Understanding whether your company needs to comply with the Ontario Securities Act (OSA) is not only a legal requirement but also important for maintaining investor confidence and market integrity.
This legislation serves to oversee securities transactions to ensure transparency and, in turn, protect investors.
In this guide, JuriGo explores the nuances of the OSA, demystifying its complexities and explaining how its regulatory framework is essential for all Ontario businesses to be aware of!
What is a security exactly? Definitions to know!
Securities encompass a broad range of financial instruments, from stocks and bonds to more complex investment contracts. The OSA defines a “security” expansively, including not only traditional instruments like bonds, debentures, notes, and shares but also a variety of other documents and agreements.
This definition reflects the diversity of investment methods in the market, which can also include:
Documents and instruments:
This can be any document or instrument commonly known as a security, evidencing title to or interest in the capital, assets, profits, earnings, or royalties of any entity.
Interest in associations, options, and subscriptions:
The Act covers documents evidencing an interest in associations of people who receive a legacy or heirs, options, subscriptions, or other interests in securities.
Agreements and contracts:
This includes agreements under which money is to be repaid or treated as a subscription to shares, stocks, units, or interests at the option of the recipient, further expanding the scope of what is considered a security.
Trust certificates, profit-sharing agreements, and investment contracts:
The inclusion of trust certificates, profit-sharing agreements, and investment contracts underlines the Act’s comprehensively wide range of investment schemes.
Interest in natural resources, annuities, and educational plans:
Securities also encompass interests in natural resources, certain annuity contracts not issued by insurance companies, and interests in scholarship or educational plans.
Commodity futures and options:
The Act extends to commodity futures contracts, such as agricultural product or energy futures, and options not traded on recognized commodity futures exchanges.
| The definition of securities was further expanded in the Pacific Coast Coin Exchange of Canada v. Ontario Securities Commission case, which stated that for a scheme to be considered an investment contract (and thus a security under the Act), it must involve an investment of money in a common enterprise, with the expectation of profits predominantly from the efforts of others. |
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This broad definition and the detailed list provided by the OSA encompass various schemes, ensuring that investment vehicles are regulated for both investor protection and market transparency.
Historical context
Securities as financial instruments have evolved from simple debt instruments to complex derivatives. Historically, securities allowed companies to raise the capital necessary for expansion while offering investors a chance to participate in the financial success of enterprises.
In today’s global economy, securities serve as the backbone of financial markets, facilitating wealth creation, economic growth, and retirement planning. The regulation of these instruments is necessary to prevent abuses, ensure market stability, and protect investors from undue risks.
Regulatory framework
In Ontario, the OSA sets forth the laws governing securities, while National Instruments provide detailed rules and guidelines on various aspects of securities regulation, including:
- Prospectus requirements: These are detailed disclosures about the issuing company, the securities being offered, and the risks involved.
- Market conduct: These are the rules against unfair practices such as insider trading and market manipulation.
- Registration requirements: This includes the criteria and processes for entities involved in trading securities to register with the Ontario Securities Commission (OSC).
These regulations are designed to ensure a fair, transparent, and efficient marketplace, safeguarding the interests of all stakeholders.
Why is it important to regulate securities?
Regulating securities is important to ensure the following:
- Investor protection: By mandating disclosures and regulating market conduct, securities laws protect investors from fraud and misinformation.
- Market integrity: Regulations ensure that markets operate efficiently and transparently, maintaining investor confidence and facilitating capital formation.
- Systemic risk mitigation: Oversight of securities markets helps identify and manage risks that could potentially destabilize the financial system.
What type of companies need to be registered?
The distinction between the Canadian and American markets highlights different regulatory approaches. Since Canada has a significant number of smaller, privately held companies, the regulatory framework is tailored to protect investors while supporting the growth of businesses across all sizes. Companies that might need to register include:
- Start-ups seeking capital
- Growing small and medium enterprises (SMEs)
- Large corporations
Reporting requirements
Reporting requirements under the OSA ensure that companies disclose essential information. These requirements can involve various disclosures, including:
- Annual and quarterly financial statements: These provide a snapshot of the company’s financial health.
- Management’s discussion and analysis (MD&A): This offers insights into the financial statements, discussing the company’s performance, trends, and risks.
- Material change reports: Any changes that could reasonably be expected to affect the market price or value of a security must be disclosed promptly.
