The Private Placement Exemptions Offering Memorandum (and problems with it)

Spread the love

You can grab notes on other topic from here.

  1. The Private Placement Exemptions

4 Groups of exemptions: 1) exemptions based on wealth/ sophistication of purchaser (accredited investor, min amount); 2) Limited offering exemptions (govt incentive sec, founder/control person/ family); 3) trades in sec of private companies; 4) Isolated trades (isolated distrib by issuer).

• *also random: discretionary ruling under 74(1) of OSA – never going to happen!

  1. Exemptions based on wealth/sophistication of purchaser
  • POLICY: sophisticated investors can take care of themselves, don’t need protection of securities act
  • Includes:

o A) Accredited investor exemption (s.2.3 of NI 45-106)

  • Can use it as many times as you want, to as many purchasers, as long as you’re selling to Accreditor Investors ^ no disclosure required
  • s 1.1 of Definitions: banks, pension funds, insurance companies, someone recognized as OSC as AI, and rich people (see definition on p. 1476)
  • Rich people: Those individually or with a spouse own financial assets of aggregate realizable value before taxes of $1m, or those whose net income reaches $200,000, or combined w/ spouse exceeded $300,000, reasonable expectation of exceeding that in current year, or those who individually or spouse have net assets of at least $5m
  • *Note problem with offering memorandum (don’t have to, but if you do…): What you have delivered is then deemed to be an offering memorandum and if so, it will have a contractual right of action if there is a misstatement / omission.

o B) Minimum Amount Exemption (Section 2.10 of NI 45-106):

  • (1) You can sell securities without a prospectus, as long as a (a) purchaser purchases as principal, (b) has an aggregate acquisition cost of not less than $150,000 paid in cash at the time of the trade, and (c) it’s from only one issuer (at $150,000 – incentive to be careful)
  • Note: (2): corporation could buy like this, but NOT if you only set it up just to use the exemption, (NSGs)
  • They want to know that you have enough $ that you’ll protect yourself (if you could drop this much money at one time, then will take precautions themselves)
  • *SAME ISSUE WITH OFFERING MEMORANDUM and practical reality that no one will invest $150,000 a pop with you without getting information, then must have contractual right of action

o If you got 30 people to raise the $150,000 (even if you created a corp to do so)- would NOT allow- no wise guys! This circumvents the rationale that you have the money and will protect yourself

o If another (legitimate) corp bought $150K of securities, that’s ok. B/C it was created for a legitimate purpose and not to circumvent the spirit of the legislation

• NOTE: securities is an area of law that doesn’t allow for certainty, only trying to promote right vs wrong

  1. Limited Offering Exemption

• (A) Government-incentive security exemption (s.2.1 of OSC Rule 45-501, p. 1561):

o Policy behind the exemption is different: government has said that they want to promote activity in the oil/gas industry, gold business w/e, in order to create activity that’s good for the country, going to make it easier for companies to sell securities by designating them as government incentive securities so they can sell them easier (has to do with nature of company/business the govnt is trying to promote) o Unlike other exemptions_where regulators feel good b/c nature of investor made investor protection more likely/unnecessary, here, dealing with naked purchaser (not differentiating purchasers, differentiating activity) ^ Therefore are more severe on the preconditions to use b/c have to protect purchase


  • First, need to have government-incentive security (designated by regulators as being 1, from time to time)
  • Preconditions to use:
  • (a) Can only solicit 75 people, can only sell to 50, each of whom must purchase as principal

o Have to be smart, can’t solicit more than 75, so be careful who you solicit (# OMs from 1-75) must be careful b/c if you get caught soliciting 76, it’s over, you can’t fix that.

  • (b) Must give an offering memorandum with certain info (see p. 1561), but things like officers/directors, identifying promoters, giving particulars of qualifications, etc.
  • (c) Before you can enter into agreement with someone, must provide them with substantially same information that a prospectus would provide

o They’re “scared,” need to “dress the naked purchaser” and do that by wrapping them in something that sounds/looks/feels like a prospectus (although doesn’t have to be reviewed by the regulator it is very similar) o AND (ii) Purchaser has to be executive officer or director, spouse or child of those, or (i) person by virtue of net worth/investment experience is able to properly evaluate investment. These are the only people you can solicit/send info to. o Have to Put rep in document: you are a person who by virtue of net worth/investment experience is able to properly evaluate the investment (might not be enough)

o Losing sight of policy for exemptions, moving more toward investor protection: Need to raise $ for businesses, if you make them prep document like a prospectus, then it’ s basically the same

  • (d) Cannot advertise in connection with this exemption

o if you did, you would be soliciting to more than 75 people o Regulators freaked out by advertising ^ if you do that, no one will read prospectus/OM, whatever, should show low lights if highlights, etc.

