OSC Testlab Creates Capital-Raising Exemptions for Early-Stage Ventures

The Ontario Securities Commission (“OSC”) introduced a set of three interim regulations, known as the Early-Stage Capital Exemptions to support capital raising for emerging businesses in Ontario. These exemptions are time-limited until October 25, 2025.

OSC TestLab and the Evaluation of Early-Stage Capital Exemptions

The Early-Stage Capital Exemptions are implemented under the OSC TestLab, an initiative developed by the OSC’s Innovation Office. This initiative supports FinTech companies experimenting with novel products, services, and business models within a regulated framework. The OSC collects and analyzes data from filings related to these exemptions to assess their effectiveness. Feedback from businesses, investors, and other stakeholders will also be sought to refine and enhance the initiatives. This effort is expected to provide the OSC with critical insights that will inform future policy-making in the FinTech sector. The Early-Stage Capital Exemptions may be extended based on market feedback.

Capital Raising for Early-Stage Businesses in Ontario

Under section 25(1) of the Securities Act (Ontario), early-stage businesses aiming to raise capital can be classified as “in the business of trading,” triggering dealer registration requirements. To alleviate this regulatory challenge, Ontario Instrument 32-509 (“Early-Stage Business Registration Exemption”) allows businesses headquartered and operating in Ontario to raise capital without the need for dealer registration under certain conditions. This exemption permits businesses to conduct marketing activities aimed at raising capital, whether they are working with a registered dealer or using an alternative like a crowdfunding portal or an angel investor group.

The OSC provides two pathways for exemptions based on whether a registered dealer is involved. Businesses working with a registered dealer can raise unlimited funds, offering greater flexibility in their capital-raising efforts. In contrast, businesses operating without a dealer face a fundraising cap of $3,000,000, limiting the amount they can raise under this pathway. The criteria for these exemptions are specific and fact-based, focusing on the entity’s activities rather than a rigid set of rules. This flexibility assists early-stage companies in raising capital more easily, connecting them with potential investors, and growing their businesses at crucial stages.

Eligibility Requirements:

To rely on the Early-Stage Business (“ESB”) Exemption, a company must be an "eligible business" with the following characteristics:

• The business must have its head office and operations located in Ontario.

• It should be in the early or developmental stages, actively seeking capital to start, grow, or scale operations.

• The business should employ fewer than 100 individuals.

• Its primary purpose should exclude activities like real estate, mortgages, or investing in other businesses or assets.

• The company should not be involved in assessing or acquiring businesses for mergers or similar financial activities.

• It should not engage in trading or holding crypto assets or operate within the gaming or betting sectors.

• The business must not be a reporting issuer or a subsidiary of one, whether in Canada or internationally.

• The business should not be registered under any securities legislation, whether in Canada or internationally

• The company is not an investment fund.

Scope of Eligible Securities: Eligible businesses are allowed to issue specific types of securities, which include:

• Common shares, non-convertible preference shares, and securities convertible into these shares.

• Non-convertible debt securities tied to fixed or floating interest rates.

• Units of a limited partnership

• Shares in the capital of a cooperative, or a share in a cooperative incorporated under Ontario’s regulations.

Dealer Registration Requirements: Eligible issuers have the option to distribute securities with or without the involvement of a registered dealer.

• Without a registered dealer, businesses meeting the ESB Exemption criteria can raise up to $3,000,000 by selling "eligible securities" directly. These sales are restricted to Ontario residents who are either accredited investors or self-certified investors. Issuers must provide a right of action for misrepresentations in marketing materials and must avoid compensating any party for investor recruitment.

• With a registered dealer, issuers still need to adhere to the eligibility requirements of being an Ontario-based eligible business, not intending to use funds for mergers or acquisitions. Securities must be distributed through registered dealers or through a person or company exempt from dealer registration, like angel investor groups or crowdfunding portals.

Reporting and Documentation: Issuers distributing securities under this exemption need to file specific documents with the OSC including:

• A completed Form 32-509F2 Alternative Report of Exempt Distribution within 30 days after the end of the reporting period if securities were distributed during that period.

• Copies of any offering memorandums or amendments provided to investors within 30 days of the reporting period's end.

Next Steps:  For companies looking to utilize the Early-Stage Business Registration Exemption, North Star offers a comprehensive set of services, including eligibility assessments, strategy development, and compliance documentation. Our ongoing support ensures your business remains aligned with current regulations. Connect with us at info@northstarcompliance.com today to discover how we can assist you.