CSA Proposed Order 45-539 Small Business Financing

May 10, 2021

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CSA Proposed Order 45-539 Small Business Financing

Letter Summary:

The ASC and the FCAA (Sask) propose a new prospectus exemption to assist small businesses in Alberta and Saskatchewan raise up to $5 million from investors in those provinces, based on a simple offering document (the document would be considered an offering memorandum under securities legislation). The choice is given to an creating their own offering document with the specified information, or to use a pre-designed form that has a Q&A format. There are many proposed conditions to the use of the exemption, which vary depending on whether financial statements are provided to an investor. For example, if the statements are not provided, the maximum an issuer group could raise from investors (that would not qualify to invest under other specified prospectus exemptions) over a 12-month period would be $1.5 million, subject to a lifetime limit of $5 million. The maximum an investor could invest would be $2,500 or $10,000 if they qualify as a “minimum income investor” (based on an “AI light” definition). The thresholds are slightly higher if financial statements are provided. The statements would not need to be audited (review engagement only) and could be prepared based on Canadian GAAP applicable to private enterprises (with some modifications). Financial statements would be required to be provided until such time as the proceeds from the offering are expended. The exemption is intended to address financing for small businesses that do not yet attract venture capital investments. Issuers using the exemption could not be a reporting issuer or investment fund. Other conditions to the exemption include receipt of a signed risk acknowledgement, the filing of a report of exempt distribution and the filing of the offering document on SEDAR

Overview of the Council’s Comments:

While we are strongly supportive of the ASC and FCAA’s intent to foster capital formation and, more importantly, help smaller businesses raise capital and thrive, we have a number of specific concerns with respect to the Proposed Order.

More specifically, we would recommend consideration of the following three areas:

  1. There does not appear to be a clearly communicated target issuer or investor base who will benefit from the proposed prospectus exemption;
  2. The economic model upon which the prospectus exemption is based may not be viable; and
  3. There may be unintended consequences of the securities offerings contemplated by the Proposed Order for retail investors.

While we are of the view that innovative prospectus exemptions can provide tangible benefits to issuers through additional avenues for capital raising and to investors through diversification opportunities outside of the traditional stock markets, we have concerns in this case that the potential loss of investor protections may outweigh the benefits of the proposed prospectus exemption, particularly given its lack of differentiation from other existing or already-proposed prospectus exemptions, including NI 45-110.

While we strongly support efforts to ease capital raising for start-up businesses, we are concerned that the Proposed Order would introduce a prospectus exemption that may not be utilized by issuers, is based on an unsustainable economic model and that could result in unintended consequences for retail investors. We recommend that the implementing jurisdictions closely monitor the usage of this exemption via public reporting on issuer usage and investor outcomes.