Report of Exempt Distribution Certification and Information Requirements Revisited by the CSA

 Viviana Beltrametti Walker and Laura Levine - 

The recently harmonized Form 45-106F1 Report of Exempt Distribution (Report) is once again in the spotlight as the Canadian Securities Administrators, other than the British Columbia Securities Commission, have published for comment amendments to the certification and information requirements in the Report.  

What’s Being Proposed?

The bulk of the proposed amendments apply to Item 10 of the Report (the Certification) which requires that a director or officer of the issuer or underwriter filing the Report certify that he or she has read and understood the Report and that the information it contains is true. The proposed amendments to the Certification include: 

  •  Adoption of a corporate-style signature block, clarifying that the individual signing the Report is doing so on behalf of the issuer, underwriter, investment fund manager or agent on behalf of whom the Report is being filed and not in his or her personal capacity;
     
  • The replacement of the capitalized warning statement regarding misrepresentations contained in the Report with a reminder of the obligation to file the Report; and
     
  • A new knowledge qualifier with respect to the information being provide in the Report in recognition of the due diligence defence under securities legislation.

Additional amendments have been proposed in respect of the remainder of the Report and its schedules:

  • Filers would only be required to provide the name of the issuer’s primary exchange rather than the names of all exchange on which the issuer’s securities are listed.
     
  • Only one exemption from the requirement to include information about directors, executive officers and promoters of the issuer would have to be identified, if applicable, as opposed to identifying all applicable exemptions.
     
  • Schedule 1 would be amended to allow issuers to indicate that they are distributing securities to non-individual permitted clients without indicating which category of accredited investor applies to such purchasers.
     
  • The relief previously granted to certain foreign issuers from the requirement to report whether a purchaser is a registrant and/or an insider of the issuer would be formalized in the Report.

Additional housekeeping amendments are also being proposed.

Background

In force since June 2016, the Report replaced the prior version of Form 45-106F1 Report of Exempt Distribution and Form 45-106F6 British Columbia Report of Exempt Distribution in an effort to harmonize post-trade disclosure across Canada. Shortly after its adoption, concerns were raised by international market participants regarding certain of the information required by the Report and the Certification. In response to these concerns, relief was granted to foreign issuers from certain of the information requirements in July 2016; however, filers have continued to experience difficulties in respect of the Certification which have impacted access to foreign investment opportunities for Canadian institutional investors.

Further Information

The CSA is seeking comments on the proposed amendments which may be submitted in writing on or before September 6, 2017. For further information, please see CSA Multilateral Notice and Request for Comment Proposed Amendments to National Instrument 45-106 Prospectus Exemptions relating to Reports of Exempt Distribution(June 8, 2017). 

Start-up crowdfunding prospectus and registration exemption adopted by certain CSA members

Vincent Laurin -

As discussed in a post last week, the securities regulators of British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia (the "Participating Jurisdictions") have implemented registration and prospectus exemptions intended to facilitate the ability of Canadian start-ups and early stage companies to raise capital through crowdfunding in the Participating Jurisdictions. These exemptions, enacted through local blanket orders (the “Blanket Orders”) in the Participating Jurisdictions, are further to the comments received as part of the consultation held in March 2014 and will expire on May 13, 2020. The conditions related to the prospectus and registration exemptions, summarized below, are outlined in Multilateral CSA Notice 45-316 – Start-up Crowdfunding Registration and Prospectus Exemptions – the Blanket Orders of each Participating Jurisdiction should be reviewed for the precise terms and conditions applicable to the use of the exemptions in such jurisdictions.

Prospectus Exemption

The prospectus exemption allows a non-reporting issuer, that is not an investment fund and whose head office is located in a Participating Jurisdiction, to issue eligible securities through online funding portals. The funding portals may either rely on the registration exemption contained in the Blanket Orders or they may be operated by a registered dealer that has provided certain written confirmations to the issuer. While issuers are exempt from the prospectus requirement under this exemption, they must produce an offering document in the prescribed form, which contains basic information about the issuer, its management and the distribution, including risk factors, how the issuer intends to use the funds raised and the minimum offering amount. Following the closing of the offering, the offering document must be filed with the participating regulator along with a report of exempt distribution.

This exemption applies only if certain conditions are met. In particular, issuers cannot raise aggregate funds of more than $250,000 per distribution and are limited to a maximum of two such distributions in a calendar year. Moreover, no investor will be allowed to invest more than $1,500 per distribution. Each investor must have a contractual right to withdraw a subscription by delivering notice to the funding portal within 48 hours of either the purchaser’s subscription or a notification by the funding portal of amendment to the offering document. The funding portal must return the funds within five business days of receiving notice from the investor. The distribution may remain open for a maximum of 90 days. Importantly, none of the principals(a promoter, director, officer or control person) of the issuer may be a principal of the funding portal. Finally, since the exemption is only available to non-reporting issuers, the eligible securities are subject to an indefinite hold period and can only be resold under another prospectus exemption, under a prospectus or four months after the issuer becomes a reporting issuer.

Registration Exemption

The registration exemption permits funding portals with a head office in Canada and a majority of Canadian residents as directors to facilitate distributions under the prospectus exemption without being formally registered, subject to certain conditions.

Notably, funding portals must deliver an information form and individual information forms for each of its principals to the securities regulatory authorities of the Participating Jurisdictions at least 30 days prior to facilitating its first start-up crowdfunding distribution. Furthermore, funding portals must not provide any advice to the purchasers and are not allowed to collect fees or commissions from investors. Additionally, the funding portals must not allow a subscription until the purchaser confirms its understanding of the offering document and the risk warning, both of which must be disclosed on the funding portal’s website. Other conditions required by the instrument include that the funding portals: (i) receive payment from investors electronically through its website, (ii) maintain books and records for a period of eight years from the date a record is created (which may be inspected by a participating regulator), and (iii) either release funds to the issuer after the minimum offering amount has been reached and provided that all 48-hour rights of withdrawal have elapsed, or return the funds to the purchasers if the minimum offering amount is not reached or if the start-up crowdfunding distribution is withdrawn by the issuer. A participating regulator reserves the right to notify the funding portal that it cannot rely on the registration exemption because its principals or their past conduct demonstrate a lack of integrity, financial responsibility or relevant knowledge or expertise.

