Stikeman Elliott LLP advises on the first Canadian SPAC IPO

Simon Romano -

Stikeman Elliott LLP has the distinction of acting as legal adviser to the first ever IPO of a Canadian SPAC to date. A Special Purpose Acquisition Corporation (a SPAC) is a publicly-traded shell company that has as its primary purpose the acquisition of one or more companies. SPACs raise money from the public and use those funds to acquire one or more operating companies. While the TSX adopted specific rules to permit for the listing of SPACs in 2008, no SPACs had been launched in Canada until this month.

Generally, a SPAC is founded by a sponsor (or founder) with the credibility and expertise to raise funds and identify a promising operating business. The founder (together, if desired, with some or all of the directors or officers of the SPAC) holds 100% ownership of the SPAC before its IPO and establishes the management team of the SPAC.

Once formed, the SPAC must apply to be listed on the TSX, satisfying various listing-related requirements. After listing, a SPAC has a maximum of 36 months to complete a qualifying acquisition. Specific listing requirements imposed by the TSX include having a minimum offering price of $2 and at least 1,000,000 freely tradeable shares with an aggregate market value of at least $30,000,000 (held by a minimum of 300 “board lot” holders). Further, at least 90% of the proceeds raised from the IPO are subject to escrow to be applied towards the funding of the qualifying acquisition, and at least 50% of underwriting commissions must similarly be placed in escrow to be released upon completion of same.

It should be noted that there may be marked differences among ongoing compliance requirements of the TSX and Canadian securities regulators as compared to U.S. best practices, where the market for SPACs is further developed. It may therefore be necessary to negotiate exemptions in order to address the differences and avoid inefficiencies in the listing and operation of SPACs in Canada.

IIROC releases summary of exemptive relief granted in 2014

Earlier this week, IIROC released a summary of the 600+ exemptions from the Dealer Member and Universal Market Integrity Rules it granted during 2014

While most of the exemptive relief was granted to individuals in respect of IIROC proficiency requirements (436 exemptions), 120 exemptions were also granted from specified provisions of the Universal Market Integrity Rules (UMIR) and 47 exemptions were granted in respect of the Dealer Member Rules.

The exemptions from the UMIR provisions included 84 exemptions in response to requests by Participants to act as principal or agent in off-marketplace trades. While the UMIR generally require all trades to be made on a marketplace, there are enumerated exceptions and the ability to seek regulatory exemptions outside of those enumerated circumstances. According to the report, such regulatory exemptions were granted in the following categories:

  • trades of securities subject to a hold period under securities laws;
  • trades by participants taking on a significant block at a discount to the prevailing market price with the intention of immediately attempting to distribute the securities;
  • the purchase of securities under the private agreement exemption from the take-over bid rules;
  • sales from control block shareholders;
  • trades made pursuant to exempt issuer bids;
  • trades of securities subject to a non-regulatory trading halt; and
  • trades in an illiquid security at a nominal value where there was no current bid for the security.

The UMIR exemptions also included 36 exemptions in relation to the UMIR definition of “Basis Order” where a Participant sought to execute a trade in an exempt ETF as a Basis Order at a price derived from the execution of the underlying securities of the ETF.

Relief from the Dealer Member Rules provisions included 38 exemptions related to the current margin requirements applicable to certain cash and security borrowing and lending arrangements, two exemptions related to cross-guarantee provisions and seven exemptions related to bulk account transfers. The report notes at page 8 that 449 applications for an exemption from the IIROC proficiency requirements were made in 2014 and approval for the exemption was granted in 436 cases.

For more information, see IIROC Notice 15-0068.

Joint regulators' report updates OBSI dispute resolution activities for registrants

The Canadian Securities Administrators (other than Quebec), IIROC and the MFDA yesterday released the first annual report of OBSI's Joint Regulators Committee, which highlights the committee's major activities for 2014.

As we previously discussed, registered dealers and advisers outside Quebec must now offer OBSI's services in order to satisfy their obligations to make independent dispute resolution or mediation services available to clients. The JRC was formed to (i) facilitate a holistic approach to information sharing among the CSA, IIROC, the MFDA and OBSI and monitor the dispute resolution process with a view to promoting investor protection and confidence in the external dispute resolution system; (ii) support fairness, accessibility and effectiveness of the dispute resolution process; and (iii) facilitate regular communication and consultation among JRC members and OBSI.

The JRC thus considered a number of matters last year, including compensation refusals, establishing a protocol to define potential systemic cases and setting out a regulatory approach to address these issues when reported by OBSI, and the independent evaluation of OBSI required to be completed by next year.

