges may also result when an offering memorandum is used to commit fraud. See: R v Aitkens, 2020 ABPC 129.

Issuers may also be required to refund investors’ funds received and may face civil action besides regulatory action in Canada (see: Sonic Holdings Ltd. v. Savage, 2021 BCCA 441; Pinizzotto v. TILT Holdings, Inc., 2021 ONSC 8001; Fiorillo v. Krispy Kreme Doughnuts Inc., 2009 CanLII 29902 (ON S.C.).

Sections in the form are not optional items. Each section of the required form must be included and all tables and required statements must be set out exactly as in the form.

The only offering memorandum format or template issuers should use in Canada are those set-out in Form 45-106F2 and Form 45-106F3 of NI 45-106.

The foregoing covers 99% of all issuers relying on the offering memorandum exemption. Issuers should know British Columbia requires a different offering memorandum form to be used for syndicated mortgages (BC Form 45-901F) and real estate securities (BC Form 45-906F). Manitoba also has a Made in Manitoba private placement exemption (section 91(b) of the Manitoba Securities Regulation) for sales to related purchasers and no more than 50 sophisticated purchasers in all jurisdictions which requires a different offering memorandum be used (MB Form 26). Saskatchewan, New Brunswick, Prince Edward Island and the Northwest Territories have each adopted orders allowing for unaudited financial statements if the amount raised by a private issuer does not exceed $500,000, and if individual investors under this exemption do not invest more than $2,000. Issuer also may use Canadian GAAP instead of IFRS. Issuers, should check the corresponding policy statement in each jurisdiction they intend to offer securities before preparing one of these alternate offering memorandums.

Provincial differences in using the offering memorandum exemption.

As mentioned earlier, there are now three main versions of the offering memorandum exemption, with complicated rules outside of British Columbia and Newfoundland Labrador. The table below sets out the various provincial and territorial requirements and limitations under the exemption.

	BC	AB	SK	MB	ON	QU	NB	NS	PEI	NFL	Territories
Requirements & Limitations
Open to Public & Private Issuers	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Open to Investment Funds	Yes	Limit ⁽¹⁾	Limit ⁽¹⁾	Limit ⁽¹⁾	No	No	No	Limit ⁽¹⁾	Limit ⁽¹⁾	Yes	Limit ⁽¹⁾
Investment Amount Limits	No	Yes ⁽²⁾	Yes ⁽²⁾	Yes ⁽³⁾	Yes ⁽²⁾	Yes ⁽²⁾	Yes ⁽²⁾	Yes ⁽²⁾	Yes ⁽³⁾	No	Yes ⁽³⁾
Limits on Security Type	No	Yes ⁽⁴⁾	Yes ⁽⁴⁾	No	Yes ⁽⁴⁾	Yes ⁽⁴⁾	Yes ⁽⁴⁾	Yes ⁽⁴⁾	No	No	No

Documents
Designated Offering Memorandum	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
2 Years IFRS Audited Financial Statements	Yes	Yes	Excep ⁽⁵⁾	Yes	Yes	Yes	Excep ⁽⁶⁾	Yes	Excep ⁽⁷⁾	Yes	Excep ⁽⁸⁾
Risk Acknowledgement Form	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Schedule 1 – Investor Classification	N/A	Yes	Yes	N/A	Yes	Yes	Yes	Yes	N/A	N/A	N/A
Schedule 2 – Investment Limits	N/A	Yes	Yes	N/A	Yes	Yes	Yes	Yes	N/A	N/A	N/A
Marketing Material Incorporated into Offering Memorandum	No	Yes	Yes	No	Yes	Yes	Yes	Yes	No	No	N/A
Mining – 43-101 Technical Report	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Report of Exempt Distribution	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

Private Issuer Ongoing Disclosure
Audited Annual Financial Statements	No	Yes	Yes	No	Yes	Yes	Yes	Yes	No	No	No
Notice of Use of Proceeds	No	Yes	Yes	No	Yes	Yes	Yes	Yes	No	No	No
Notice of Key Events	No	No	No	No	Yes	No	Yes	Yes	No	No	No

Notes:

