1.2 OSC mandate and guiding principles
This policy review must
take into account the OSC’s dual mandate of:
·
providing
protection to investors from unfair, improper or fraudulent practices, and
·
fostering
fair and efficient capital markets and confidence in capital markets.
The
objectives of this policy review are to consider how to best regulate the
exempt market in a manner that:
·
enhances its role in
raising capital for businesses, particularly SMEs,
·
provides retail investors
with greater access to investment opportunities without compromising investor
protection, and
·
better aligns the interests
of issuers and investors.
We are also guided by the statutory principle that business and
regulatory costs and other restrictions on the business and investment
activities of market participants should be proportionate to the significance
of the regulatory objectives sought to be realized.
In carrying out this policy
review, it is important that we consider the exempt market as a whole and the
range of prospectus exemptions available in that market. In that respect, we
must consider the current policy reviews of the minimum amount and accredited
investor exemptions as well as the proposed approach to securitized products
distributed under the short term debt exemption. While there are currently
multiple policy initiatives looking at different prospectus exemptions, we must
consider in this policy review the full range of prospectus exemptions available
in the exempt market, the rationale for those exemptions and the interplay of
those exemptions with our concept ideas.
2. BACKGROUND ON EXEMPT MARKET
2.1 Prospectus and registration requirements
Prospectus
requirement
One of the key principles of
Ontario securities law is that securities may not be distributed unless a
prospectus is filed with and receipted by the OSC.
A prospectus is a
comprehensive disclosure document that sets out detailed information about the
issuer and describes the securities being issued and the risks associated with
purchasing those securities. However, a prospectus is not simply a disclosure
document, but also gives rise to key purchaser rights. The Securities Act (Ontario) (the Securities Act) provides specific
remedies to purchasers of securities under a prospectus including the right to
sue for damages in the event of a misrepresentation in the prospectus. The
persons that are required to sign the prospectus assume liability for the
disclosure included in the prospectus.
In limited circumstances,
securities may be distributed without a prospectus. This is typically referred
to as an “exempt distribution” that occurs in the “exempt market”. As long as
the terms of an available exemption are met, no disclosure is mandated to be
provided to purchasers. As a result, the key statutory protections associated
with a prospectus, such as the right to sue for damages in the event of a
misrepresentation, do not apply. Private placements may, however, be made on
the basis of some form of offering document which will attract liability under
section 130.1 of the Securities Act in the event of a misrepresentation.
Exemptions
from the prospectus requirement are primarily set out in NI 45-106. Generally
speaking, each exemption is premised on a specific policy rationale that
supports not requiring a prospectus in the circumstances. For example, an
exemption may be premised on the nature of the security being offered, the
characteristics of the purchaser or the fact that alternative disclosure is
being provided (such as an information circular under a statutory procedure).
If a security is issued
under a prospectus exemption, then in many cases that security can only be
resold if certain conditions are met. These resale conditions are designed to
ensure that there is sufficient disclosure available in the marketplace to
allow a subsequent purchaser to make an informed investment decision.
An exempt distribution
avoids the costs associated with a prospectus offering and may be a more
effective means for a smaller issuer to raise capital.
Registration
requirement
Registration requirements
are imposed on persons and companies in the business of trading in securities
or advising others in connection with securities. Although there is no
requirement for issuers to distribute securities through a registrant, in many
cases, as a practical matter, this will be necessary to sell the offering. The
registration requirements are intended to ensure the suitability of individuals
or firms for registration. The cornerstones of these registration requirements
are:
·
proficiency
(only qualified persons can deal in securities, advise or manage investment
funds),
·
integrity (registrants are
subject to business conduct rules and are held accountable for their securities
related activities), and
·
solvency (registered firms
must be financially viable).
Registration requirements also require
registrants to disclose conflicts of interest and to comply with
Know-Your-Client (KYC), Know-Your-Product (KYP) and suitability obligations. In
many cases, registrants base their KYP and
suitability determinations on prospectus or other disclosure
provided by issuers. Accordingly, disclosure requirements that are imposed on
issuers help support and inform registrants' compliance with their KYP and
suitability requirements and these requirements may be viewed as complementary
to the distribution process.
Registrants may, however, not be prepared to
participate in smaller offerings or offerings by smaller issuers. We note that
an issuer is not required to be registered where it is not carrying on the
business of trading in securities.