OBSI also updated the JRC on a number of matters, including OBSI process enhancements, onboarding of new membership groups and segregated funds and the protocol for cooperation between OBSI and the Ombudservice for Life and Health Insurance cooperation. OBSI also reported to the JRC on the adoption of a blanket tolling agreement to suspend limitation periods while OBSI considers a complaint. The tolling agreement applies to new complaints received after October 27, 2014.

For more information, see CSA Staff Notice 31-340.

CSA identify local variations in NI 31-103 and other national instruments

The CSA yesterday issued a notice identifying local amendments to national instruments, in particular NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, in Alberta and NI 58-101 Disclosure of Corporate Governance Practices in Yukon that may be of importance outside of those jurisdictions.

The CSA note that several national instruments have been varied in Alberta to conform with changes in terminology made in the Securities Act (Alberta) to create a framework for derivatives regulation. Specifically, the Securities Act was amended last year to add a definition of “derivative” and to repeal and replace throughout the Securities Act the terms “exchange contract” and “futures contract” with the term “derivative”. As such, NI 31-103 as applicable in Alberta was amended effective October 31, 2014 to reflect these changes in terminology, as were the ASC Rules (General), ASC Rule 15-503 Production of Records, NI 21-101 Marketplace Operation, NI 23-102 Use of Client Brokerage Commissions, NI 55-104 Insider Reporting Requirements and Exemptions. For more information on the changes to Alberta's Securities Act, see our related post on our Canadian Structured Finance Law blog. The CSA further note that effective January 11, 2015, the local amendments made to NI 31-103 in Alberta that vary from the other CSA jurisdictions are contained in sections 8.20 and 8.20.1, which deal with exemptions from the dealer registration requirement.

Meanwhile, in Yukon, amendments were made to NI 58-101 Disclosure of Corporate Governance Practices on December 31, 2014 in coordination with Manitoba, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Quebec and Saskatchewan to adopt disclosure requirements in respect of board diversity.

For more information, see CSA Staff Notice 11-328.

TSX updates NCIB and dividend/distribution declaration forms

The Toronto Stock Exchange yesterday announced that it is adopting various housekeeping amendments to the TSX Company Manual in respect of Form 14A (monthly reporting for NCIBs for investment fund issuers), Form 14B (monthly reporting for NCIBs for non-investment fund issuers) and Form 5 (Dividend/Distribution Declaration).

According to the TSX, Forms 14A and 14B have not historically adequately addressed situations where listed issuers are interlisted on other markets, where purchases are made off exchange through private agreements and where purchases were made on the TSX under the block purchase exemption. As such, amendments to the forms will break out certain information into separate tables with the intention of enhancing the visibility of monthly trading activity and to ensure the required trading details are being reported. Amendments are also being implemented to make the forms more user friendly.

In respect of Form 5, the TSX is amending the notification requirement for the value of the distribution as a percentage of the value of the security from 10% to 25%. The change will harmonize the notification requirement with the general rule that the TSX will use due bills when the value of the distribution per listed security represents 25% or more of the value of the listed security on the declaration date.

While the amendments are effective today, the TSX will accept Forms 14A and 14B in the previous form until April 1.

TSXV adopts amended rules for private placements

Junaid K. Subhan

The TSXV recently amended Policy 4.1 (Private Placements), Form 4B (Private Placement Notice Form) and Policy 5.1 (Loans, Loan Bonuses, Finder’s Fees and Commissions) of the TSX Venture Exchange Corporate Finance Manual. The amendments are described by the TSXV as “a major redrafting” though only some of the amendments are described as being non-substantive in nature.

In particular, the TSXV is discontinuing the Expedited Filing System (and consequently deleting what was formerly Part 5 of Policy 4.1). In its place, Issuers can use a new system called “V-File” which allows for the electronic filing of the information that is currently included in Form 4B. V-File also automates parts of the TSXV’s review and acceptance process for private placements.

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CSA release 2014 Enforcement Report

The Canadian Securities Administrators recently released their 2014 Enforcement Report, which provides a summary of the enforcement actions undertaken by CSA members over the past year.

According to the report, CSA member staff initiated 105 proceedings in 2014, involving 189 individuals and 92 companies. The most common offences for which proceedings were commenced included charges of illegal distribution, fraud, market manipulation and misconduct by registrants.

CSA member staff also concluded 105 cases against 149 individuals and 106 companies in 2014. About $58.2 million in fines and administrative penalties were ordered, in addition to about $65.7 million in restitution. The report also provides highlights of specific cases.