Investment fund must be a non-redeemable investment fund, or a mutual fund that is a reporting issuer.
If investor an individual, investment capped at $10,000 under exemption per year unless an “eligible investor”. Investment cap of $30,00 under exemption per year for eligible investors UNLESS (i) advice from a portfolio manager, investment dealer or exempt market dealer that the investment is suitable, then investment cap raised to $100 000 per year; or (ii) an accredited investor; or (iii) a close personal family friend, family or business associated as defined in section 2.5(1) of NI 45-106. No cap on investors who are not individuals.
Investment capped at $10,000 per acquisition unless an “eligible investor”. No investment cap on eligible investors.
Cannot offer a security that is a specified derivative or a structured finance product.
SK General Order 45-922 – Exemption from Certain Audit and Financial Statement-Related Requirements in the Offering Memorandum Exemption – allows for unaudited financial statements if the amount raised by an issuer does not exceed $500,000, and if individual investors relying on this exemption do not invest more than $2,000. May also use Canadian GAAP.
NB Blanket Order 45-507 – Exemptions from Certain Financial Statement Requirements of Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers – allows for unaudited financial statements are not required if the amount raised by an issuer does not exceed $500,000, and if individual investors relying on this exemption do not invest more than $2,000. May also use Canadian GAAP.
PEI Blanket Order – Financial Statement Requirement Exemptions of Form 45-106F2 – allows for unaudited financial statements if the amount raised by an issuer does not exceed $500,000, and if individual investors relying on this exemption do not invest more than $2,000. May also use Canadian GAAP.
NWT Blanket Order 45-501 – Exemptions from Certain Financial Statement Requirements of Form 45-106F2 Offering Memorandum for Non-Qualifying Issuers – allows for unaudited financial statements if the amount raised by an issuer does not exceed $500,000, and if individual investors relying on this exemption do not invest more than $2,000. May also use Canadian GAAP.

In British Columbia and Newfoundland Labrador, the offering memorandum exemption is available to all issuers, including all investment funds and issuers offering derivatives and structured investment products. Investors have no cap on their investments under the exemption and issuers have no ongoing compliance requirements after closing the offering. The only requirements are that (1) the investor purchases the securities offered as principal; (2) that the issuer delivers the offering memorandum in the required form to the investor prior to the subscription agreement being signed; and (3) that the issuer obtains a signed risk acknowledgment from the investor, and (4) the issuer file a Form 45-16F1 exempt distribution report along with the offering memorandum within 10 days of the first investment.

The other provinces and territories introduce the definition of an “eligible investor” to determine how much an individual investor can invest under the exemption. An eligible investor is an individual whose (1) net assets, alone or with their spouse, exceed $400,000, or (2) whose net income before taxes exceeded $75,000 and who reasonably expects to exceed that income level in the current calendar year or (3) together with a spouse exceeded $125,000, in the last 2 years and who reasonably expects to exceed that income level in the current calendar year; or (4) an accredited investor, or (5) a person described in section 2.5 – Family, friends and business associates in NI 45-106. You can find the full definition of who is an eligible investor here.

In Manitoba, Prince Edward Island, Northwest Territories, Nunavut and the Yukon, the offering memorandum exemption is available to all issuers, except, if the issuer is an investment fund, the investment fund must be a non-redeemable investment fund or a mutual fund that is a reporting issuer. These jurisdictions allow all securities under the exemption, including derivatives and structured investment products. Investors may only invest up to $10,000 in any one offering unless they are an eligible investor. Eligible investors are not subject to a maximum investment cap in these jurisdictions. The eligible investor if a company, however, must not have formed solely for the purpose of investing under the offering memorandum. In these jurisdictions: (1) the investor must purchase the securities offered as principal; (2) the issuer must deliver the offering memorandum in the required form to the investor prior to the subscription agreement being signed; (3) the issuer must obtain a signed risk acknowledgment from each investor, along with the required schedule 1 investor classification, and schedule 2 investor limits verification, and (4) the issuer must file a Form 45-16F1 exempt distribution report along with the offering memorandum within 10 days of the first investment. The Northwest Territories, Nunavut and Yukon do not allow any commissions or finder’s fees to be paid to any person, other than to a registered dealer, in connection with the offering memorandum exemption. Saskatchewan had a similar ban until March 23, 2010 when it adopted General Order 45-919 ** removing this limitation. This provision is taken very seriously by the regulators that have it in place and can result in an immediate cease trade order. (see: Sitefinders Capital 9 Corporation (02/16/2010); 20/20 Diversified Income Trust (10/27/2009); Edgeworth Mortgage Investment Corporation (02/16/2010); Fisgard Capital Corporation (03/08/2010); and Investicare Seniors Housing Corp. (01/27/2010).