Conclusion

This equity crowdfunding model follows the adoption by the SEC of rules to facilitate smaller companies’ access to capital by allowing them to offer and sell up to $50 million of securities in a 12-month period through crowdfunding sites. These crowdfunding measures are intended to address certain small and medium-sized businesses’ needs and issues, "which are more local in nature and sometimes industry-specific", as it broadens their capital raising alternatives.

However, reporting issuers are still prohibited from participating in crowdfunding. Certain regulators of the Participating Jurisdictions, as well as Ontario, are still working on proposed Multilateral Instrument 45-108 – Crowdfunding, which would allow certain reporting issuers to use crowdfunding portals, registered with securities regulators as dealers, to raise capital. The OSC is expected to publish a new rule this fall which is in line with the crowdfunding proposal published last year for comment and discussed in our previous posts.

CSA regulators adopt crowdfunding prospectus exemption and accompanying funding portal registration exemption

On May 14, 2015, the securities regulators of British Columbia, Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia announced that they have implemented, or expect to implement, a crowdfunding prospectus and registration exemption intended to facilitate the ability of Canadian start-ups to raise capital. 

The prospectus exemption would apply to issuers who meet certain conditions.  Notably, issuers may only raise up to an aggregate of $250,000 per distribution with a maximum of two such distributions per issuer annually.  Furthermore, investors are only permitted to invest $1,500 per distribution. 

A central condition to the exemption is that securities distributed pursuant to the crowdfunding exemption must be distributed through a designated online funding portal.  Funding portals are subject to an accompanying registration exemption provided they meet certain conditions set out in the same adopting blanket order.  In particular, the funding portal’s head office must be located in Canada and a majority of its directors must be Canadian residents.  Notably, funding portals are not permitted to collect fees or commissions from investors.

The crowdfunding exemption was enacted through local orders in the above-noted provinces, which expire on May 13, 2020.  For further information, please see our prior posts, Multilateral CSA Notice 45-316 and the blanket orders adopted in each participating jurisdiction.

Important amendments to exempt financing regime to come into force on May 5, 2015

Junaid K. Subhan -

As we noted previously, important amendments to NI 45-106 Prospectus and Registration Exemptions are set to come into force on May 5, 2015.

Notably, the amendments will require issuers relying on the accredited investor prospectus exemption to obtain a signed risk acknowledgment form when selling securities to individual accredited investors. Such risk acknowledgement forms must be retained for a period of 8 years from the distribution. Individual accredited investors who are permitted clients (i.e. who have net financial assets with an aggregate realizable value in excess of $5 million) are exempt from the requirement to complete and execute a risk acknowledgement form. Amendments to 45-106CP Companion Policy also underscore CSA staff’s views that issuers and selling security holders may need to undertake enhanced due diligence to ascertain the status of a given purchaser and that, depending on the circumstances, relying on a signed risk acknowledgment form or representation in a subscription agreement may no longer be sufficient. These amendments will likely come into force in unison with other Ontario-specific amendments which will, among other things, move certain accredited investor categories from NI 45-106 to equivalent provisions in s. 73.3 of the Securities Act (Ontario).

The amendments also make important changes to the minimum amount investment prospectus exemption, which will no longer be available to individual investors. The short-term debt prospectus exemption will also be amended and a new short-term securitized product prospectus exemption will be introduced. Finally, the family, friends and business associates prospectus exemption will be introduced in Ontario to counteract the removal of the Ontario founder, control person and family prospectus exemption.

While these represent important changes to the exempt financing regime in Ontario, we remind readers that, as we have discussed in detail in prior posts, a number of other proposals are still being considered including the Ontario crowd-funding prospectus exemption and the rights offering prospectus exemption as well as changes to Form 45-106F1 Report of Exempt Distribution.

OSC releases draft statement of priorities for 2015-2016

The Ontario Securities Commission today released a draft Statement of Priorities for the financial year ending March 31, 2016. 

The draft statement specifically identifies five regulatory goals for the following year, namely: (i) delivering strong investor protection, including by developing and evaluating regulatory provisions to create a best interest duty, developing targeted regulatory reforms under NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations to improve the advisor/client relationship and implementing pre-sale delivery of Fund Facts for mutual funds; (ii) delivering responsive regulation, including by publishing the results of the disclosure review and continuing to promote transparency and representation of women on boards, and developing and publishing rules to implement new prospectus exemptions, such as the offering memorandum exemption, crowdfunding, rights offering and new reporting requirements regarding exempt market distributions; (iii) delivering effective compliance, supervision and enforcement, including by taking steps to improve the OSC's case management and adjudicative processes; (iv) promoting financial stability, including by implementing rules and a compliance program for OTC derivatives trade reporting and developing a registrant regulation framework for derivatives market participants; and (v) being an innovative, accountable and efficient organization.

The OSC is accepting comments on its draft statement of priorities until June 1, 2015. For more information, see OSC Notice 11-771.

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.

The following provides an overview of the amendments to Policy 4.1:

  1. Section 1.2 (Summary of Procedures, formerly section 1.1) is expanded to provide more detailed guidance on each of the steps involved in the notice and acceptance process for a private placement. This includes price reservation through to the publication of the TSXV’s bulletin;
     
  2. Section 1.7 (Part and Parcel Pricing Exception) was redrafted to facilitate an understanding of the existing pricing rules. In addition, this section was substantively revised to now provide that the warrant exercise price premium component of the part and parcel pricing rules does not apply if the private placement is the concurrent financing to a Qualifying Transaction, Reverse Takeover or Change of Business. In other words, the exercise price of warrants issued as part of a concurrent financing to a Qualifying Transaction, Reverse Takeover or Change of Business does not have to be set at a premium to the applicable Market Price;
  3. Section 1.9 (News Releases, formerly section 1.11) and section 1.10 (Filing Requirements, formerly section 1.13) now include additional guidance relating to initial, closing and other news releases relating to private placements and applications for conditional and final acceptance, respectively;
     
  4. Section 1.11 (Closing of the Private Placement) now includes additional guidance with respect to conditions to and timeframes for closing and final filing requirements. In particular, if a private placement involves the creation of a new Insider or a new Control Person, the issuer may not close on their subscriptions until the TSXV has provided its final acceptance; and
     
  5. A new Part 4 is added which sets forth requirements for obtaining TSXV acceptance for an amendment to the terms of previously issued Convertible Securities. While Policy 4.1 did not previously have specific provisions in this regard, the TSXV has indicated that the amendments merely codify existing TSX practice.

