Capital raising in Canada is receiving intense scrutiny from market participants and regulators, as small-to-midsize enterprises seek to expand their access to capital through crowdfunding and the Offering Memorandum (OM) exemption.

The OM exemption is available in Canadian jurisdictions other than Ontario.

There are two primary models of the OM exemption: In the British Columbia model, there is no restriction on the identity of the purchaser nor on the investment size.

In the Alberta model, a purchaser may not invest more than $10,000 unless the purchaser is an “eligible investor.” The Alberta model also limits use of the exemption by investment funds. Only mutual funds that are reporting issuers and non‐redeemable investment funds may rely on this exemption.

Most market participants support harmonization of the prospectus exemptions across the country, noting that there are no negative issues that have arisen in jurisdictions that have the OM exemption available, and therefore believe any reservations Ontario had regarding this exemption have been alleviated.

Regulators are being asked to consider harmonizing the BC and Alberta OM exemption models, and take into account investor protection features and limits being proposed under the crowdfunding exemption.

“As an operator of multiple exchanges, we try to figure out the right balance between ease of access to capital and long-term sustainable market integrity,” said Kevan Cowan, president of TSX Market, at a recent roundtable held by the Ontario Securities Commission. “One of the most interesting things in that area is what effect competition will have on that regulatory balance. Will there be a race to the top or a race to the bottom? We have seen some companies delist from TSX because they wanted to undertake a transaction that would have required shareholder approval on TSX.”

The OSC has said that it intends to develop a proposal for an OM exemption in Ontario securities law that is substantially harmonized with the existing Alberta model. In developing an OM exemption, the OSC will consider whether there is a need for additional measures that would facilitate capital raising by issuers while protecting the interests of investors.

The OSC is also working to develop a crowdfunding regulatory framework. “We recognize that for crowdfunding to be a viable method of raising capital, the regulatory framework must provide investors with adequate protections without imposing excessive regulatory costs on issuers and funding portals,” the OSC said in an August 2013 progress report on its review of prospectus exemptions to facilitate capital raising.

A typical source of business financing in Canada is venture capital. The total amount of venture capital investment in Canada has remained relatively constant over the last five years at approximately $2 billion per year.

Venture capital firms have become more conservative, concentrating a larger proportion of investment dollars in later-stage deals which attracted approximately 73% of all venture capital investment dollars in 2012, as opposed to seed or early-stage deals.

“One of the key issues that we face today are is a lack of capital in early stages,” said Jos Schmitt, CEO of Aequitas Innovations. “We need to give issuers access to more investors at earlier stages in their lifecycle.”

To facilitate access to capital, Aequitas will introduce a centralized marketplace for exempt securities [ESM], focused on early and mid-stage companies. The ESM will allow these companies to raise capital from accredited investors and other participants, as well as allow them to benefit from secondary trading to provide investors with liquidity.

The ESM will also represent a new business opportunity for the dealer community in the Canadian market, as access will take place through registered dealers.