Results of FSRA Consultation on Interpretation and Approach Guidance No. CC0001INT: High-Risk Offerings issued under the Co-operative Corporations Act | Financial Services Regulatory Authority of Ontario

Purpose of consultation:

FSRA had sought feedback on its proposed Guidance, which would require co-operative corporations (“co-ops”) that issue “high-risk offerings” of securities to provide enhanced disclosure to investors in the offering statement required under section 34 of the Co-operative Corporations Act (the “Co-op Act”). If enhanced disclosure is not provided, FSRA will not issue a receipt for the offering statement.

FSRA’s principal objective in issuing this Guidance is to protect investors, by helping them make more informed investment decisions. In addition, the Guidance is intended to help co-ops understand what additional disclosures FSRA requires, promote high standards of business conduct, improve the transparency of FSRA’s decision-making process, and reduce the risk of deceptive or fraudulent conduct relating to high-risk offerings.

This Guidance provides FSRA’s:

Interpretation of the requirement for co-ops to provide “full, true and plain disclosure of all material facts relating to the securities proposed to be issued”, pursuant to subsection 35(1) of the Co-op Act, in the context of “high-risk offerings”; and
Approach to exercising its discretion to issue a receipt for an offering statement for a “high-risk offering” of securities, if enhanced disclosure has been provided.

FSRA received three submissions regarding the proposed Guidance during the consultation period (i.e. from October 5, 2020 to November 18, 2020).

Our response

FSRA would like to thank all commenters for the views expressed. FSRA carefully considered all comments received before finalizing and issuing the Guidance.

List of contributors

The following stakeholders took the time to share their perspectives with FSRA:

Julien Geremie (Conseil de la coopération de l’Ontario)
Erin Morgan (Ontario Co-operative Association)
Canadian Advocacy Council of CFA Societies Canada

Summarized Comments	Response
The CCO’s submission indicated general support for the draft Guidance and FSRA’s proposal to enhance protections for investors in high-risk offerings by co-ops. A suggestion was made that the CCO work with FSRA to develop a template for offering statements that would be easy for FSRA to review and evaluate, and for co-ops and investors to understand.	The principal objective of the Guidance is to protect investors in co-ops, and help them make more informed investment decisions. The “enhanced disclosure” requirement for co-ops that propose to issue securities pursuant to a “high-risk offering” is intended to fulfil this objective. FSRA notes that the Ontario Co-operative Association has developed an offering statement template and is currently in the process of updating it. This template may be useful for co-ops in preparing their offering statements.

Summarized Comments

Response

The CCO’s submission indicated general support for the draft Guidance and FSRA’s proposal to enhance protections for investors in high-risk offerings by co-ops.
A suggestion was made that the CCO work with FSRA to develop a template for offering statements that would be easy for FSRA to review and evaluate, and for co-ops and investors to understand.

The principal objective of the Guidance is to protect investors in co-ops, and help them make more informed investment decisions. The “enhanced disclosure” requirement for co-ops that propose to issue securities pursuant to a “high-risk offering” is intended to fulfil this objective.
FSRA notes that the Ontario Co-operative Association has developed an offering statement template and is currently in the process of updating it. This template may be useful for co-ops in preparing their offering statements.

Summarized Comments	Response
The OCA thanked FSRA for its commitment to protect the integrity of co-ops and their members. The OCA noted that the statutory requirement for “full, plain and true disclosure” in the offering statement context is linked to two key co-operative principles. For these reasons, the OCA stated that it supports FSRA’s oversight of the offering statement regime, and appreciated for the opportunity to consult on the proposed Guidance. The OCA’s written submission contains a number of questions, including the reason for creating the category of “high-risk offerings”; whether there would be new disclosure requirements or requests for information beyond what members currently receive (i.e. audited financial statements); the impetus for the Guidance (e.g. investor complaints or other provinces’ regimes); and how FSRA would determine if an offering is “high-risk”. The OCA suggested that a classification system might be helpful, depending on whether a co-op is community- or commodity-based or investment-based (i.e. only the latter would be considered “high-risk”). The OCA recommended that, since the list of enhanced disclosure information is non-exhaustive, the definitions and requirements should be clearly outlined. The OCA expressed the concern that FSRA could use the enhanced disclosure requirement to judge “business competence” (i.e. dissuade potential investors from investing in a “high-risk” offering even though full, true and plain disclosure is provided). A question was posed as to whether the enhanced disclosure requirements would add time and cost to the offering statement process. Finally, the OCA recommended specific increases in the offering statement exemption limits in the Co-op Act, and queried whether fees for offering statements might increase.	Co-ops have a statutory obligation to ensure that their offering statements satisfy the requirement for “full, true and plain disclosure” in subsection 35(1) of the Co-op Act. For “high-risk offerings”, FSRA interprets this requirement to include “enhanced disclosure”, in order to ensure that potential investors are fully informed of the risks of investing in securities in a high-risk offering, and to assist them in making an informed investment decision. The Guidance clearly defines a “high-risk offering” and provides concrete examples of the “enhanced disclosure” that FSRA will require in this context. FSRA created the category of high-risk offerings, and related enhanced disclosure requirements, in order to assist investors in making more informed investment decisions, and also to improve the transparency of FSRA’s decision-making process relating to offering statements. The examples of enhanced disclosure in the Guidance are intentionally non-exhaustive, since FSRA may request additional information, depending on the circumstances of the offering. This is consistent with FSRA’s commitment to principles-based regulation. Co-ops proposing to issue securities pursuant to a high-risk offering should review the list of “enhanced disclosure” information in the Guidance in advance, and determine what is required in order to provide “full, true and plain disclosure” to investors. If they do not provide the enhanced disclosure, FSRA will not issue a receipt for the offering statement. If full, true and plain disclosure is provided to investors, FSRA will not refuse to receipt an offering statement, even though the offering is high-risk. FSRA does not opine on the merits of a securities offering; it simply requires offering statements to contain full, true and plain disclosure. FSRA encourages co-ops that intend to issue securities in a high-risk offering to review the Guidance carefully before submitting an offering statement to FSRA for review. This will minimize time and costs. With respect to the OCA’s recommended increases to the offering statement exemption limits and queries regarding fees, FSRA notes that the Ministry of Government and Consumer Services (MGCS) is responsible for the Co-op Act and its regulations, including the provisions relating to exemptions from the offering statement requirement and setting of fees.