In addition to the foregoing, the TSXV amended Policy 4.1 to include a guidance note which provides that a private placement with a creditor where the cash received from the creditor will be used to repay the debt to the creditor or where the creditor’s subscription price is offset against the debt will be subject to Policy 4.3 – Shares for Debt. The TSXV also included guidance notes on the circumstances in which a transaction may be considered a private placement and subject to Policy 4.1:

  • any transaction or series of transactions that has the effect of directly or indirectly financing the issuer in exchange for the direct or indirect issuance of securities of the Issuer;
     
  • any private placement of special warrants (or a similar security, such as subscription receipts) will be treated as a private placement of the securities underlying the special warrants; and
     
  • an issuer’s sale for cash of any of its previously issued listed shares that were purchased or otherwise acquired by the Issuer.

Policy 5.1 was also amended to incorporate guidance on existing policy requirements to improve clarity. Some of the substantive amendments are as follows. First, Policy 5.1 is revised to change the method of calculating the limits for bonus shares and warrants – the limits will now be calculated using the applicable Market Price instead of the Discounted Market Price. Further, the limit on bonus warrants is being increased from 40% to 100% of the value of the loan. Bonus shares are no longer permitted on loans having a term of less than one year.

Second, subject to certain exceptions, Policy 5.1 now includes a prohibition on the ability of an issuer to pay a commission to an investor in connection with such person’s own investment in the issuer. Similarly, issuers are prohibited, subject to certain exceptions, from paying a finder’s fee to a vendor or purchaser in connection with such person’s sale or purchase of assets or services to or from the issuer.

Third, Policy 5.1 is clarified to provide that if a commission (or other compensation) is payable by an issuer in respect of a financing that includes shares and warrants, the aggregate value cannot exceed 12.5% of the gross proceeds of the financing.

For further details, please consult the blacklines of changes to the new Policy 4.1 and Policy 5.1 made available by the TSXV.

Policies 4.1 and 5.1 of the TSX Venture Exchange Corporate Finance Manual were amended effective January 26, 2015. Any private placement filings made on or after January 26, 2015 are subject to the new Policy 4.1. Any transactions that are filed on or after January 26, 2015 will be subject to the new Policy 5.1.

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.

Risk Acknowledgement Form

Despite concerns that the new obligations would impose unnecessary administrative burdens on issuers, the final amendments have retained the RAF requirement. Persons relying on the AI exemption will be required to obtain a completed and signed RAF when distributing securities to individual AIs who qualify as AIs under the existing income or the asset tests. The RAF is in a prescribed form and includes specific disclosure advising purchasers of the risks of investing in securities and has them acknowledge exactly how they satisfy the AI test. It also requires identification of any relevant “salesperson” that meets with or provides information to the purchaser with respect to the investment. This includes representatives of the issuer, selling security holder, registrant or registration exempt firm or individual, as applicable. The RAF must be completed and signed at the same time as the individual signs the agreement to purchase the security and retained for a period of 8 years from the distribution.

Notably, the RAF will not be required in respect of a new category of individual AIs, being an individual who owns financial assets having an aggregate realizable value net of liabilities of $5,000,000. This additional category will be familiar as it forms part of the “permitted client” category under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and allows for the waiver of “know your client” and suitability obligations of registered dealer and advisers.

While revisions have been made to the earlier proposals (including by revising the RAF so that persons who meet with or provide information to the purchaser would no longer be required to sign the form, and clarifying that the form may be executed and retained in electronic form), the changes are considered non-material. According to the CSA, the RAF will improve investor protection "by itemizing the risks associated with products sold under prospectus exemptions".

Changes to prospectus exemptions

The MI exemption, being available to purchasers investing a minimum amount of $150,000 at the time of distribution, will no longer be available to individual investors. However, in their response to specific comments, the CSA have clarified that it will be available to holding companies provided they have not been created or used solely to purchase securities under the exemption.

With respect to the AI exemption, a new category of AI has been added, being a trust established by an AI for the benefit of the AIs family members provided all of the trustees are AIs and all of the beneficiaries fall within the prescribed classes of family members. Further, in Ontario, fully managed accounts will also now be permitted to purchase investment fund securities under the managed account category of the AI exemption, harmonizing with the rest of the CSA.

Determining when the exemption is available

When relying on the AI exemption or any other exemption that is based on the characteristics of the purchasers, it has generally been the case that the issuer or seller relying on the exemption was responsible for determining whether the exemption was available, typically done through representations or certification as to a purchaser’s status. Revised guidance in the Companion Policy to NI 45-106 has now been enhanced to indicate that it may not be sufficient to accept standard representations from the purchasers and that additional steps may be required to verify that the investor in fact meets the required status. This may include, in the least, enhanced or more detailed questions that aim to ensure the purchaser understands the requisite test and to elicit details that allow the seller to be satisfied that the test is met. Beyond the new RAF requirement, the proposals released last year also included significant changes to the form of report required to be filed following a private placement, including a new requirement to identify each category of purchaser under a prospectus exemption. Ultimately, however, the CSA have decided against making these proposed changes at this time, and will address any potential changes as a separate project. In considering future changes, the CSA state that they will consider stakeholder comments on the proposals, including concerns that Canada has two separate forms for reporting exempt distributions (Form 45-106F6 in B.C. and Form 45-106F1 in all other jurisdictions) and in respect of additional information requirements.