  • (e) Cannot use this exemption more than once in any calendar year!

o NOTE: *There is nothing wrong with combining exemptions ^i.e. raising some money with $150k exemption and $500k with govt incentive-exemption. Need to be smart about this though- first ask ppl if they are an accredited investor before govt-exemption (b/c govt exemption one is ltd to 75 ppl and once per yr while other is unltd)

• (B) Founder, Control Person and Family Exception

o Prospectus requirement doesn’t apply if you Purchase as principal and you are:

  • a founder of company (who alone or with others, started business)
  • an affiliate of the founder of the issuer
  • a spouse, parent, brother, sister, grandparent, grandchild or child of an executive officer, director or founder of the issuer, or
  • a person that is a control person of the issuer
  1. Trades in Securities of Private Companies (s.2.4 of NI45-106)

To help companies in their early stages, it’s how they get going

Have to satisfy two things to rely on exemption:

  1. Private Company
  • Look at articles of incorp to see if there are these 3 things:

o (i) Restriction on transfer of shares: no one can buy/sell shares of company unless they get authorization from board transferring shares from A-B; o (ii) Number of shareholders in company (exclusive of employees/former employees) cannot exceed 50

o (iii) Restriction has to say that only a certain IDENTITY of person can buy your shares (can’t distribute shares to public)

  1. Specific identity as a purchaser
  • In third part of the articles.
  • Who you can sell to: (see p. 1482 – s.2.4(2))

o (a) a director, officer, employee, founder or control person of the issuer o (b) a director, officer or employee of an affiliate of the issuer

o (c) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer, founder or control person of the issuer

o (e) a close personal friend of the director, exec officer, founder or CP (knows someone well enough that they trust them; must be direct)

o (f) a close business associate of director, exec officer, founder or CP (ind who has had suff prior bus dealings; direct)

o (g) a spouse.. ..etc.. ..of selling security holder or selling security holder’s spouse o (h) securityholder of the issuer o (i) an accredited investor […] o (L) *A person who is not the public

  • Policy: Stupid for good intentions- worried about protecting purchaser. Want efficient capital market to allow private companies to raise money from people that aren’t members of public, but you don’t know members of public are

o These categories are very diff to qualify/ define ^ if it is found that you are not one of the permitted purchasers, it has a large econ impact (can’t be used again)

WHO IS THE PUBLIC? A Question of Fact – Case Law

Two Tests: 1) common bonds AND 2) “need to know”

R v. Pipegrass (AB CA) – Common Bonds Test

COMMON BONDS TEST: If persons are not in any sense friends or associates of the accused, or persons having common bonds of interest or associations, they are considered to be the public, if they have common bonds, then not the public

IS A FINDING OF FACT ^ the court must see if the sale transcended sales beyond private concern

Facts: Promoter sought 50k by soliciting farmers with whom there was a previous business dealing.

Issue: Were these 5 people “the public”? – YES.

Decision: Constitutes a distrib to the public Reasons:

  • Private corp can’t seek to sell securities – it is clear that it is impose to define what is meant by the term, “offer for sale to the public”; differs in each instance.

SEC v. Ralston Purina – “Need to know ” test

Need to know test (Test of whether you’re selling to “the public” -in which case, can’t use private issuer exemption). TEST: Persons b/c of their sophistication or relationship with company who don’t need protection ofprospectus are not members of the public. Focus of inquiry is NEED of offerees for protection afforded by the act.

Facts: Company did NOT SOLICIT ANYONE, but offered shares to employees. Among those who bought were several production employees, a clerk, bakeshop foreman, electrician, secretary. Etc.

US Ct Decision: common bonds test is dumb, it’s “need to know” test. Employees aren’t necessarily going to qualify as not being the public and therefore being able to sell to them under the exemption. Some will (e.g. exec officers), and some will not. Employees here did not have access to the info that a prospectus would provide.