Of particular interest, while the number of cases concluded in respect of illegal distributions dropped from 220 in 2013 to 122 in 2014, the fines and penalties imposed in those types of cases rose from just under $17 million to $17.6 million (although the amount of restitution and compensation dropped by about $7 million to about $12.7 million). Also notable was the fact that courts in Alberta, Ontario and Quebec imposed jail terms for five individuals last year for cases involving fraud and illegal distributions.

IIROC proposes adjusting margin requirements for agency lending agreements

The Investment Industry Regulatory Organization of Canada yesterday proposed amendments to Dealer Member Form 1 intended to address concerns that current rules do not set out specific margin requirements for agency cash and security borrowing and lending arrangements, as well as the fact that current rules do not have the same margin requirements for arrangements with acceptable counterparties versus regulated entity counterparties.

The concerns are especially relevant considering the recent trend involving dealers entering into borrowing and lending arrangements with custodians that act as agents for counterparties. According to IIROC, the risk of such agreements is equivalent to comparable "principal" arrangements. However, since Dealer Member Form 1 does not cover these types of agency agreements, dealers are currently required to provide additional margin in these cases. 

To address these concerns, the amendments are designed to ensure that agency arrangements are treated for margin purposes in the same way as equivalent principal arrangements between dealers and custodians. As such, the counterparty credit risk classification of the custodian would determine the level of margin required. Custodians that are active in the security borrowing and lending business are typically financial institutions that meet the definition of "acceptable institutions" and are considered low credit risk clients.

Proposals to amend the margin requirements were first published last year, and yesterday's release takes into account comments received from stakeholders. IIROC is accepting comments on its revised proposal until May 27, 2015. For more information, see IIROC Notice 15-0053.

OSC releases 2014 report for investment fund and structured product issuers

Darin Renton

The OSC last week released its annual Summary Report for Investment Fund and Structured Product Issuers, which reviewed the OSC's initiatives for 2014 that impact investment fund and structured product issuers (including in respect of research on mutual fund fees, the adoption of pre-sale delivery of Fund Facts and the accredited investor exemption), discussed emerging issues and trends (including the recent update on linked note offerings), and set out the results of continuous disclosure reviews and recent developments in staff practices.

Of particular interest, the report discusses some of staff's findings in respect of disclosure and compliance reviews, including in respect of IFRS adoption, investment funds with high management expense ratios, fixed income volatility (the report states a staff notice will soon be published outlining the findings of reviews of asset classes that may be susceptible to liquidity issues), senior loans, direct payment of ongoing dealer service fees and fee and expense disclosure

The report also provides an overview of recent regulatory developments impacting funds, including changes to the “accredited investor” exemption that will now allow fully-managed accounts to purchase securities of investment funds (something that was previously prohibited in Ontario). This amendment harmonizes the managed account category of the accredited investor exemption in all Canadian jurisdictions. The report also discusses the application of recent changes to the conflict of interest provisions under securities laws that historically applied only to mutual funds but now apply to investment funds in general.

Changes adopted to accredited investor and minimum amount investment prospectus exemptions

Timothy McCormick and Ramandeep K. Grewal

The CSA announced last week the adoption of amendments to the "accredited investor" and "minimum amount investment" prospectus exemptions that will, among other things, result in significant changes when selling securities to individual investors, including the requirement to obtain a written Risk Acknowledgment Form (RAF) from individual accredited investors (AIs) and the elimination of the $150,000 minimum investment amount (MI) exemption when selling to individuals.

As we discussed last year, the CSA first proposed the amendments in February 2014. These included proposals to require the RAF for certain investors purchasing as AIs as well as significant changes to the form of exempt trade report that is filed with the regulators. The final version of the amendments announced last week retain the RAF requirement but have deferred changes to the report of trade to a future point in time. They also make other revisions, including those made to reflect comments received from stakeholders on the initial proposal published in March of 2014.

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CSA adopt amendments to short-term debt and short-term securitized products prospectus exemptions

Last week, the Canadian Securities Administrators released amendments to prospectus exemption rules relating to the short-term debt and short-term securitized products prospectus exemptions.

Ultimately the changes will, among other things, (i) change the requirements that short-term debt securities must satisfy in order to be distributed under the short-term debt prospectus exemption; (ii) make the short-term debt prospectus exemption unavailable for securitized products such as asset-backed commercial paper; and (iii) introduce a new short-term securitized products prospectus exemption. The new requirements for reliance on the amended short-term debt exemption include the imposition of a new “modified split rating condition”, which will require that, in addition to satisfying the rating threshold condition (that the short-term debt has at least one credit rating at or above the prescribed threshold), the short-term debt not have any rating that is below those prescribed.