The amendments also result in consequential amendments to a number of other rules and policies and assuming Ministerial approvals, will come into force on May 5, 2015. Concurrently, amendments were also announced to the short-term debt and short-term securitized products prospectus exemptions and to make the “family, friend and business associates” exemption available in Ontario which we have separately written about.

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.

New existing security holder prospectus exemption comes into force in Ontario

Jonah Mann and Duncan Snyder - 

Of the four new prospectus exemptions proposed by the Ontario Securities Commission in March 2014, the “existing security holder” exemption, an exemption that permits certain reporting issuers to issue new securities to their existing security holders without having to file a prospectus (the “Ontario Exemption”), has been adopted by the OSC and comes into force today. As announced on November 27, 2014, the Ontario Exemption is being adopted through amendments to OSC Rule 45-501 and varies somewhat from the exemption as originally proposed and published for comment on March 20, 2014 (the “Proposal”).

Requirements of the Ontario Exemption

Under the Ontario Exemption, existing security holders of an issuer are permitted to purchase equity securities of the issuer on a prospectus exempt or "private placement" basis provided the securities are listed on the TSX, TSXV, CSE or the Aequitas NEO Exchange (each a “listed security”). The Ontario Exemption also extends to units comprised of a listed security and a warrant entitling the holder to acquire a listed security and applies where the person is purchasing as principal only. In order to rely on the Ontario Exemption, the issuer must be a reporting issuer in a Canadian jurisdiction, other than an investment fund, and be current in its continuous disclosure filings. An announcement of the offering must be made in a news release containing a reasonably detailed description of the offering, including the number of securities proposed to be distributed and how they will be distributed, the aggregate proceeds of the distribution and the proposed use of the proceeds.

To participate in the offering, a purchaser must represent to the issuer, in writing, that it held at the “record date” (a date determined by the issuer, which must be at least one day prior to the announcement date) and continues to hold the applicable listed security. A purchaser may only purchase an aggregate of up to $15,000 of listed securities in any 12-month period pursuant to the Ontario Exemption, unless it has obtained suitability advice in respect of the investment from a registered investment dealer in Canada. Securities purchased under the Ontario Exemption are subject to a four-month hold period under section 2.5 of National Instrument 45-102 Resale of Securities.

The Ontario Exemption imposes an anti-dilution measure that prohibits an issuer from making a distribution that would increase the number of its outstanding listed securities by more than 100% (the “Dilution Limit”). In addition, issuers relying on the exemption are required to make certain representations in the subscription agreement that “core documents” and “documents” (as defined in s. 138.1 of the Securities Act (Ontario) under the "secondary market civil liability" provisions) do not contain a misrepresentation and that there are no undisclosed material facts or material changes relating to the issuer. Other than the subscription agreement, offering materials must be filed with the regulator.

Ontario Exemption vs. Proposed Exemption

While the Ontario Exemption is similar to the Proposal, in some instances, the requirements deviate from those initially proposed. For example, the Proposal contained a seasoning period for issuers intending to use the exemption and a requirement that securities be distributed to purchasers under the exemption on a pro rata basis. While the seasoning period has been completely removed, the pro rata requirement is no longer in the rule itself but rather in Companion Policy 45-501 (“45-501CP”), which recommends that an issuer treat its security holders in a manner that is perceived to be fair and equal. According to the OSC, fair treatment involves giving each security holder an identical opportunity to invest in the distribution and by implementing specific policies and procedures, an issuer can provide reasonable assurance that the investment opportunities will be allocated fairly among its security holders.

The liability regime included in the Ontario Exemption has also been amended. The Proposal contained a regime of contractual liability, which required that the subscription agreement entered into between a purchaser and issuer provide the purchaser with contractual rights against the issuer in the event that the issuer made a misrepresentation in its disclosure record. In the Ontario Exemption, the OSC eschewed this contractual liability for secondary market civil liability (“SMC Liability”). According to the OSC, SMC Liability is advantageous to contractual liability as it: (i) gives purchasers additional rights of action, (ii) provides additional persons against whom those rights are enforceable, and (iii) ensures greater consistency among issuers because the applicable contractual provisions would very likely differ from issuer to issuer (or be excluded altogether). However, as noted above, the Ontario Exemption still requires that the subscription agreement include an issuer representation that (i) certain disclosure documents do not contain a misrepresentation, and (ii) there is no material fact or change that has not been generally disclosed by the issuer.

On the other hand, despite comments advocating to the contrary, there were many requirements from the Proposal that were retained. For example, while commentators advocated for a longer minimum time period between the record date and the announcement date, the OSC maintained the one-day requirement. Commentators also opposed the requirement that a purchaser obtain suitability advice from a Canadian investment dealer or be limited to a $15,000 investment. One comment proposed that the limit, instead of being capped at $15,000, should be set at an amount equal to a purchaser’s pro rata ownership in the listed security. In this way, a purchaser would be able to maintain a pro rata position in the listed security without having to obtain suitability advice. However, the OSC maintained that the $15,000 limit is an important investor protection mechanism that (i) mitigates the risk of loss to an investor, (ii) encourages asset class diversification, and (iii) maintains flexibility for those investors for whom it may be appropriate to exceed the limit.

Harmonization with the Other Provinces Exemption

The OSC justified many of its decisions to keep or remove criteria by citing its desire to harmonize the Ontario Exemption with the similar exemption that was adopted in March of this year by the securities regulators in the rest of the Canadian provinces and territories (other than Newfoundland and Labrador) (the “Other Provinces Exemption”).

Given that Aequitas NEO Exchange obtained recognition as an exchange on November 13, 2014, only the Ontario Exemption is available to issuers listed on the Aequitas NEO Exchange. In contrast to the Other Provinces Exemption, the Ontario Exemption is not available to investment funds. This exclusion, in the eyes of the OSC, is not only consistent with the objective of the Ontario Exemption, which is to facilitate capital-raising by business enterprises, particularly small- and medium-sized enterprises, but also with the principles underlying the existing regulatory framework that applies to investment funds. Lastly, the Ontario Exemption imposes the Dilution Limit, which is not included in, nor is a similar anti-dilution measure imposed by, the Other Provinces Exemption. It is the OSC’s position that the Ontario Exemption should not result in the significant dilution of security holders’ holdings and because issuers, subject to individual investors’ investment limit, are not prohibited from using the Ontario Exemption multiple times in a year, the OSC does not believe that the Dilution Limit is overly restrictive.