Summarized Comments

Response

The OCA thanked FSRA for its commitment to protect the integrity of co-ops and their members. The OCA noted that the statutory requirement for “full, plain and true disclosure” in the offering statement context is linked to two key co-operative principles. For these reasons, the OCA stated that it supports FSRA’s oversight of the offering statement regime, and appreciated for the opportunity to consult on the proposed Guidance.
The OCA’s written submission contains a number of questions, including the reason for creating the category of “high-risk offerings”; whether there would be new disclosure requirements or requests for information beyond what members currently receive (i.e. audited financial statements); the impetus for the Guidance (e.g. investor complaints or other provinces’ regimes); and how FSRA would determine if an offering is “high-risk”.
The OCA suggested that a classification system might be helpful, depending on whether a co-op is community- or commodity-based or investment-based (i.e. only the latter would be considered “high-risk”).
The OCA recommended that, since the list of enhanced disclosure information is non-exhaustive, the definitions and requirements should be clearly outlined.
The OCA expressed the concern that FSRA could use the enhanced disclosure requirement to judge “business competence” (i.e. dissuade potential investors from investing in a “high-risk” offering even though full, true and plain disclosure is provided).
A question was posed as to whether the enhanced disclosure requirements would add time and cost to the offering statement process.
Finally, the OCA recommended specific increases in the offering statement exemption limits in the Co-op Act, and queried whether fees for offering statements might increase.

Co-ops have a statutory obligation to ensure that their offering statements satisfy the requirement for “full, true and plain disclosure” in subsection 35(1) of the Co-op Act. For “high-risk offerings”, FSRA interprets this requirement to include “enhanced disclosure”, in order to ensure that potential investors are fully informed of the risks of investing in securities in a high-risk offering, and to assist them in making an informed investment decision.
The Guidance clearly defines a “high-risk offering” and provides concrete examples of the “enhanced disclosure” that FSRA will require in this context. FSRA created the category of high-risk offerings, and related enhanced disclosure requirements, in order to assist investors in making more informed investment decisions, and also to improve the transparency of FSRA’s decision-making process relating to offering statements. The examples of enhanced disclosure in the Guidance are intentionally non-exhaustive, since FSRA may request additional information, depending on the circumstances of the offering. This is consistent with FSRA’s commitment to principles-based regulation.
Co-ops proposing to issue securities pursuant to a high-risk offering should review the list of “enhanced disclosure” information in the Guidance in advance, and determine what is required in order to provide “full, true and plain disclosure” to investors. If they do not provide the enhanced disclosure, FSRA will not issue a receipt for the offering statement.
If full, true and plain disclosure is provided to investors, FSRA will not refuse to receipt an offering statement, even though the offering is high-risk. FSRA does not opine on the merits of a securities offering; it simply requires offering statements to contain full, true and plain disclosure.
FSRA encourages co-ops that intend to issue securities in a high-risk offering to review the Guidance carefully before submitting an offering statement to FSRA for review. This will minimize time and costs.
With respect to the OCA’s recommended increases to the offering statement exemption limits and queries regarding fees, FSRA notes that the Ministry of Government and Consumer Services (MGCS) is responsible for the Co-op Act and its regulations, including the provisions relating to exemptions from the offering statement requirement and setting of fees.

