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Securities Law

NIN 99/18 - Revamping the Exempt Market - Proposals of Staff of the Ontario Securities Commission [NIN - Rescinded]

Published Date: 1999-06-04
Effective Date: 1999-06-02
The Commission is seeking comment on a staff proposal of the Ontario Securities Commission ("OSC") entitled "Revamping the Regulation of the Exempt Market" (the "OSC Staff Proposal"). The OSC released the OSC Staff Proposal for comment on May 4, 1999. The Commission is publishing a summary of the OSC Staff Proposal. The full text of the OSC Staff Proposal can be found at the OSC Website at

The Commission has no current intention to propose similar changes to British Columbia’s system of exemptions. However, given that a number of exemptions in B.C. parallel those in Ontario and that larger private placements are often made in more than one jurisdiction in Canada, the OSC staff proposal could, if adopted, affect transactions involving issuers, investors and intermediaries in British Columbia. In addition, given the general effort towards harmonization of Canadian securities legislation, the Commission anticipates that publication of the OSC Staff Proposal may lead some market participants to question whether it should become a uniform standard for all Canadian jurisdictions.

The Commission has concerns about whether the OSC Staff Proposal would accomplish one of the objectives, which is to enhance small business financing, and whether it would be appropriate for B.C.’s market. The Commission is very interested in the views of those who participate in the small business or exempt market concerning the impact these proposals would have on financing.


In June 1994, the OSC established a Task Force on Small Business Financing (the "Task Force"). The mandate of the Task Force was to review, and make recommendations with respect to, the Ontario regulatory framework governing the raising of equity capital by small and medium-sized business enterprises. In June 1995, the Task Force issued a proposal for comment.

The Commission had significant concerns with certain aspects of the Task Force’s proposals. In September 1995, the Commission published its response to the proposals under NIN#95/34. While most of the Commission’s concerns were focused on the Task Force’s proposals dealing with public financing by small businesses, the Commission did have some concerns about the Task Force’s proposals dealing with the exempt market.

In October 1996, the Task Force presented its final report to the OSC. Since the release of the Task Force report, staff of the OSC has been working on proposals to simplify exempt market financing.

The OSC Staff Proposal

The OSC Staff Proposal recommends replacing four existing exemptions in Ontario (the private company, $150,000, seed capital and government incentive security exemptions) with two new exemptions. The first new exemption would be for closely held issuers, and is primarily intended to replace the private company exemption. The second exemption, for sales to "accredited investors", would replace the $150,000 exemption and create some new classes of sophisticated investors.

Legislation in British Columbia contains equivalent exemptions to the private company and $150,000 exemption, namely the private issuer exemption in section 46(j) of the Act and the $97,000 exemption in section 74(2)(4) of the Act. However, in 1988, B.C. replaced the seed capital and government incentive security exemptions with the "50 purchaser" exemption (now in section 128(a) of the Securities Rules) and "$25,000" exemptions (now found in sections 128(b) and (c) of the Rules). These exemptions were tightened in the 1995 amendments, which imposed net worth or income tests for "sophisticated purchasers", as defined in section 1 of the Rules.

The net worth and income thresholds for "accredited investors" under the OSC Staff Proposals are significantly higher than the thresholds under the B.C. exemptions that require the purchaser to be a "sophisticated purchaser". In addition, there is no exemption in Ontario equivalent to the exemption in section 128(c) of the Rules, which permits sales by a registrant to clients who are not "sophisticated purchasers", but for whom the registrant has determined that the investment is suitable. However, the B.C. exemptions mandate disclosure to investors in the prescribed form of offering memorandum. Investors must also sign an acknowledgement of sophistication (Form 20A). The following table provides a comparison of the individuals who are defined as "sophisticated purchaser" in British Columbia and "accredited investor" under the OSC proposal.

British Columbia individual
"sophisticated purchaser"
Ontario individual
"accredited investor"
individual who has a net worth, or net worth jointly with the individual’s spouse, at the date of the agreement of purchase and sale of the security, of not less than $400,000, individual who, together with such individual’s spouse, has a net worth (excluding one-half of the net equity of such individual’s personal residence(s)) exceeding $2.5 million
individual who has had in each of the 2 most recent calendar years, and reasonably expects to have in the current calendar year,

(a) annual net income before tax of not less than $75,000, or

(b) annual net income before tax, jointly with the individual's spouse, of not less than $125,000;
individual whose income is in excess of $200,000 in each of the two most recent years or whose joint income with that person’s spouse is in excess of $300,000 in each of those years and who, in either case, has a reasonable expectation of reaching the same income level in the current year

Specific Request for Comment

The Commission encourages market participants to provide comments both to the OSC and to the Commission on any aspect of the OSC Staff Proposal. In addition, the Commission seeks responses to the following specific questions:

1. Should the OSC Staff Proposal be adopted in British Columbia in place of or in addition to existing exemptions?

Questions relating to Closely Held Issuer Exemption 
2.  Are 35 purchasers and $3 million appropriate thresholds for the closely held issuer exemption?