Practical Considerations

The Ontario Exemption will likely appeal to small-cap issuers that wish to avoid the more onerous requirements associated with the rights offering exemption in NI 45-101 (the “Rights Offering Exemption”). The Rights Offering Exemption currently requires that a circular be prepared and submitted to the applicable securities regulator for review, and only allows an issuer to dilute its outstanding securities by 25%. In contrast, the Ontario Exemption only requires a news release to be issued and permits up to 100% dilution of an issuer’s securities. Even after the proposed amendments to the Rights Offering Exemption recently published by the OSC for comment, which would increase the dilution limit to 100% and remove the requirement that the circular be reviewed by the OSC, the Ontario Exemption may still be advantageous due to lower transaction costs. Whereas the Rights Offering Exemption requires the preparation of a circular and distribution of notices to shareholders, the Ontario Exemption only requires the preparation of a subscription agreement and a news release. Finally, given the $15,000 investment limit (without suitability advice) imposed by the Ontario Exemption, large-cap issuers may not find the Ontario Exemption particularly useful.

OSC adopts new prospectus exemption to permit issuance of securities to existing securityholders

The Ontario Securities Commission yesterday announced the adoption of a new prospectus exemption that will allow companies listed on the TSX, TSX-V, Canadian Securities Exchange or Aequitas NEO Exchange to raise capital from existing security holders based on the issuer's existing continuous disclosure.

Offerings under this exemption would be limited to 100% of the issuer’s outstanding securities of the same class and investors would be limited to investments of no more than $15,000 every 12 months unless they obtain suitability advice in respect of the investment (from a registered investment dealer in the case of Canadian securityholders). The exemption will not, however, be available to investment funds. As we've previously discussed, the OSC first proposed such an exemption in March 2014, while the other CSA jurisdictions (other than Newfoundland and Labrador) adopted a similar exemption in final form earlier this year.

A number of changes to the proposed amendments have been made in responses to comments received and aimed at harmonization with the similar exemption newly adopted in other Canadian jurisdictions, including removal of the seasoning requirement for issuers and of the requirement that issuers allocate a pro rata portion of the offering to existing security holders. However, additional guidance has been added to the Companion Policy to 45-501 regarding the fair and equal treatment of existing security holders intended to clarify that a issuer should fairly allocate investment opportunities among all of its security holders.

While no specific form of offering document is prescribed, any offering materials used must be filed on SEDAR on the same day they are provided to purchasers. Further, the rule also prescribes that secondary market disclosure liability applies to securities purchased under the exemption providing purchasers with rights of action for damages under the Securities Act (Ontario) relating to misrepresentations, both oral and written, and timely disclosure failures.

The changes to the original proposal are not considered material and, assuming Ministerial approval, the exemption will come into effect on February 11, 2015. The OSC also stated that the remaining prospectus exemptions proposed earlier this year, namely in respect of (i) crowdfunding; (ii) family, friends and business associates; and (iii) offering memoranda, remain under consideration.

CSA propose rights offering prospectus exemption

The Canadian Securities Administrators yesterday published for comment proposed amendments to existing rules intended to create a streamlined prospectus exemption for rights offerings.

The new amendments are intended to ease some of the current requirements found in National Instrument 45-101 Rights Offerings (NI 45-101). For example, issuers seeking to rely on the current rights offering prospectus exemption must have their offering circular reviewed and accepted by CSA staff. Under the proposed exemption, a circular would still be prepared; however, prior regulatory acceptance of the circular would not be required. Rather, issuers would send security holders a short notice prior to using the exemption setting out basic disclosure about the offering and informing security holders how to access the rights offering circular electronically. A circular would be filed concurrently with the notice but would not need to be sent to security holders.

The new proposed form of rights offering circular would be in question and answer format with disclosure focused on information about the offering, use of funds and the financial condition of the issuer, and would not require inclusion of information about the business. In streamlining the information required in the circular, the CSA recognize that most investors exercising rights would be existing security holders and, thus, familiar with the issuer's disclosure record. This will further streamline the process, for example, by eliminating the need for technical reports in connection with disclosure in the circular.

The proposed exemption would also increase the current dilution limit from 25% to 100% assuming the exercise of all rights issued under the exemption during the preceding 12 months. However, as opposed to the current exemption, issuers would have to make the basic subscription privilege available on a pro rata basis to each holder of the class of securities to be distributed on exercise of the rights. The subscription price for a security would have to be lower than the market price at the time of filing the notice for listed issuers, while issuers not listed on a marketplace would have to offer securities at a price lower than "fair value" at the time of filing the notice. The proposed exercise period would be a minimum of 21 and maximum of 90 days. The proposed rights offering exemption would only be available to reporting issuers other than investment funds subject to NI 81-102, as such funds are restricted from issuing warrants and rights.

While CSA staff would not review the notice or circular prior to use, the CSA intend to conduct reviews of circulars for two years after the adoption of the proposed exemption to ensure compliance with the exemption's conditions and to gauge how issuers are using the exemption.

Statutory civil liability for secondary market disclosure is proposed to apply to the acquisition of securities in a rights offering under the exemption. The proposal also includes requirements in respect of stand-by commitments, the need to file a closing news release, and resale restrictions. An exemption for issuers with a minimal connection to Canada is also being proposed in substantially the same form as the current exemption found in section 10.1 of NI 45-101.

NI 45-101 and the prospectus exemption in NI 45-106 for rights offerings by non-reporting issuers would both be repealed and the proposed exemption would be included in National Instrument 45-106 Prospectus and Registration Exemptions. Stakeholder comments, including in respect of specific questions set out by the CSA, are being accepted until February 25, 2015.

The OSC also published a new prospectus exemption for issuances to existing security holders yesterday.

