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In a speech Thursday, Howard Wetston said the OSC appreciates the importance of fostering growth in the exempt market, which saw firms raise $26-billion in the province last year, dwarfing fundraising in the public markets for securities that trade on stock exchanges.Fernando Morales/The Globe and Mail

The Ontario Securities Commission wants to move ahead with new rules to broaden investor access to the exempt investment market in the province, but needs dealers to co-operate by tightening their standards and adhering to rules about who can buy securities, chairman Howard Wetston says.

In a speech Thursday, Mr. Wetston said the OSC appreciates the importance of fostering growth in the exempt market, which saw firms raise $26-billion in the province last year, dwarfing fundraising in the public markets for securities that trade on stock exchanges.

But he said a recent OSC "sweep" of exempt market dealers found "substantive" problems at some firms that were allowing securities to be sold inappropriately to investors who did not meet the required financial thresholds.

"I don't know how that could happen, personally," Mr. Wetston said in remarks to industry officials at a conference sponsored by the Exempt Market Dealers Association of Canada. "I have no idea how any of these could be sold to non-accredited investors.... In our view, more work needs to be done by the industry to consistently meet the existing requirements."

Investment managers can sell securities to investors in the exempt market without having to issue a prospectus that requires stringent review by regulators. The market is limited to institutional investors or wealthy individuals who meet "accredited" investor thresholds, including have at least $1-million in net financial assets or making a minimum investment of at least $150,000.

But the market has faced criticisms for being lax about applying those thresholds. In addition, fraudsters have also taken advantage of the loose regulatory scrutiny in the exempt market to sell securities to unwitting investors, some of whom have later complained they didn't meet the accredited investors thresholds.

The OSC is studying whether to change its exempt market rules, and has faced lobbying from exempt market dealers to make it easier for more investors to participate. One option under review is to allow companies to raise funds using an "offering memorandum" or OM, which offers less disclosure than a full prospectus but would allow a broader array of investors to participate.

Mr. Wetston said Thursday the OSC is reviewing about 100 comment letters it has received about possible exempt market changes.

"We can clearly see at this stage that we are open to considering changing in our exempt market regulatory regime for alternative capital raising exemptions, including the OM exemption," he said.

He said the OSC plans to publish a "progress update" on its review of the exempt market rules later this summer, while the results of the recent "sweep" of exempt market dealers will be published in the fall.

Ontario has different rules for exempt market investments than other provinces. Alberta already has an offering memorandum rule, allowing any investors to put a maximum of $10,000 into securities issued using an offering memorandum, while British Columbia has no limits to the value of securities investors can buy under an offering memorandum. Ontario is considering a maximum limit of $2,500 for purchases made under an offering memorandum, but exempt market industry representatives have said that amount is too low.

Mr. Wetston said one of the OSC's priorities is to harmonize its exempt market rules with other provinces.

"It's probably the most significant area that lacks harmonization," he said. "We realize that creates inefficiency and costs."

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