Summarized Comments	Response
The CAC notes that the Guidance sets out FSRA’s expectations for “full, true and plain disclosure” and states that it supports FSRA’s objectives of promoting high standards of business conduct for co-ops and helping investors make more informed investment decisions. The CAC queried why enhanced disclosure could not be required for all co-op securities offerings, given the breadth of the definition of a “high-risk offering” and the fact that all purchasers of co-op securities would have an interest in this information. The CAC also suggested that prospective purchasers should be required to sign a risk acknowledgement statement prior to purchase, similar to Form 45-106F4 Risk Acknowledgement, given the high-risk nature of these securities. For offerings that are exempt from the offering statement regime, the CAC recommends that FSRA consider mandating a form for reporting high-risk offerings, similar to Form 45-106F1 Report of Exempt Distribution, so that FSRA receives this information. The CAC queried whether, if investor protection issues relating to co-op securities are the reason for the Guidance, it would be helpful for FSRA to publish investor alerts, advising investors of its concerns and informing them of their rights and remedies. The CAC warned of regulatory arbitrage and/or investor harm to the extent that co-ops are subject to requirements that differ from offerings subject to securities laws, and recommended that FSRA consider joining a working group involving other regulators to discuss some of these issues and a harmonized approach to securities offerings where the legislative framework permits distributions of securities outside the scope of securities legislation and related regulatory requirements.	The Guidance provides FSRA’s interpretation of “full, true and plain disclosure” in subsection 35(1) of the Co-op Act in the context of “high-risk offerings”; however, FSRA notes that all co-ops proposing to raise capital through the offering statement regime in the Co-op Act are required to provide “full true and plain disclosure” to investors. The “enhanced disclosure” requirement is intended to ensure that potential investors in a high-risk offering are fully informed of the risks, and to assist them in making an informed investment decision. It is also intended to improve the transparency of FSRA’s decision-making process relating to offering statements. FSRA acknowledges the CAC’s suggestions that a risk acknowledgement form and report of exempt distribution should be required; however, FSRA cannot compel this information in the absence of statutory authority to do so. FSRA notes that the Ministry of Government and Consumer Services (MGCS) is responsible for the administration of the Co-op Act, including the provisions relating to offering statements. As noted above, the Guidance is intended to protect investors by ensuring that they receive enhanced disclosure before deciding whether to invest in securities in high-risk offerings. FSRA will consider whether it is necessary to publish additional investor protection-related information in future, consistent with its statutory authority and obligations under the Co-op Act.

Summarized Comments

Response

The CAC notes that the Guidance sets out FSRA’s expectations for “full, true and plain disclosure” and states that it supports FSRA’s objectives of promoting high standards of business conduct for co-ops and helping investors make more informed investment decisions.
The CAC queried why enhanced disclosure could not be required for all co-op securities offerings, given the breadth of the definition of a “high-risk offering” and the fact that all purchasers of co-op securities would have an interest in this information.
The CAC also suggested that prospective purchasers should be required to sign a risk acknowledgement statement prior to purchase, similar to Form 45-106F4 Risk Acknowledgement, given the high-risk nature of these securities.
For offerings that are exempt from the offering statement regime, the CAC recommends that FSRA consider mandating a form for reporting high-risk offerings, similar to Form 45-106F1 Report of Exempt Distribution, so that FSRA receives this information.
The CAC queried whether, if investor protection issues relating to co-op securities are the reason for the Guidance, it would be helpful for FSRA to publish investor alerts, advising investors of its concerns and informing them of their rights and remedies.
The CAC warned of regulatory arbitrage and/or investor harm to the extent that co-ops are subject to requirements that differ from offerings subject to securities laws, and recommended that FSRA consider joining a working group involving other regulators to discuss some of these issues and a harmonized approach to securities offerings where the legislative framework permits distributions of securities outside the scope of securities legislation and related regulatory requirements.

The Guidance provides FSRA’s interpretation of “full, true and plain disclosure” in subsection 35(1) of the Co-op Act in the context of “high-risk offerings”; however, FSRA notes that all co-ops proposing to raise capital through the offering statement regime in the Co-op Act are required to provide “full true and plain disclosure” to investors. The “enhanced disclosure” requirement is intended to ensure that potential investors in a high-risk offering are fully informed of the risks, and to assist them in making an informed investment decision. It is also intended to improve the transparency of FSRA’s decision-making process relating to offering statements.
FSRA acknowledges the CAC’s suggestions that a risk acknowledgement form and report of exempt distribution should be required; however, FSRA cannot compel this information in the absence of statutory authority to do so. FSRA notes that the Ministry of Government and Consumer Services (MGCS) is responsible for the administration of the Co-op Act, including the provisions relating to offering statements.
As noted above, the Guidance is intended to protect investors by ensuring that they receive enhanced disclosure before deciding whether to invest in securities in high-risk offerings. FSRA will consider whether it is necessary to publish additional investor protection-related information in future, consistent with its statutory authority and obligations under the Co-op Act.