Further analysis on limited disclosure relief for certain private placements by qualified non-Canadian issuers
Ken Ottenbreit and Ralph Hipsher -
As we initially discussed in an earlier post, on April 23 the Canadian Securities Administrators issued a decision providing a specified group of dealers limited exemptive relief (the Relief) from certain disclosure requirements under Canadian securities laws otherwise applicable where a foreign prospectus or offering memorandum (a Foreign Offering Document) is delivered by a dealer to a Canadian “permitted client” in connection with a private placement of foreign securities in Canada.
While any efforts to streamline the disclosure requirements applicable to private placements into Canada are certainly welcome, the Relief has limitations and imposes specific compliance obligations. Although the Relief may be helpful in resolving some of the timing concerns associated with extending certain qualified foreign offerings to Canadian “permitted clients”, it also imposes a number of conditions and requirements that will require advance planning and monitoring to maintain eligibility and to ensure there are no time delays in the preparation and delivery of offering documents.
Among the significant conditions and requirements that may impede the usefulness of the Relief are the requirement to satisfy certain disclosure standards applicable to U.S. registered offerings, inter-syndicate restrictions applicable to dealers not qualified under the Relief, additional compliance obligations associated with the requisite client notice – return receipt requirement and the additional monthly reporting of transaction information to the Canadian securities regulators.
Dealers should consider whether relying on the existing market practices is preferable to meeting the conditions and requirements of the Relief. In some cases, it may be more cost effective and efficient to rely on the existing “Canadian wrapper” procedures.
Significantly, there is also a risk of fragmentation in market practice as dealers and syndicates decide whether and how to rely on the Relief. Issuers and dealers are not required to rely on the Relief and can conduct offerings in the same manner as they have done previously. Also, there are still a number of reasons why, for certain offerings, a form of Canadian “wrapper” or supplemental Canadian disclosure may be required or recommended, even under circumstances where the Relief is relied upon.
The Relief applies only to the dealers named therein. The Relief will come into effect sixty (60) days after April 23, 2013. This delay is designed to allow other dealers time to file and receive similar exemptive relief from the CSA. Dealers which do not file for similar relief will need to continue to be prepared to separately rely on the conventional Canadian wrapper form and process.
The Relief may work best in the context of a U.S. registered public offering. In certain other situations, reliance on the Relief may prove challenging as, for example, in the context of a private placement under U.S. securities laws or in connection with a non-U.S. offering, regardless of whether such offering is a public offering or private placement in the foreign jurisdiction.
The following are some of the key features, requirements and limitations of the Relief:
- Only applies to “foreign issuers”
- Does not apply to “investment funds”
- Does not provide an exemption from applicable Canadian mining/mineral disclosure
- Does not apply to “reporting issuers” in Canada (i.e., issuers that are either public companies or subject to continuous disclosure obligations in Canada)
- The offering must be either a U.S. registered offering or comply with disclosure requirements applicable to a U.S. registered offering regarding underwriter conflicts of interest (a legal opinion may be required)
- The offering must be made primarily outside of Canada
- Each dealer must be named in the Relief or have obtained similar relief
- Each Canadian purchaser must be a “permitted client”
- Each dealer must have delivered a specified notice to each Canadian purchaser
- Each Canadian purchaser must have signed and returned the notice to each dealer
- Each dealer must have delivered the required monthly report summarizing the dealer’s use of the Relief to its principal Canadian securities regulator
Scope of Relief
The Relief is not a blanket exemption applicable to all offerings by foreign issuers into Canada on a private placement basis and is only available to the specified dealers where all of the prescribed conditions are satisfied. It is very important to understand the limitations, conditions and requirements of the Relief.
Conditions to Reliance on the Relief
(i) Foreign Issuer / Non-Reporting Issuer Requirement
The Relief is limited to offerings by “foreign issuers” where the securities are being offered primarily outside of Canada. A “foreign issuer” is an issuer that:
- is incorporated, formed or created under the laws of a jurisdiction other than Canada or a province or territory of Canada,
- whose head office and principal place of business is located outside of Canada, and
- that is not a “reporting issuer” in Canada.
An offering by an issuer that maintains a listing on an exchange in Canada, or that is otherwise subject to “reporting issuer” requirements in Canada as a consequence of an acquisition or other transaction will not be entitled to rely on the Relief.
The Relief does not extend to offerings by “investment funds”, including so called “mortgage REITs”.
