The Capital Markets Modernization Taskforce was established in February 2020 and mandated to make recommendations to modernize Ontario’s capital markets regulation. An initial report was published in July 2020 for consultation and received significant feedback. A product of input from over 110 stakeholders, the taskforce released its final report on January 22, 2021.
In Part 2 of this series we outline recommendations aimed at modernizing capital raising requirements. When Ontario’s securities regulatory regime was first put into place, capital raising was typically done by way of a prospectus offering. Since then, alternative financing models have emerged. The taskforce has proposed a number of changes that will expand the options issuers have to raise funds both in public and private markets.
Streamlining prospectus-exempt offerings
The taskforce recognizes that issuers are increasingly relying on prospectus-exempt offerings to raise capital. Some of the restrictions and requirements that apply to such offerings are, in the taskforce’s view, overly restrictive and no longer serve their original purpose. The following recommendations were made to modernize prospectus-exempt offerings:
- Four-month hold period: Securities distributed on a prospectus-exempt basis are often subject to a statutory four-month hold period during which the investor is restricted from trading those securities. The taskforce notes this requirement was originally intended to allow for undisclosed news about an issuer to disseminate through quarterly filings so that an investor could not take advantage of material information. These concerns are not relevant in our digital age, so the taskforce recommends reducing the hold period to 30 days for reporting issuers with a full 12-month disclosure record. The taskforce recommends that the OSC revisit this rule in two years and consider eliminating the hold period.
- Offering memorandum exemptions: The taskforce notes that although the offering memorandum exemption was the second most-used exemption in 2019, only $202 million was raised compared to $83.8 billion raised in reliance on the accredited investor exemption. In Ontario, investors are subject to a $100,000 limit for investments made under the offering memorandum exemption. To increase the usefulness of the exemption, the taskforce recommends that any proceeds from the disposition of such exempt securities are not counted towards an investor’s annual limit, provided that the investor is receiving advice from a registrant.
- Accredited investor categories: The taskforce recommends that additional categories of individuals should be able to qualify as accredited investors if they have passed proficiency requirements, such as the Exempt Market Products Exam, the CFA Charter, or Series 7 and New Entrants Course Exam.
- Finder registration: Issuers frequently use finders, or often informal networks of investors, to raise money in a private placement. The taskforce recommends introducing a new “finder” category of regulatory registration with less onerous obligations than exempt market dealers (EMDs) or investment dealers. The new registration category would permit finders to engage in solicitation and receive transaction-based compensation. Finders would also be required to meet certain proficiency requirements and comply with appropriately constructed conflict of interest disclosure requirements.
- Angel investor groups: The taskforce recommends the OSC adopt a framework that would permit formal angel investment groups of accredited investors to operate. This would enhance access to capital for start-ups and entrepreneurs. Such angel groups would be subject to certain restrictions, including that they be a non-profit organization and not be permitted to hold or have access to investor funds or securities. The proposed framework would also limit fees collected by angel groups and prohibit promotional activities or the provision of any investment advice or suitability analysis.
New public offering methods
Raising capital in the public markets is expensive and time consuming, and may provide information that is duplicative and not of value to investors. The taskforce made the following recommendations to provide issuers with less burdensome access to public markets:
- Alternative short-disclosure offering model: The taskforce recommends creating a new prospectus exemption to allow capital raising up to an annual maximum limit of 10% of an issuer’s market capitalization based on a short disclosure document. This new offering model would be available to reporting issuers that have a 12-month disclosure record without default. Smaller reporting issuers (market cap of less than $50 million) could be subject to alternative annual limits on funds raised using this method, for example, the lesser of $5 million and 100% of the issuer’s market capitalization.
- Well-known seasoned issuer (WKSI): In the U.S. certain large issuers are subject to a less burdensome shelf registration process for routine raising of capital. The taskforce recommends that Ontario adopt WKSI, which would be available to issuers with a minimum of $500 million in public float and an appropriately developed disclosure record.
- Expanded pre-marketing: Under current rules, issuers are restricted from approaching prospective investors to gauge interest in a potential prospectus offering other than an IPO. The taskforce heard feedback that this restriction is driving issuers away from public offerings and into private placements. Further, such “testing the waters” is permitted in the U.S. to certain institutional investors, putting Canadian issuers at a disadvantage. The taskforce recommends allowing issuers to pre-market prospectus offerings on a similar basis as is allowed in the U.S. The taskforce recommends that regulators enhance monitoring and compliance requirements to reduce the risk of insider trading and tipping, including, for example, requiring dealers to keep and file a list of contacted investors.
In Part 3 of this series we will discuss the taskforce’s recommendations for changes to ESG, diversity and other governance requirements for public issuers.
The taskforce’s final report can be accessed here: https://www.ontario.ca/document/capital-markets-modernization-taskforce-final-report-january-2021