The Ontario Securities Commission (OSC) has enacted several new measures aimed at increasing access to capital for the province’s early-stage businesses.
The new initiatives include an extension of the self-certified investor prospectus exemption to October 2025, as well as new, temporary dealer registration exemptions for early-stage businesses and not-for-profit angel investor groups, which are also effective until October 2025.
The initiatives are being introduced as part of the OSC’s TestLab, which is the regulator’s testing environment for new solutions and approaches to regulation. The OSC said it will use data collected from these initiatives to inform future policymaking.
“This should really enhance the ability for angels to help more entrepreneurs.”
Mark Lawrence, Angel Investors Ontario
According to interim class orders issued today by the OSC, if a business in Ontario wants to raise capital from investors, it may be required to be registered as a dealer. Similarly, not-for-profit angel investor groups engaging in trading or advising might also be subject to registration requirements.
The OSC’s new dealer registration for early-stage businesses allows them to raise up to $3 million in capital without necessarily registering as a dealer.
The first exemption allows businesses to market their securities with the help of a registered dealer or an intermediary that does not need to register as a dealer, like a crowdfunding portal or an angel investor group. The second exemption applies when a business raises funds without those intermediaries.
Businesses must meet several criteria to be eligible for these exemptions. They must be considered early-stage, have fewer than 100 employees, have a head office and business operations in Ontario, and their business purpose should not be primarily based on investing in real estate, mortgages, or other businesses and assets. The exemptions are also not applicable to companies that hold, invest in, or trade crypto assets, nor those that operate a gaming or betting business.
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The OSC also announced a similar dealer registration exemption for not-for-profit angel groups. The exemption is also temporary, and would allow eligible angel groups to trade securities in Ontario early-stage businesses without having to register as a dealer.
Like the exemptions for early-stage businesses, this exemption for angel groups comes with a few caveats. Among them, the angel investor group must operate for non-profit purposes, must operate in Ontario, and must have all of its members be an accredited investor or eligible to be a self-certified investor.
The OSC said its decision to enact these temporary exemptions followed a period of research in 2023 through which the regulator aimed to gain a deeper understanding of how small and medium-sized businesses in Ontario’s private markets access capital.
Mark Lawrence, executive chair of Angel Investors Ontario, told BetaKit he’s pleased the OSC is working to improve angel investors’ ability to conduct business in the province, and hopes the test period will result in a more permanent structure for these exemptions.
“I think this will be viewed very positively by the angel investment community,” Lawrence said, adding that a major issue in the angel investment community has been concerns over whether the activities of some angel groups might be approaching regulatory lines regarding whether or not they are registered.
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“We’ve been trying as the community to make sure that we don’t cross the line ever,” he added. “This should really enhance the ability for angels to help more entrepreneurs.”
In addition to enacting these new exemptions, the OSC is also extending the timeline of its self-certified investor prospectus exemption. The exemption was launched in 2022 and expands the definition of “accredited investor” to include new criteria that make it easier for investors to put capital into emerging businesses. The availability of this exemption was slated to end April 25, 2024, but with the extension, it will continue to be available until October 25, 2025.
“The self-certified investor prospectus exemption will allow a broader range of informed investors to continue supporting the growth of their local economies,” Claudio Rojas, CEO of the National Angel Capital Organization, told BetaKit. “Building companies is hard. We welcome regulatory changes that better enable and empower entrepreneurs with the capital they need to grow and scale their companies.”
Raising capital has become a key challenge in the last year for early-stage companies in Canada, largely due to macroeconomic uncertainties and tighter financial conditions that have led investors to become more cautious. For tech startups, overall investment in Canada has declined each year since 2021.
“Expanding the pool of capital and risk-takers has never been more important for Canada,” Kate Tomen, vice-president of business development and operations at Angel Investors Ontario, wrote in a LinkedIn post. “It is wonderful to see the OSC’s commitment to fostering the conditions for growth and innovation in Ontario’s capital markets without compromising investor protection.”
Feature image courtesy of Unsplash. Photo by Chris Robert.