The OSC announced yesterday that it has entered into a Memorandum of Understanding with the Canadian Public Accountability Board focused on consultation, cooperation and information exchange between the parties. According to the OSC, the exchange of information facilitated by the MOU will support collaboration on review and oversight matters.
Last week, the Investment Funds Branch of the Ontario Securities Commission released the November 2013 issue of the Investments Fund Practitioner. The publication provides an overview of recent issues identified by the Branch arising from prospectus filings, exemptive relief applications and continuous disclosure documents filed by investment funds.
Of particular interest, the Practitioner states that Branch staff are currently focusing on three priority areas in their prospectus reviews, namely fees and expenses (including whether explanations are in clear and plain language), investment objectives and strategies (including the provision of meaningful information for investors), and conflicts of interest. According to the Practitioner, staff's intention is to encourage more consistent disclosure and promote clear, accurate and understandable disclosure, rather than boilerplate language.Continue Reading...
Certain members of the CSA proposed regulatory amendments yesterday that would relieve underwriters, under certain circumstances, of the obligation to provide connected and related issuer disclosure in offering documents for certain distributions of securities that qualify as "designated foreign securities" as defined in the proposed amendments. To rely on the exemption, among other things, the offering would have to be restricted to "permitted clients" and the exempt offering document would have to comply with U.S. disclosure requirements on conflicts of interest between issuers and underwriters, regardless of whether or not the U.S. requirements applied to the distribution.
The proposed amendments will not apply to a distribution if a prospectus has been filed with any Canadian securities regulatory authority, as these provisions are intended to relate solely to private placements made to investors that qualify as permitted clients. Finally, the proposal would require specified firm registrants to notify permitted clients that they were relying on the exemptions.
In conjunction with this proposal, securities regulators, except for those in Ontario and B.C., also proposed certain limited exemptions from prohibitions relating to making listing representations and to require disclosure of statutory rights of action. These exemptions would be available in similar circumstances as the proposed NI 33-105 exemptions and are detailed in the proposed Multilateral Instrument 45-107 Listing Representation and Statutory Rights of Action Disclosure Exemptions. Similar amendments were proposed by Ontario earlier this year and are not required in B.C.
Both of these proposals are intended to codify, on a broader basis, exemptive relief granted earlier this year to certain applicants. Comments on both proposals will be accepted until February 26, 2014.
OSC continues to consider new capital raising prospectus exemptions, including crowdfunding exemption
Streamlining access to capital has been a popular topic, with regulators around the globe poised to implement various regulatory reforms aimed at simplifying the process for startup companies and small enterprises. As we’ve discussed in the past, the Ontario Securities Commission released a consultation paper on December 14, 2012, and a progress report on August 28, 2013, with respect to the OSC’s consideration of new capital raising prospectus exemptions in Ontario. According to the progress report, which will be discussed in more detail below, the OSC has been directed to focus on four new capital raising prospectus exemptions in the future, namely: (1) a crowdfunding exemption; (2) a family, friends and business associates exemption; (3) an offering memorandum exemption; and (4) a streamlined rights offering exemption. The focus of this post is crowdfunding.
Crowdfunding covers a wide range of online activities from charities soliciting donations to companies raising capital. In the case of financing a company, crowdfunding refers to a company selling small amounts of securities to a large number of investors via an internet portal intermediary. Crowdfunding can thus be considered an exchange of cash consideration for securities, which raises issues for securities regulators around the globe.Continue Reading...
The Toronto Stock Exchange published proposed amendments to its Company Manual today that would extend the current exemption from security holder approval in cases where listed issuers adopt security based compensation arrangements for employees of a target issuer in the context of an acquisition, to new security based compensation arrangements created to retain employees of the target. In such cases, the number of securities issuable under the security based compensation arrangement could not exceed 2% of issued and outstanding securities of the issuer and no more than 25% of the issued and outstanding securities of the issuer could be issued as consideration for the acquisition (including those issuable under the security based compensation agreement). Ultimately, the amendments would formalize an exemption currently granted by the TSX on a discretionary basis.
