The Art of Drafting the OM
By: Darren Smits
All too often in our office we see Offering Memorandums (“OMs” or an “OM”) that have either been drafted by lawyers who specialize in legal areas unrelated to securities (such as real estate or corporate-commercial, for example). Even worse, it is not uncommon that we see OMs that have been drafted by the principal(s) of Issuers in an effort to save costs. When we review these OMs, it’s evident to us that the author of the OM had little, or no, expertise with drafting these important disclosure documents.
After the introduction of National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”) in the fall of 2005, it was not uncommon practice for Issuers or inexperienced counsel to draft OMs based solely upon the requirements set out in the Regulations. However, much has changed since the early introduction of NI 45-106. The requirements of the OM have become more and more complex as securities regulators have significantly increased their expectations of what should and should not be included in OMs. In addition, the implementation of National Instrument 31-103 Registration Requirements and Exemptions (“NI 31-103”) on September 28, 2009 has added yet another layer of complexity to drafting and using OMs to raise funds.
Due to the complex nature of the applicable regulations, as well as the need for specificity in the document, it is strongly recommended that Issuers retain legal counsel that is not only familiar with the exempt securities regulations laid out in NI 45-106, but who is also well versed in any other securities regulations that will have an impact on drafting OMs and has experience with dealing with various Securities Commissions. Unlike a Prospectus, an OM is not reviewed by Securities Regulators. However, Securities Regulators will review an OM as a result of their planned compliance-monitoring programs, certain market activity that they observe, or if they receive specific complaints or referrals. Over the last few years we have seen a significant increase in Securities Regulators reviewing OMs and, as a result, they have found considerable issues with many of the OMs that have been filed. In fact, the Securities Regulators found so many common problems with the OMs that the Canadian Securities Administrators published CSA Staff Notice 45-309, on April 26, 2012, which set out many of the common problems that they kept finding and how to reconcile these issues. While this CSA Staff Notice has been very useful for the industry, it should be noted that this Notice only deals with the most common problems encountered and does not address all of the other problems or concerns that the Securities Regulators have encountered with the thousands of OMs they have reviewed. That is why it is crucial that the counsel retained to prepare the OM be familiar not only with NI 45-106 but also with the expectations of the Securities Regulators.
The art of drafting an OM requires an experienced hand. Inexperienced drafters will look to past OMs or other Issuers’ OMs to act as precedents and attempt to copy them. While precedent OMs do exist, they are too often utilized in a ‘copy-and-paste’ style of drafting. This should never be done for a number of reasons including, without limitation: they almost always differ from the current offering because the projects and/or the investments differ; they do not include what Securities Regulators now require to be in OMs; and they often contain errors that have been copied from OM to OM. Each OM should be completely drafted from scratch and thoroughly reviewed by experienced counsel. Retaining counsel without experience or drafting one’s own OM in an effort to save money could not only damage the reputation of the Issuer but of the exempt market industry in the long run. Save yourself some heartburn and hire a qualified professional with adequate experience with drafting OMs.