3. Is the proposed first trade relief in connection with the "closely held exemption" appropriate if it results in the total amount of money at risk exceeding $3 million?

4. Should there be a requirement for the 35 purchasers to have some relationship to the issuer or its principals?

5. Should employees be included or excluded from the group of 35 purchasers (they are included in the OSC proposal for a closely held issuer but excluded from the number of shareholders counted for the purpose of the "private issuer" definition)?

Questions relating to Accredited Investor Exemption
6. Should there be a requirement for financial, business or investment experience (as there is in the B.C. definition of "sophisticated purchaser") in addition to net worth, net income or other tests?

7. Are the net worth and income levels set at the right level?

8. If the net worth and net income levels should be lower, is disclosure to investors (i.e. an offering memorandum as required under the 50 purchaser and $25,000 exemptions in B.C.) important (at some levels or at all levels)?

9. Should the test for accredited investors be based on a specified amount of assets in the investor’s portfolio rather than the investor’s net worth or net income?

Request for Comment

The OSC is seeking comment on the OSC Staff Proposal until August 6, 1999. The Commission is seeking comment on the impact the proposal would have on small businesses, first if adopted only by the OSC and second if adopted also in British Columbia. The Commission would encourage interested persons to direct written comments to:

The Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8

Copies of any submissions made to the Ontario Securities Commission should also be addressed to the Commission as follows:

Brenda J. Benham
Policy and Legislation
British Columbia Securities Commission
200 - 865 Hornby Street
Vancouver, British Columbia V6Z 2H4

Commenters should note that since the Ontario Securities Act requires that a summary of written comments received during the comment period be published, confidentiality of submissions cannot be maintained.

A limited number of copies of the full text of the OSC Staff Proposal Report is available for pick-up from the Commission, upon request. Requests should be directed to:

Shandie Hertslet
Information Officer
British Columbia Securities Commission
200 - 865 Hornby Street
Vancouver, British Columbia V6Z 2H4
Tel: (604) 899-6670
Fax: (604) 899-6665
Toll Free: 1-800-373-6393

DATED at Vancouver, British Columbia, on June 2, 1999.

Douglas M. Hyndman

REF: OSC Staff Proposal dated May 4, 1999


Staff’s proposal contemplates replacing four of the current exemptions (the private company exemption, the $150,000 exemption, the seed capital exemption and the government incentive security exemption) with two new exemptions:

(1)The Closely-Held Issuer Exemption - This exemption would permit issuers to raise a total of $3 million, through any number of financings, from up to 35 investors without concern for the “qualifications” of the investors.

(2) The Accredited Investor Exemption - This exemption would permit issuers to raise any amount at any time from any person or company that meets specified qualification criteria.

The closely-held issuer prospectus exemption would replace the current private company exemption and permit issuers to raise a limited amount of money from a small number of persons without regard for the sophistication or other qualifications of those persons. No prospectus or other disclosure document would be mandated and issuers relying upon this exemption would be subject to very few securities regulatory requirements. For example, there would be no civil liability under the Securities Act (Ontario) (the “Act”) associated with any documents provided to such investors.

The accredited investor prospectus exemption would provide an exemption for certain classes of investors (including prescribed institutions, persons and corporations with a certain net worth and the issuer’s management) on the basis that these qualified persons and entities should be considered sophisticated and able to withstand financial loss. No offering memorandum or other disclosure document would be mandated, although it is contemplated that civil liability of a lesser standard than that imposed on prospectus offerings would apply to selling documents voluntarily delivered to accredited investors.

The proposal also includes a recommendation that only the issuer and its directors and officers be permitted to trade in securities of a closely-held issuer (i.e., dealers would not be permitted to trade). Furthermore, Staff recommends that the limited market dealer registration category be abolished, leaving dealers subject to proficiency and capital adequacy requirements as the only market intermediaries able to trade in securities issued under the accredited investor exemption.

Various provisions in the Act, the regulation made under the Act (the “Regulation”) and the reformulated rules create classes of accredited investors. Since Staff believes that a definition of accredited investor should be as complete as possible, it is proposed that a number of these accredited investor classes currently in the Act, the Regulation and the rules would be incorporated into the new regime.