The proposed amendments to the Manual would also attempt to clarify the definition of a "backdoor listing" and clarify the discretion of the TSX to either exempt a transaction from the requirements to meet original listing requirements that may otherwise constitute a backdoor listing or consider a transaction a backdoor listing even if it may not otherwise qualify as one.
The TSX and OSC are accepting comments on the proposed amendments until January 13, 2014.
Convertible debentures have been and continue to be an extremely popular capital raising instrument in Canadian capital markets. Yesterday, Canada Revenue Agency (CRA) officials offered some long-awaited comfort to public company issuers of convertible debentures at the Canadian Tax Foundation’s annual conference in Toronto. As part of a roundtable discussion, CRA officials confirmed that there should not be any withholding tax arising on the conversion of a “standard convertible debenture” issued by a Canadian public corporation and held by a non-resident of Canada.
Since 2008, interest payments made by Canadian issuers to non-residents have generally not been subject to Canadian withholding tax unless the interest was “participating debt interest”, or the recipient did not deal at arm’s length with the issuer. In a ruling released by the CRA last year (2011-0418721R3– Convertible Notes), the CRA found that regular periodic interest payments on a convertible debenture issued by a Canadian public corporation would not constitute “participating debt interest”. However, uncertainty remained as to whether certain provisions of the Income Tax Act might deem a premium arising on the conversion of a debenture to be “participating debt interest” that would be subject to withholding tax. This uncertainty has generally forced corporate issuers to try to comply with specific conditions set out in the Income Tax Act and published by the CRA in order to ensure that their convertible debentures would be excluded from these deeming rules.
While these roundtable comments provide a welcome change, they do not go all the way in addressing the uncertainty surrounding withholding tax on convertible debentures. The comments were expressly limited to “standard convertible debentures” (as that term was defined in a letter from the Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants sent to the CRA in May 2010) issued by public corporations, such that some uncertainty will remain with respect to convertible debentures issued by trusts, partnerships, and private corporations. Nonetheless, even in these contexts, the comments should offer some comfort as there is no principled reason why the withholding tax rules should apply differently based on the nature of the issuer.
Earlier this week, the Globe and Mail published its annual report on corporate governance among Canadian issuers.
Specifically, Board Games 2013 includes articles on topics such as the push for director term limits to ensure regular turnover (including an overview of international regulations on director tenure) and an overview of the best and worst trends in governance, including with respect to the issue of gender diversity on boards, which has received much attention in the last few months. The report also includes a ranking of issuers on governance issues based on a methodology that takes into account board composition, shareholding and compensation, shareholder rights and disclosure.
Last week, Institutional Shareholder Services released updates to its Canadian benchmark corporate governance policy effective for meetings on or after February 1, 2014.
Among other things, the updated policy addresses the failure by boards to adequately respond to majority withhold votes for directors or majority supported shareholder proposals, adjusts the pay for performance evaluation methodology, generally recommends withhold votes for directors who are overboarded or have a poor record of board or committee meeting attendance, recommends generally voting against enhanced quorum bylaws for contested director elections, and removes the exception under which ISS would approve a stock option repricing or option exchange proposal.
The Investment Industry Regulatory Organization of Canada yesterday published guidance on marketplace and average price disclosure language that will be considered acceptable on trade confirmations. As we discussed earlier this year, IIROC released proposed guidance in September, with the final version clarifying that the required disclosures may be located on the back side of the trade confirmation. A summary of comments received to the initial proposal was also published.
As we discussed earlier this month, the Ontario Securities Commission recently published final rules dealing with the regulation of trade repositories, derivatives data reporting requirements and the scope of derivatives that will be subject to such reporting requirements.
Our colleagues Margaret Grottenthaler and William A. Scott have now published a more comprehensive analysis of the new rules on their structured finance law blog.
Certain Canadian regulators propose prospectus exemption for distributions to existing TSX-V issuer security holders
Canadian securities regulatory authorities in all jurisdictions but Ontario and Newfoundland and Labrador today published for comment a draft prospectus exemption that would allow issuers listed on the TSX Venture Exchange to distribute securities to existing security holders. According to the CSA, the time and cost involved in preparing the required offering documents are currently preventing TSX-V issuers from conducting prospectus offerings or using prospectus exemptions to offer securities to retail investors.