The offering memorandum exemption is not available to investment funds in Ontario, Quebec and New Brunswick. Alberta, Saskatchewan and Nova Scotia allow non-redeemable investment funds and mutual funds that are reporting issuers to use the offering memorandum exemption in their jurisdictions. All six of these provinces do not allow specified derivatives, or a structured finance products, to be sold under the offering memorandum exemption in their jurisdictions. In these jurisdictions, individual investors may only invest up to $10,000 under the offering memorandum exemption in a calendar year unless they are an eligible investor. Eligible investors have an investment cap of $30,000 in any 12-month period unless they receive suitability advice from a portfolio manager, investment dealer or exempt market dealer than the cap is $100,000. Accredited investors and individuals that fall within the description provided under subsection 2.5(1) – Family, friends and business associates of NI 45-106 and companies not formed solely to invest under the exemption have no investment caps in these jurisdictions. In these jurisdictions: (1) the investor must purchase the securities offered as principal; (2) the issuer must deliver the offering memorandum in the required form to the investor prior to the subscription agreement being signed; (3) the issuer must obtain a signed risk acknowledgment from each investor, along with the required schedule 1 investor classification, and schedule 2 investor limits verification, and (4) the issuer must file a Form 45-16F1 exempt distribution report along with the offering memorandum, and all marketing material within 10 days of the first investment. In addition, issuers relying on the offering memorandum exemption in these jurisdictions must file audited financial statements and a notice of use of proceed each subsequent year to the offering. These requirements continue until the issuer becomes a reporting issuer or ceases to carry on business. Ontario, New Brunswick, Nova Scotia also require issuers to file certain notice of key event reports such a discontinuation of business, change of control, change of industry. In Ontario and New Brunswick, issuers considered “market participants” in those jurisdictions on using the offering memorandum exemption in those jurisdictions.

Hot spots and reoccurring problem areas.

In January 2020, the Alberta Securities Commission (the “ASC”) released ASC Notice 45-705 which set out the results of its review of 80,158 separate distributions to 6,343 individual purchasers under the offering memorandum exemption for compliance with the investments limits under the exemption. Overall, the ASC found 93% of the distributions complied with the investment limits under the exemption. They attributed much of the non-compliance uncovered as issuer and dealer record keeping errors. The ASC noted several issuers did not confirm the purchaser has properly completed Schedule 1 to Form 45-106F1. In particular, the purchasers did not note in Schedule 1 how they qualified as an eligible investor.

In April 2012, Canadian Securities Administrators, except Ontario, released Multilateral CSA Staff Notice 45-309 – Guidance for Preparing and Filing an Offering Memorandum under National Instruments 45-106 Prospectus and Registration Exemptions. They identified the following nineteen items of concern. Seven of these items related to the financial statements of the issuer.

Failing to file an OM on time
Failing to update the OM when distributions are ongoing
Using an incorrect form of update
Failing to include sufficient information to make an informed investment decision
Inadequately disclosing the issuer’s business
Failing to provide balanced disclosure
Inadequately disclosing available funds and use of available funds
Inappropriately reallocating available funds
Omitting key terms of material agreements
Omitting compensation disclosure
Inadequately disclosing management experience
Disseminating material forward-looking information not included in the OM
Omitting required interim financial reports
Omitting key elements of financial statements
Failing to obtain required audits
Omitting required audit reports or including non-compliant audit reports
Inappropriately using a Notice to Reader
Failing to prepare financial statements in accordance with appropriate accounting
principles
Improperly certifying the OM