As we've previously discussed, these focused changes in respect of short-term securitized products are a retreat from the more comprehensive proposals to establish a new framework for the regulation of securitized products proposed in 2011.

Assuming Ministerial approvals, the changes will come into force on May 5, 2015. Notably, the CSA has also announced changes to the accredited investor and minimum amount investment prospectus exemptions. 

OSC introduces harmonized family, friends and business associates prospectus exemption

On February 19, the Ontario Securities Commission announced that it is introducing a family, friends and business associates prospectus exemption intended to be substantially harmonized with the exemption available in other Canadian jurisdictions.

The exemption will allow issuers other than investment funds, subject to certain conditions, to distribute securities to the issuer's directors, executive officers, control persons and founders, as well as certain family members, close personal friends and close business associates of such persons. Much like in the case of the CSA's recently-announced amendments to the accredited investor and minimum amount investment prospectus exemptions, Ontario's new exemption will require that purchasers sign a risk acknowledgement form in order for issuers to rely on the exemption.

Assuming Ministerial approval, the new exemption will come into force on May 5, 2015, at which time, the existing "Founder, Control Person and Family Exemption" under National Instrument 45-106 Prospectus and Registration Exemptions (which was only available in Ontario) will be repealed. The introduction of the new exemption also corresponds with the adoption of the CSA's changes to accredited investor and minimum amount investment prospectus exemptions in NI 45-106, which will also come into force on the same date along with various other consequential amendments.

Existing Canadian trade reporting rules add EU to substituted compliance provision

The securities regulators in Ontario, Manitoba and Quebec recently released changes to their respective rules regulating trade repositories and derivatives data reporting to extend their substituted compliance provisions to reporting counterparties that report pursuant to European Union derivatives reporting rules.

As you may recall, the substituted compliance provisions effectively exempt certain entities from data reporting requirements under the Canadian rules where they comply with the equivalent trade reporting laws of certain specified foreign jurisdictions. The European Union derivatives reporting rules now join the reporting rules of the CFTC as “equivalent reporting obligations” for the purposes of the exemption. Under these “limited” substituted compliance provisions, the exemption is only available where local counterparty is a registered derivatives dealer or a guaranteed affiliate of a local counterparty.

The amendments will also delay the requirement that designated trade repositories publicly disseminate transaction-level data to July 29, 2016. Transaction-level data reporting had been scheduled to come into force on April 30, 2015.

These amendments were made to the local rule 91-507 in each of Ontario, Manitoba and Quebec, with consequential amendments to Companion Policy 91-506. For more information on Canadian rules on trade repositories and data reporting, see our previous post on the subject.

CSA report on medical marijuana issuer finds disappointing disclosure deficiencies

The Canadian Securities Administrators today released the results of CSA staff’s review of continuous disclosure by reporting issuers announcing their intention to enter Canada's medical marijuana industry. Generally, CSA staff found that the reviewed issuers had unbalanced and promotional disclosure, and requested that 92% of the issuers reviewed file clarifying disclosure.

This review follows significant interest by reporting issuers and investors in the medial marijuana industry, with the CSA noting that a substantial number of issuers (a majority being in the junior mining industry) announced their intention to explore opportunities in the industry after the introduction of federal regulations effective April 1, 2014, to govern the production, distribution and use of medical marijuana in Canada.

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Canada adds to list of prohibited entities and individuals under Russia and Ukraine sanctions

Earlier this week, the Canadian government announced it is updating the schedules of designated persons and entities to whom sanctions apply in respect of Russia and Ukraine.

As we've previously stated, the sanctions generally prohibit Canadians and any person in Canada from, among other things (i) dealing in any property, wherever situated, held by or on behalf of a designated person; (ii) entering into or facilitating, directly or indirectly, any transaction related to a dealing referred to in paragraph (i); (iii) providing any financial or other related service in respect of a dealing referred to in paragraph (i); (iv) making any goods, wherever situated, available to a designated person; or (v) providing any financial or related service to or for the benefit of a designated person. The sanctions also require that various financial entities, including securities dealers and advisers, determine on a continuous basis whether they are in possession or control of property owned or controlled by or on behalf of a designated person.

For details on the Russia and Ukraine sanctions to date, see the website of Foreign Affairs, Trade and Development Canada.