The role of prospectuses and misrepresentation
A prospectus is a formal legal document that is required by and filed with a securities regulatory authority, such as the Ontario Securities Commission (OSC) in Ontario. It provides detailed information about an investment offering to the public.
The primary purpose of a prospectus is to disclose essential facts and information about the issuing company and the securities being offered, enabling potential investors to make informed decisions. The contents of a prospectus typically include:
- A detailed description of the issuer’s business, including its operations, history, and objectives.
- Audited financial statements that give potential investors insight into the issuer’s financial health and performance.
- Information about the company’s management team, directors, and governance practices.
- A thorough disclosure of the risks associated with the investment, enabling investors to make informed decisions.
- Details on how the company plans to use the funds raised from the offering, which helps investors understand the company’s growth and expansion plans.
- Information on any legal issues or regulatory compliance matters that could impact the issuer’s operations or financials.
Misrepresentation refers to false or misleading statements or omissions of material facts in a prospectus or other disclosure documents. There are two main types of misrepresentation:
- An untrue statement of material fact, occurring when a prospectus contains statements that are factually incorrect or misleading.
- An omission of a material fact, which involves failing to include important information in a prospectus that is necessary to prevent other statements from misleading investors.
| The consequences of misrepresentation can be severe for both the issuing company and its officers. Investors who purchase securities based on a prospectus containing misrepresentations may have the right to rescind their purchase (i.e., to sell the security back to the issuer at the purchase price) or to seek damages for losses incurred as a result of relying on the inaccurate information. |
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To mitigate the risk of misrepresentation, issuers and their underwriters are required to conduct thorough due diligence to ensure that all material information is accurately presented and that no significant facts are omitted. Legal and financial experts also often review prospectuses to comply with regulatory standards.
Reporting and registration exemptions
The OSA recognizes that not all situations warrant the same level of regulation. Exemptions are provided to facilitate capital raising and trading under certain conditions without the full burden of compliance. Examples include:
Private placements
Private placements refer to the offering of securities to a limited number of investors without a public offering. This exemption is designed for companies seeking to raise capital directly from qualified investors without the extensive disclosures and regulatory requirements of a public offering.
Qualified investors, also referred to as accredited investors under the OSA, include individuals with a net income before taxes exceeding $200,000 (or $300,000 with a spouse) in each of the last two years, individuals with net assets of at least $5 million, or institutions with financial assets exceeding $5 million.
This exemption is based on the assumption that accredited investors have the financial knowledge and resources to deal with the risks of their investments.
Friends, family, and business associates
Companies can issue securities to directors, executives, employees, family members, close friends, or business associates of a director, executive officer, or control person of the issuer.
This exemption recognizes the personal or professional relationship between the issuer and the investor, which presumably provides the investor with access to information about the issuer’s operations and financial condition.
Offering memorandum exemption
This allows issuers to raise capital from the public without a prospectus, provided they supply an offering memorandum that discloses relevant information about the offering and the issuer.
This document must include details about the business, the use of proceeds, and the risks involved. Although less comprehensive than a prospectus, the offering memorandum must still provide sufficient information for investors to make an informed decision.
Minimum amount investment exemption
Transactions involving a minimum investment of $150,000 paid in cash by the investor at the time of the trade are exempt from prospectus requirements.
This exemption is based on the premise that investors making significant investments have the capacity to assess the investment’s risks and conduct their own due diligence.
Crowdfunding exemption
This exemption allows companies to raise small amounts of capital from a large number of investors through online crowdfunding platforms, subject to certain conditions and limits.
It is designed to support start-ups and small businesses in accessing capital while offering protections to investors participating in crowdfunding campaigns.
Navigating reporting requirements and exemptions can be complex!
It’s important for issuers to carefully comply with the conditions and reporting obligations associated with each exemption mentioned above to ensure they remain within the bounds of the law.
Investors, on the other hand, should be aware of the risks involved in participating in exempt market transactions, including the potential for limited liquidity and less comprehensive disclosure compared to public market investments.
Additionally, given the intricacies of securities regulations, the potential for unintentional non-compliance is high, which can lead to severe legal and financial consequences.
Hiring a lawyer for this process is strongly recommended, as experienced securities lawyers possess the expertise to interpret and apply the nuances of the OSA for companies to meet their reporting obligations and correctly use the available exemptions.
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