OSC releases Statement of Priorities for 2014-2015

The Ontario Securities Commission today released its Statement of Priorities for the 2014-2015 financial year. The OSC notice also addresses stakeholder comments received in response to a draft version released earlier this year.

Ultimately, the OSC provides five broad regulatory goals for the upcoming year, namely (i) delivering strong investor protection, including by considering the best interest duty to investors, completing research in regards to embedded fees in mutual funds and publishing final rules to introduce pre-sale delivery of Fund Facts for mutual funds; (ii) delivering responsive regulation by, among other things, publishing proposals to update the order protection rule, developing proposals for streamlining the existing rights offering exemption, and moving forward on proposed rules regarding board gender diversity; (iii) delivering effective enforcement and compliance; (iv) supporting and promoting financial stability, including by developing rules for the clearing of OTC derivatives and implementing trade reporting rules, as well as by working with B.C., Ontario and the federal government to implement a cooperative securities regulator to deliver "more efficient and effective regulation of the capital markets" and oversee sources of systemic risk; and (v) running a modern, accountable and efficient organization.

For more information, see OSC Notice 11-770.

A closer look at the OSC's proposed crowdfunding exemption

As we have previously discussed, the Ontario Securities Commission recently proposed a crowdfunding prospectus exemption aimed at facilitating greater access to capital through the exempt market, particularly for start-ups and small and medium-sized enterprises (SMEs). The exemption is one of four new prospectus exemptions proposed for Ontario.

Under the crowdfunding exemption, both reporting and non-reporting issuers and their affiliates would be able to raise up to $1.5 million per year. Investors would also be limited to investing no more than $2,500 in a single investment, and no more than $10,000 in a year under the exemption.

While the proposed exemption would certainly make it easier for smaller companies to raise capital, as we stated in our comments to the OSC, the following are some proposed restrictions the OSC may want to reconsider to ensure that access to the exemption is not unduly restricted.

Qualification Criteria

For example, issuers relying on the exemption would be required to be be incorporated or organized in Canada. While a requirement that a business have its principal place of business in Canada would serve the objective of assisting Canadian start-ups and SMEs with raising capital, a requirement for incorporation or organization in Canada arguably fails to provide a sufficient or relevant nexus.

There are many reasons why a business may be organized outside of Canada while still being a “Canadian” business. For example, many “B Corps” (corporations certified to meet certain standards of social and environmental performance, accountability, and transparency) incorporate or organize in other jurisdictions, predominantly Delaware, where legislation currently exists where it is possible to incorporate a B Corp or that is more favourable to B Corps than the Canada Business Corporations Act or other Canadian corporate statutes. These are the types of entities that would benefit the most from, and make the most use of, the crowdfunding exemption.

It should also be noted that the requirement that a majority of the directors of the issuer be resident in Canada imposes a restriction above and beyond current Canadian corporate law. For example, the Canada Business Corporations Act only requires that 25% of the directors of a corporation be resident in Canada (the same residency requirement is mandated by the Business Corporations Act (Ontario)). In other Canadian jurisdictions (i.e., British Columbia and Québec) there are no such residency requirements.

Offering Paramaters

The crowdfunding exemption also prohibits the completion of an offering unless the issuer has “financial resources sufficient to achieve the next milestone in [its] written business plan, or if no milestones, to carry out the activities set out in the business plan”. It remains to be seen whether this requirement would achieve any significant investor protection given than the milestones may not be significant or represent any minimum level of achievement by the issuer.

Investment Limits

While the proposed investment limits provided in the crowdfunding exemption would serve to protect investors, it may make sense to exclude accredited investors from such limits. Investment limits should also not extend to anyone who would be able to purchase securities through another prospectus exemption.

Proposed Risk Acknowledgement Form under amended "accredited investor" exemption would impose burdens

Darin Renton, Alix d’Anglejan-Chatillon and Nick Badeen -

As we have previously discussed, the CSA recently proposed amendments to the “accredited investor” prospectus exemption to require that individual accredited investors complete a Risk Acknowledgment Form (RAF) at the same time or before signing the purchase agreement in order for the accredited investor exemption to apply to a distribution.

Under the proposal, the RAF would include specific disclosure advising purchasers of the risks of investing in securities under the accredited investor exemption, having them acknowledge exactly how they satisfy the exemption and confirming the type and value of the securities they are purchasing. A salesperson involved in selling the securities would also have to sign and date the form, including particulars as to how they may be contacted and their registration status.

Risk Acknowledgment Form

In providing comments to the CSA on their proposal, we identified a number of concerns with the RAF. First, we anticipate that the RAF requirement will place an administrative burden on issuers, as the RAF must be presented to purchasers in physical form on one double-sided page and two copies of the form are required to be physically signed. In keeping with developing practices, the bulk of document execution and delivery now takes place electronically. The additional administrative burden may also create a disincentive for foreign issuers, in particular, to extend exempt offerings to Canadian-resident individuals who otherwise qualify as accredited investors. The proposal would also require that the issuer keep a copy of the RAF for eight years following the distribution. This requirement is not consistent with most record-retention requirements, and it is unclear from the proposal whether the RAF would have to be retained in physical form.

Further, most of the information included in the RAF is information that would typically already be included in subscription materials. Imposing the RAF requirement could create issues with respect to the validity of representations made in subscription agreements and the ability to rely on them. The RAF requirement would also effectively impose a due diligence obligation as to the basis of subscriber representations where, typically, unless a party is aware of a reason to question a particular representation, that party is entitled to rely on the representation without further investigation.

Finally, in respect of concerns regarding investors investing in inappropriate products or products that the investor does not understand, the proper avenue to address these concerns is through dealer “know your client”, “know your product” and suitability obligations. Mandating the use of a RAF will not address any investor knowledge gap. While these investor protections would not be available in cases of an investor purchasing securities directly from the issuer, these concerns could be addressed by requiring the issuer to disclose to the investor that the issuer is not a registrant and therefore is not subject to the same obligations vis-à-vis the investor as a dealer is.