(ii) Offering Must Meet U.S. Prospectus Disclosure Rules Regarding Underwriter Conflicts
For a Foreign Offering Document to qualify under the Relief, whether or not the offering is a U.S. registered offering, it must comply with the conflicts of interest disclosure requirements applicable to a U.S. registered offering (the U.S. Disclosure Requirement). Specifically, reliance on the Relief is conditioned on the Foreign Offering Document containing the disclosure mandated pursuant to section 229.508 of Regulation S-K (Reg. S-K) under the United States Securities Act of 1933, as amended, and FINRA Rule 5121.
As the Relief requires that conflicts disclosure contained in the Foreign Offering Document comply with the U.S. Disclosure Requirement, we expect that a legal opinion or certification confirming compliance with the U.S. Disclosure Requirement, may be necessary to confirm that the Foreign Offering Document complies with the U.S. Disclosure Requirement.
(iii) Advance Client Notice and Return Receipt Requirement
Reliance on the Relief requires that each dealer deliver to each prospective Canadian purchaser, prior to each dealer’s first reliance on the Relief, a notice in a form specified under the Relief and that such prospective purchaser execute and return a written acknowledgment and consent to reliance by each dealer on the Relief.
Furthermore, reliance on the Relief requires that all offers and sales into Canada made in reliance on a Foreign Offering Document be restricted to “permitted clients” only. As such, investment dealers, exempt market dealers and restricted dealers would not be permitted to offer or sell to “accredited investors” (who are not also “permitted clients”) under their respective registrations pursuant to a Foreign Offering Document prepared in reliance on the Relief.
(iv) Monthly Reporting of Trade Information to Canadian Regulators
On a monthly basis, each dealer relying on the Relief is required to deliver to its principal Canadian securities regulator a list of all private placements in Canada made in reliance on the Relief (this is in addition to the filing of the usual post-trade report). The list is required to include for each such distribution:
- the name of the issuer,
- the security distributed,
- the total value of the offering in Canadian dollars,
- the value in Canadian dollars of the securities distributed in Canada by the dealer and its affiliates,
- the date each report of exempt distribution on Form 45-106F1 Report of Exempt Distribution (Form 45-106F6 British Columbia Report of Exempt Distribution) was filed with the applicable regulators, and
- each jurisdiction in which a report of exempt distribution was filed.
(v) Post-Trade Reporting Requirements
Reliance on the Relief does not exempt dealers and issuers from the requirement to prepare and file a report of the exempt distribution, and to pay associated fees, in connection with the private placement of securities in Canada. Also, as a condition to relying on the Relief, all post-trade reports must be filed in electronic forms (no paper filings permitted in reliance on the Relief).
Scope of Relief – Not a Blanket Exemption from All Mandated Canadian Disclosure
The Relief is limited in scope and is not a blanket exemption from all applicable Canadian disclosure requirements. Issuers and dealers will need to continue to consider other disclosure requirements, such as disclosure applicable to mineral projects, resale restrictions, certain legending requirements, and, in Québec, the French language requirements.
In addition, dealers may want to preserve certain legal defenses by including in any Foreign Offering Documents distributed into Canada, Canada-specific supplemental disclosure containing applicable representations, warranties and other investor information specific to the Canadian marketplace.
Significantly, the Relief will apply to only certain qualifying offerings (assuming all conditions of the Relief are satisfied) and non -qualifying offerings will need to be done in accordance with existing market practice. Because the Relief imposes additional compliance and monitoring obligations, dealers should review the Relief and its potential impact on their participation in foreign offerings being extended into Canada. While the Relief will undoubtedly be useful to some dealers, issuers and investors for certain offerings, it is important that dealers which are actively offering foreign securities into Canada understand the conditions, requirements and limitations of the Relief, as well as existing market practices to determine the best way to ensure compliance with the Canadian offering rules.
We are working with various dealers to prepare the necessary documentation to file for similar relief and would be pleased to review and discuss the requirements, costs and timing.
Please also note, as we also discussed in our earlier post, that the Ontario Securities Commission recently published a Notice and Request for Comment dated April 25, 2013 that proposes amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions and National Instrument 45-106 Prospectus and Registration Exemptions that would change the rules relating to certain of the disclosure exemptions that are the subject of the Relief. The comment period is open for 90 days.
Please contact us if you have any questions or would like further information about these developments.