Thus, under the proposal a new prospectus exemption would be available to TSX-V issuers if certain conditions are met, including that: (i) the issuer has a class of equity securities listed on the TSX-V; (ii) the issuer has filed all required timely and periodic disclosure documents; (iii) the offering consists only of the class of equity securities listed on the TSX-V or units consisting of the listed security and a warrant to acquire the listed security; (iv) the issuer issues a news release disclosing the proposed offering, including details of the use of proceeds; and (v) each investor confirms in writing to the issuer that, as at the record date, the investor held the type of listed security that the investor is acquiring under the exemption.
Investors would be limited to investing no more than $15,000 per year under the exemption unless suitability advice from a registered investment dealer is obtained. Further, investors would be provided with certain rights of action in the event of a misrepresentation in an issuer's continuous disclosure record or, if the issuer voluntarily provides one, an offering document. Securities issued under the proposed exemption would be subject to resale restrictions. In order to reinforce the goal of statutory insider trading prohibitions, the proposal requires that issuers represent to prospective purchasers in the subscription agreement that there are no material facts or material changes relating to the issuer that have not been generally disclosed.
The participating jurisdictions are accepting comments on the proposal until January 20, 2014. If implemented, the exemption would expire in some of the jurisdictions at the end of 2015, although the use of the exemption would be assessed for usefulness with the potential for extension. For more information, see Multilateral CSA Notice 45-312.
Citing the importance of exempt distribution reports to the OSC, the guidance provides a summary of requirements, including in respect of the form of report (reminding issuers of upcoming changes to electronic filing requirements), deadlines, and recent changes to filing fees and late filing fees.
Of particular interest, the OSC states that a report in paper form is considered filed, and a payment is considered made, when the form or payment is received at the OSC's office. A report that uses an e-form is considered filed when the e-form has been successfully submitted online to the OSC. Meanwhile, where a deadline for filing a report falls on a weekend or other day when the OSC is not open, the deadline is the next day the OSC is open.
For more information, see OSC Staff Notice 45-713.
The CSA announced today that the transition of responsibility for the CSA national systems is being deferred. The CSA intend to publish a future notice in regards to the new change-over date.
As we discussed on October 8, the responsibility for the CSA national systems were scheduled to be transitioned from CDS to CGI Information and Management Consultants on December 2, 2013. Since Ontario cannot delay the effective date of the amendments to certain national instruments relating to the transition, OSC staff request that Ontario market participants continue to treat CDS Inc. as the SEDAR filing service contractor, SEDI operator and NRD administrator until further notice is given. For more information, see OSC Staff Notice 13-321.
The Ontario Securities Commission today published final versions of harmonized derivatives rules in respect of product determination, trade repositories and derivatives data reporting. Quebec's Autorité des marchés financiers and the Manitoba Securities Commission also published final rules.
As we discussed in June, Ontario, Quebec and Manitoba each published draft harmonized rules on the subject earlier this year, while the CSA released draft rules in December 2012.
The final rules released today by the OSC make non-material revisions to the earlier drafts to address comments received from stakeholders. Assuming Ministerial approval, the requirements come into force beginning on December 31, 2013 with the implementation of some requirements staggered over the next year. For example, data reporting obligations for reporting counterparties involving a local counterparty come into effect on July 2, 2014, while obligations regarding the public dissemination of transaction level data by designated trade repositories will come into effect on December 31, 2014. Where both counterparties are non-dealers, no reporting will be required until September 14, 2014.
For more information, see OSC Rule 91-506 and OSC Rule 91-507.
The Investment Industry Regulatory Organization of Canada today republished revised proposed rules to consolidate certain enforcement and related rules found in the UMIR and Dealer Member Rules. As we published last year, IIROC first released a draft set of rules in March 2012, and the proposed version released today addresses comments from stakeholders to the initial proposals and input from the Canadian Securities Administrators, including in regards to the confidentiality of investigations, standards of conduct and sanctions.
Comments are being accepted by IIROC until February 12, 2014. For more information, see IIROC Notice 13-0275.