For a more thorough review of these issues, as well as the technical issues identified with the proposals, see our Comment Letter submitted to the CSA.

Ontario's proposed prospectus exemptions: family, friends and business associates exemption

Kristina Vranjkovic -

The Ontario Securities Commission’s (OSC) proposed family, friends and business associates exemption (the Ontario Exemption), if adopted, would allow small to medium-sized enterprises (SMEs) to raise capital in Ontario from a broader range of permitted individuals, while imposing concurrent parameters and obligations which promote investor protection and consistency of application. With a view to facilitating capital raising by SMEs and harmonizing the exemption across all provinces, the Ontario Exemption is based largely on the existing private issuer and family, friends and business associates exemption available in the other Canadian provinces (the Existing Exemption) with a few notable differences, as summarized below. The OSC’s proposal also calls for the repeal of the existing founder, control person and family exemption in section 2.7 of NI-106 upon enactment of the proposed Ontario Exemption.

As we previously discussed, the Ontario Exemption is one of the prospectus exemptions proposed by the OSC last month.

Current Regime

In Ontario, issuers can currently raise capital from certain family members of their executive officers, director or founders without the need to file a prospectus by way of the private issuer exemption in section 2.4 of National Instrument 45-106 Prospectus and Registration Exemptions or the founder, control person and family exemption in section 2.7 of NI 45-106. In the other Canadian provinces, however, a much broader family, friends and business associates exemption is available in section 2.5 of NI 45-106 (and section 2.6 of NI 45-106 in Saskatchewan), whereby companies can raise capital from a wider scope of family members, as well as close personal friends and close business associates of their or their affiliates’ executive officers, directors or control persons.

Similar Features

Like the Existing Exemption, the Ontario Exemption would be available to both reporting issuers and non-reporting issuers and selling security holders, imposes no restrictions on the size of the offering, the jurisdiction of incorporation or organization of the issuer, or the nature of the business, and does not provide investors with a right of withdrawal. Also consistent with the Existing Exemption, there is no requirement for principals to invest their own money in the business prior to making an offering under the exemption, and investors can invest an unlimited amount of money into the company. The resale restrictions would be the same under the Ontario Exemption, with securities of a reporting issuer being subject to a four-month hold period, and securities of a non-reporting issuer being subject to an indefinite hold period unless resold under another prospectus exemption or the issuer becomes a reporting issuer.

Distinguishing Features

In contrast to the Existing Exemption, however, the Ontario Exemption is not available to investment funds, as the OSC notes it seeks to address investment funds in separate initiatives targeted towards the modernization of product regulation and point of sale disclosure. Also, unlike the Existing Exemption under which the distribution of any type of security is permitted, only specific categories of securities can be distributed under the Ontario Exemption, namely: common shares, non-convertible preference shares, securities convertible into common shares or non-convertible preference shares, non-convertible debt securities linked to a fixed or floating interest rate, units of a limited partnership or flow-through shares under the Income Tax Act (Canada). Novel or complex products are purposefully excluded from distribution under the Ontario Exemption, as it is the OSC’s view that SMEs would be unlikely to issue complex products and that such securities only be sold with the full protection afforded by a prospectus.

While the use of registrants, finders or advertising is not prohibited to solicit investors in connection with a distribution under the Existing Exemption, the Ontario Exemption prohibits such advertising as well as any corresponding finder’s fees or commissions. Given that investors must be within the personal networks of the executive officers, directors or control persons of the issuer or its affiliates, the OSC reasons that any such advertising would be unnecessary and any need for advertising would raise concerns about the application of the exemption in the first instance. Another proposed change under the Ontario Exemption provides that if potential investors are voluntarily supplied with an offering memorandum in connection with a distribution under the exemption, then statutory rights of action, including rights of action for damages and rescission, would be available to investors.

Of note, the most significant differences found in the Ontario Exemption include additional guidance on the scope of “close personal friends” and “close personal business associates”, which has been a longstanding concern, and imposing additional and/or more comprehensive reporting requirements. Each of these changes is described in greater detail below.

Close Personal Friends and Close Personal Business Associates

Although the Ontario Exemption contemplates substantially similar categories of investors as those found in the Existing Exemption, being family members, close personal friends and close personal business associates, the OSC also proposes expanded guidance on the meaning of “close personal friend” and “close personal business associate” in the companion policy to NI 45-106 in its attempt to mitigate against improper use of the exemption. The expanded guidance would add more colour to the guidance accompanying the Existing Exemption, which the OSC considers to be insufficient, and would place the onus on the issuer to establish whether such close personal relationship exists. In addition to providing definitions of “close personal friend” and “close personal business associate”, the proposed amendments to the companion policy also enumerate specific factors that the OSC would examine in its determination of the existence of such relationships. In recognition of the rise of social media, the OSC also notes that a friendship that is primarily founded on Facebook, Linkedin or other internet forums would generally not meet the standard of a close personal friend or close personal business associate.

Risk Acknowledgment Form

Notably, the Ontario Exemption would require any investor who is an individual to sign a risk acknowledgment form (RAF) upon purchasing a security in reliance on the exemption. Such prerequisite currently exists in Saskatchewan but not in the other jurisdictions where the Existing Exemption is available. In order to promote greater investor awareness and protection, the proposed RAF would require the investor to acknowledge, among other things, the riskiness of the investment, that the investor could lose all of the money invested, and that the investor will not have the benefit of protections under securities laws that are afforded under prospectus distributions. Furthermore, the investor must disclose which category of investor he or she satisfies and provide specifics of his or her relationship, including the length of time the investor has known the director, executive officer, founder or control person with whom he or she is claiming to be a close personal friend or close personal business associate. The issuer as well as the director, executive officer, founder or control person with whom the investor has directly or indirectly asserted the exempt relationship must sign the RAF and the person making the distribution must retain a copy of the form for eight years following the distribution.