The Corporate Finance Branch of the Saskatchewan Financial Services Commission’s Securities Division publishes its review findings of offering memorandums filed in Saskatchewan. They have identified several hot spots and reoccurring problem areas in offering memorandums. Frankly, I found it disheartening to read that almost all offering memorandums filed in Saskatchewan were non-compliant. A good portion of these offering memorandums must have had some input by legal professionals, but obviously not enough input to make a real difference. Here is a quick list of what to check before filing your offering memorandum (“OM”) as based on the Saskatchewan Securities Divisions findings:

Problem Areas	Remedy and Check
Attachments to the OM	financial statements must be placed just before the certificate and not included as an attachment; all information considered material should be provided in the body of the OM; only attach a document if it is material to understanding the issuer or the proposed investment (ie., a copy of a limited partnership agreement); any necessary attachments to an OM must be incorporate by reference in the OM; and information contained in the OM and in the attachment should be reconciled and not contradict one another.
Material Agreements	provide accurate summary of all material agreements with related parties; provide an accurate summary of all other material agreements; disclose relationship with related party; provide cost of asset to related party and cost of asset to issuer if sale of asset has occurred; disclose all finder’s fees and commissions paid or to be paid to related parties; dates of all agreements, closing dates and termination dates are required; disclose material outstanding obligation under material agreements; and where an agreement relates to a debenture or loan you must include information about the principal amount, repayment terms, security pledged, due date and interest rate.
Projections	avoid providing projections unless absolutely necessary; provide underlying assumption and hypothesis to any projections or financial forecasts included; clearly and correctly identify any projections as audited or unaudited; any audit report on projections must be clearly identified; projections, information in the OM, financial statements, and audit report must reconcile and not contradict one another; confirm arithmetic is correct in all projections or financial forecasts based on assumptions and calculation methodology disclosed; limit the period covered of projections or the financial forecasts to one that can be reasonably estimated (six months/one year?); and all projections and financial forecasts must be compliance with parts 4A and 4B ofNational Instrument 51-102 – Continuous Disclosure Obligations and be approved by management. OM with projections on business and financial assumptions that were not considered reasonable under the circumstances. Canadian Rockport Homes Int’l Inc.; Malone, William; and Riis, Nelson (BC); Failure to disclose financial condition: Michael Patrick Lathigee and Earle Douglas Pasquill, FIC Real Estate Projects Ltd., FIC Foreclosure Fund Ltd., WBIC Canada Ltd.

Financial Statements	financial statements must be placed just before the certificate and not included as an attachment; financial statements must be prepared in compliance with National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards and its companion policy; you must include financial statements for any business acquisitions or proposed business acquisitions; financial statements of a general partner are required to be included along with the financial statements of the limited liability partnership; financial statements must be current and not stale dated at time of investment; Financial statements must now conform to IFRS versus Canada GAAP; and Signature on any audit reports enclosed must be dated prior to the OM date.
Investors Rights/ Certificates	request legal assistance to draft correct language in statutory right of action section to conform with each provinces requirements; limited partnerships must include Item 13 certificates signed by issuer, general partner and promoters; and Item 13certificate must be signed by the chief executive officer, chief financial officer, and any two directors of the issuer and each promoter of the issuer (see subsection 2.9 of NI 45-106).
Structural Issues	a venture capital corporation (or similar issuer) formed to invest in another business must include sufficient details, including financial statements and share structure, about that other business to enable investors to make an informed decision; and the indirect investment must be sufficiently disclosed to enable investors to understand how their funds will be invested and how returns will be calculated on that investment.
Securities Offered	clearly identify the material terms of the securities being offered; and if the securities are redeemable provide disclosure on how the redemption will be funded and the possible effect on the overall business of issuer.
Stale Dated OM	issuers must update the OM each and every time there is a material change or create and deliver a new OM prior to any sales; and any time an OM is updated or amended it must include a newly dated and signed Item 13 certificate(s).
Use of Proceeds	if 10% or more of proceeds raised will be used to pay down debt incurred in last two years issuers must disclose this intent and provide information as to when this debt was incurred and for what purpose or benefit to the issuer. clearly identify funds from other sources required by issuer to proceed with business plans; provide enough detail in use of proceeds section to enable prospective investors to understand how funds raised will be used; identify any existing working capital deficiency and whether use or proceeds will be used to remedy this deficiency or how the issuer intends to remedy or manage its working capital deficiency; and provide details in use of proceeds and in description of business about any proposed investment in a related operation. Details should include purpose and role of entity to the operations of issuer, how investment will be funded, and ownership percentages and rights attached to investment (ie., subsidiary or joint venture).