  • The exemption is for those for whom there is no practical need for application of the prospectus. So should turn on whether the class of persons affected needs protection of the act. Those who are able to fend for themselves = not a public offering.
  • **BOTTOM LINE: Not sure which test applies, but it’s like what a security is ^ if they think that the act ought to apply, it will. If the court or regulators think that they need the protection, or they don’t, they’ll act accordingly.
  1. Isolated Trades (s.2.30 of NI45-106)

Distribution must be an isolated one that is not made (a) in the course of continued and successive transactions of a like nature or (b) by a person whose usual business is trading in securities.

  • Very rarely used (prob not on exam)
  1. Discretionary Ruling (74(1)) – not going to happen

Exemption order (1) Upon the application of an interested person or company, the Commission may make the following rulings if the Commission is satisfied that to do so would not be prejudicial to the public interest: 1. A ruling that any person or company is not subject to section 25; 2. A ruling that any trade, intended trade, security, person or company is not subject to section 53. (2) can impose conditions

  1. Offering Memorandum (and problems with it)

Some and at least one of the exemptions gives legal obligation on company to deliver document that meets definition of offering memorandum (looks/acts like a prospectus)

  1. What is an offering memorandum?

Rule 14-501 Definitions (s.1.1(2)) & OSA (s. 1(1); same as s.1.1(2)) (also see 5.6(2) of CP 45501 for what isn’t one)

Offering memorandum: a document prepared by a seller of securities which describes the business and affairs of the company in order to provide the prospective purchasers (investors) with sufficient information as to whether they want to make an investment

Not sure what it is, and no statutory authority to clarify, just know you need truth and no omissions, sounds like full, true and plain disclosure ^ Thus offering memo is no less complicated than a prospectus

  • All the guidance we have:

o (a) as long and short as necessary, o (b) can’t be ambiguous, o (c) needs statutory right of action

  • Not every doc is an offering memorandum: per s.5.6(2) of CP 45-501 ^ if you provide a term sheet JUST setting out the deal, that’s not an OM

o Again, practical import of that is zero ^ no one lets you sell securities just by laying out deal

  1. Must Contain Statutory Right of Action (if you deliver one) (Rule 45-501 s.5.3) & Deliver (s.5.4) for rescission

OSC RULE 45-501, s.5.3: you don’t have to deliver any document to AIs in connection with the securities, but if you CHOOSE to issue them an offering memorandum, must contain a contractual right of action saying

you can sue us if there’s a misrepresentation (not only misstatement of material fact, but also omission of MF)

  • Exemptions Should technically be fast, but problem: (Inv prot v. eff cap mark):
  • If you give an OM, have an obligation to be accurate and include everything
  • Tension and Critique: if you give NO information, that’s cool, but if you do, we’ll call it an OM and it has to give all info you need to know

OSC RULE 45-501, s.5.4: Delivery of OM^If you do deliver it have to send copy of doc to securities commission w/In 10 days of date of trade

o Problem in Practice: Try to make it easy, but now we’ve made it very difficult. Not likely anyone will give you $ without information, so you end up being in prospectus territory (“looks/costs like one”)

o Actually a huge burden: have to (a) tell the truth and (b) not omit anything (which forces you to think about what you don’t know)

  1. Liability under Offering Memorandum (s.130.1 of OSA)

s.130.1 (1) Liability for misrepresentation in offering memorandum where a misrep, the purchaser has the following rights: 1) right of actions for damages against issuer and selling securityholder; 2) right of rescission against person/ company; (2) Defence: not liable if purchaser knew of misrep

  • (1) Where an offering memorandum contains a misrepresentation, a purchaser who purchases a security offered by the offering memorandum during the period of distribution has, without regard to whether the purchaser relied on the misrepresentation, the following rights:

o 1. The purchaser has a right of action for damages against the issuer and a selling security holder on whose behalf the distribution is made.

o 2. If the purchaser purchased the security from a person or company referred to in paragraph 1, the purchaser may elect to exercise a right of rescission against the person or company. If the purchaser exercises this right, the purchaser ceases to have a right of action for damages against the person or company.

  • (2) Defence: No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation.
  • (3) Limitation in action for damages: In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of the damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.

*if including a forecast, must still comply with NI 51-102, or else takes you out of the exemption

You can grab notes on other topic from here.

Spread the love

Leave a Reply

Your email address will not be published. Required fields are marked *