The Complexities of the Offering Memo Exemption, Ongoing Requirements and Pitfalls

Offering Memorandum Exemption under NI 45‑106 (Ontario)

Eligibility & Purpose

• NI 45‑106 section 2.9 allows non‑reporting issuers to raise capital from the public via an Offering Memorandum (OM) distributed to investors who meet certain eligibility and investment limits; the issuer must file a Report of Exempt Distribution under that exemption. The OM must comply with Form 45-106F2 or F3 for qualifying issuers (OSC).
• The OM must include all required disclosures, incorporate marketing materials, and be certified by the issuer that it contains no misrepresentations (subsection 2.9(8)) (OSC).

Ongoing Disclosure Obligations (Sections 2.9(17.4)–(17.21))

Audited Annual Financial Statements – NI 45‑106(17.5)

• In Ontario (along with NB, QC and SK), the issuer must deliver to the OSC audited annual financial statements and make them reasonably available to each OM purchaser within 120 days of fiscal‑year end § 2.9(17.5) (OSC).
• The financials must include two years’ comparative statements (income, cash flows, changes in equity and balance sheet per IFRS), notes, and (if first IFRS year or policy changes) transition disclosures § 2.9(17.8)–(17.12) (OSC).

Notice of Use of Proceeds – NI 45‑106(17.19)

• Must accompany the financial statements and detail, in reasonable detail, how gross proceeds raised under the OM exemption were used, using Form 45‑106F16. Disclosure must include related‑party uses, commissions, offering costs, closing unused proceeds, etc. § 2.9(17.19) (OSC).

Notice of Specified Key Events – NI 45‑106(17.20)

• In Ontario, issuers must notify holders within 10 days (Form 45‑106F17) of a discontinuation of business, change in industry, or change in control, until the issuer becomes a reporting issuer or ceases operations (subsection 2.9(17.21)) (OSC).

Duration of Obligations

• These obligations apply year after year after the initial offering until the issuer becomes a reporting issuer or ceases carrying on business § 2.9(17.21) (OSC).

Why These Obligations Exist & Consequences of Non‑Compliance

Investor Protection

• Audited financials and use-of-proceeds disclosures provide transparency and accountability, supporting informed investor decisions in a non‑reporting marketplace.

Enforcement & Consequences

• OSC staff consider issuers that miss filing deadlines to be in default, unless they have legitimately ceased business, and may:
  • Apply late filing fees under OSC Rule 13‑502;
  • Publish the issuer’s name on its website as non‑compliant;
  • Prohibit further distributions under the OM exemption until compliance;
  • Refer the matter to the Enforcement Division, possibly resulting in administrative penalties or other sanctions (OSC, BCSC, Financial and Consumer Affairs Authority, ASC, Practical Law).  Enforcement historically includes administrative penalties, cease-trade orders, and restrictions on future distributions.

Required Accounting Standards

Issuers relying on the OM exemption in Ontario must prepare audited financial statements in full compliance with IFRS, including comparative periods, notes and disclosures as required under IFRS and NI 45‑106 § 2.9(17.8)–(17.10) (OSC).

Compliance Actions & Best Practices

Steps for Compliance:

1. Deliver annual audited financial statements in a timely manner to the OSC via SEDAR+, using the “Annual Financial Statements for non‑reporting issuers” subtype.
2. File Form 45‑106F16 for each year disclosing use of proceeds.
3. If business has ceased, changed control or industry, submit Form 45‑106F17 with supporting evidence.
4. Pay any applicable late‑filing fees and request removal from non‑compliance listings once filings are accepted.

Prevent Future Defaults:

• Establish controls and procedures to ensure audited financials and use‑of‑proceeds notices are prepared and delivered within 120 days after fiscal‑year end.
• Maintain investor contact information and ensure “reasonably available” delivery (e.g. mailed or accessible via a secure website).
• Track key events (change in control, industry, cessation) to trigger Form 45‑106F17 filings within 10 days.

Strategic Considerations:

• Consider transitioning to becoming a reporting issuer to benefit from public continuous disclosure and relieve the OM ongoing obligations.
• If OM exemption continues, consider engaging counsel or compliance advisors to review disclosure policies, timeline triggers, and SEDAR+ processes.

Summary of Key Requirements

Why Issuers Must Comply

• Compliance supports investor trust and confidence, reduces reputational and regulatory risks, and maintains access to the OM exemption as a capital-raising route.
• Non‑compliance can lead to distribution suspensions, regulatory scrutiny, financial penalties, and difficulties raising future capital.
• Demonstrating robust internal compliance, timely filings and audit reviews helps mitigate risk and signals governance maturity to stakeholders.

Final Observations

The regulatory framework of NI 45‑106 section 2.9, notably subsections (17.4) through (17.21), clearly sets out the annual compliance roadmap for non‐reporting issuers using the OM route.

Issuers like Mortgage Investment Corporations must act swiftly, engage auditors and legal counsel, ensure SEDAR+ filings, and implement ongoing internal controls to avoid default, enforcement and preserve access to exemption-based capital raising.