Voluntary pre-offering filings and reviews.

Offering memorandums are not required to be pre-filed in any province or territory in Canada. The first look a securities regulator takes at an offering memorandum or its corresponding Form 43-101 technical report is when an issuer files its first Form 45-106F1 Report of Exempt Distribution after the first sale of securities. Securities regulators go through a two check process when reviewing these documents. This first check review is a relatively quick look to make sure the offering memorandum, and if applicable technical report, are in the required form, all sections have been addressed, the certificates are in order and properly signed, and that the issuer has provided the regulator with the correct filing fee. The second check review is detail oriented and deliberate. The regulators on this go round look at the substance of the information provided by an issuer. If they find the offering memorandum or technical report to be deficient, the regulator may issue a letter requesting the deficiency be addressed and that the investors receive an updated document. If they deem the deficiencies to be significant, the securities of the issuer may be cease traded until an amended offering memorandum and or technical report in compliance with the rules has been filed by the issuer. If the regulators determine the deficiencies are serious or there is a suggestion of fraud or an intentional misrepresentation, the file is elevated to enforcement to handle.

Only two jurisdictions in Canada currently allow issuers to pre-file their offering memorandum to confirm if they comply with the securities rules as viewed by that regulator. Issuers, resident in Saskatchewan and New Brunswick, may file a draft offering memorandum with staff of the Corporate Finance Branch of the Saskatchewan Financial Services Commission’s Securities Division or the New Brunswick Financial and Consumer Services Commission’s Securities Division respectively. Securities Division staff will review the draft document and return comments on how to improve the offering memorandum for compliance purposes. It is something for issuers in those jurisdictions to consider.

Conclusions.

The offering memorandum exemption is a terrific way for issuers to expand their horizon as to who they may approach to invest in their business. As an issuer you will avoid unnecessary regulatory problems if you carefully follow the required form and related instructions that apply to you as either a non-qualifying issuer or qualifying issuer. The key is to keep the information factual and only include statements you can back-up or can prove are reasonable.

If you plan to go it alone in preparing your offering memorandum, you should consider conducting your own internal due diligence review of your company prior to putting your document together. If you engage legal counsel it is likely they will make such a review mandatory. The reason I recommend a due diligence review is to make sure you don’t inadvertently miss something. It is why lawyers and auditors insist on a due diligence review when drafting a major disclosure document. I also recommend you use an offering memorandum checklist to confirm you have addressed each section or that an item is not applicable to you. Using the wrong form or missing a required section is the number one reason issuers get in trouble with regulators when using the offering memorandum exemption (excluding those issuers who are involved in blatant fraud). You may also want to consider using a lawyer to prepare your offering memorandum or at a minimum have a lawyer review the documents you have prepared. Alternatively, if you choose to forego getting a lawyer involved, and you are an issuer resident in Saskatchewan or New Brunswick, you should seriously consider a pre-filing review of your offering memorandum with the respective securities commission in those provinces. The Corporate Finance Branch of the Saskatchewan Financial Services Commission’s Securities Division charges $500 for this service. There is no cost to have the New Brunswick Financial and Consumer Services Commission’s Securities Division review your offering memorandum.

This ends our three-part series entitled Anyone With Money is a Friend of Mine: Traps to Avoid When Raising Private Capital.

I hope you found the series useful or at a minimum informative.

Links to the other articles in this series:

** Thank-you to Bill Nickel from McDougall Gauley LLP in Saskatchewan, for sending me a copy of Saskatchewan Financial Service Commission General Order 45-919.

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Disclaimer

The articles on this website are not intended to create, and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.

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