Report of Exempt Distribution

Consistent with the approach taken in other provinces, issuers relying on the Ontario Exemption would be required to file a report of exempt distribution on proposed Form 45-106F11. Beyond simply identifying the exemption relied upon, however, additional disclosure concerning the identity and position of the individual with whom the investor has declared a relationship and the category of relationship asserted must also be provided. Such additional disclosure would be provided in a confidential schedule to the report of exempt distribution and would not appear on the public record. Such information is intended to help monitor compliance with the Ontario Exemption and create a more uniform interpretation of the close personal friend and close personal business associate categories.

Comments on the proposed Ontario Exemption will be accepted by the OSC until June 18, 2014.

This article is the third in a series of posts discussing the prospectus exemptions proposed in Ontario. Our first post on the existing security holder exemption was published on March 20 and our second post on the crowdfunding exemption was published earlier this week.

Ontario's proposed prospectus exemptions: crowdfunding exemption

Cara Cornacchia -

In its March 20, 2014 proposals for four new prospectus exemptions intended to facilitate capital raising for businesses in Ontario, the Ontario Securities Commission (OSC) proposed a crowdfunding prospectus exemption (the “Crowdfunding Exemption”) aimed at facilitating greater access to capital through the exempt market, particularly for start-ups and small and medium-sized enterprises.

The securities regulatory authorities in each of Quebec, Saskatchewan, New Brunswick, Manitoba and Nova Scotia have also published for comment a crowdfunding exemption substantially similar to the proposed exemption in Ontario. In addition, these regulators, other than Saskatchewan, have published a separate crowd-funding exemption for start-ups, which would provide both a prospectus and registration exemption (the “Start-up Exemption”) as an alternate source of capital for non-reporting issuers in early phases of growth. In these jurisdictions, it is expected that both the Crowdfunding Exemption and the Start-up Exemption will coexist. These regulators believe that the Crowdfunding Exemption and the Start-up Exemption are complementary as they are targeted at issuers at different stages of development. The Start-up Exemption is currently available in Saskatchewan, and is substantially similar to what has been proposed by the other jurisdictions.

British Columbia has not published for comment a Crowdfunding Exemption, but did request comments on whether it should consider a Start-up Exemption. Although the Alberta Securities Commission is not publishing the Crowdfunding Exemption or the Start-up Exemption for comment, it will be considering the public comments in respect of these proposals.

Jurisdiction

Proposed Exemption

Maximum Offering Amount

Maximum Investment Amount

Ontario

Crowdfunding

$1.5 million every 12 month period

$2,500 per single investment; $10,000 aggregate per calendar year

Quebec, Saskatchewan, New Brunswick, Manitoba, Nova Scotia

Crowdfunding

$1.5 million every 12 month period

$2,500 per single investment; $10,000 aggregate per calendar year

Quebec, New Brunswick, Manitoba, Nova Scotia

Start-up

$150,000 per offering subject to a maximum of 2 offerings per calendar year

$1,500 per single investment

British Columbia

Start-up

$150,000 per offering subject to a maximum of 2 offerings per calendar year

$1,500 per single investment

Alberta

Neither

N/A

N/A


Crowdfunding Exemption

As we discussed in a post last month, the proposed Crowdfunding Exemption would be available to both reporting and non-reporting issuers incorporated or organized in Canada. This exemption would not available to investment funds, “real estate issuers” that are not reporting issuers, or issuers without a written business plan. The type of securities that could be offered pursuant to this exemption could not be novel or complex, and would be limited to certain types of securities including, among others, common shares, non-convertible preference shares and non-convertible debt securities.

Under the Crowdfunding Exemption, issuers could raise no more than $1.5 million in the 12-month period immediately preceding the offering. Any offering under the Crowdfunding Exemption could not be completed unless the minimum offering is fully subscribed and the issuer, at the time of completion of the offering, has financial resources sufficient to achieve the next milestone in its written business plan or, if no milestones, to carry out the activities set out in its business plan.

Investors would be limited to investing up to $2,500 per single investment under the Crowdfunding Exemption, and could not invest more than an aggregate of $10,000 under the Crowdfunding Exemption in a calendar year. Each investor would be required to sign a risk acknowledgement form confirming, among other things, that they fall within the prescribed investment limits and acknowledging the key risks associated with the investment.

Issuers would be required to provide a disclosure document, which includes basic information about the issuer, the offering, the funding portal through which the offering is made and certain financial information of the issuer, including, in the  case of a reporting issuer, the most recent annual financial statements filed with the securities regulatory authority, and, in the case of a non-reporting issuer, audited annual financial statements if an issuer has crossed certain prescribed thresholds. Issuers, both reporting and non-reporting, would also be subject to certain ongoing disclosure requirements.

Securities issued in reliance on the Crowdfunding Exemption by a reporting issuer would generally be subject to a four-month hold period and, in the case of a non-reporting issuer, could not be resold until the issuer becomes a reporting issuer, unless the sale is made under another prospectus exemption (other than the Crowdfunding Exemption).

Following an offering, a report of exempt distribution would be required to be filed within 10 days of the distribution.

Any offering under the Crowdfunding Exemption would be required to be carried out through a funding portal registered under applicable securities laws. Portals would be required to comply with general registrant requirements applicable to exempt market dealers, and would be required to, among other things, conduct background checks on issuers and their directors, officers, promoters and control persons, and review disclosure documents of issuers. A portal could not provide advice to investors about the securities offered on their platform.  

Start-up Exemption

The proposed Start-up Exemption (which is not being proposed in Ontario) would be available to non-reporting issuers only, other than investment funds, whose head office is located in a participating jurisdiction. Under this exemption, an issuer would not be allowed to raise more than $150,000 per offering, and the exemption could only be used twice in a calendar year. Investors would be limited to investing no more than $1,500 per single investment under the Start-up Exemption. Similar to the Crowdfunding Exemption, each investor would be required to sign a risk acknowledgment form, and issuers would be required to file a report of exemption distribution following the closing of any distribution.

Unlike the Crowdfunding Exemption, companies relying on the Start-up Exemption would not be required to file financial statements, nor would they be subject to ongoing disclosure. Additionally, there would be no requirement for a portal to be registered as a dealer provided it complies with the requirements applicable to portals set out in the Start-up Exemption.

Since the exemption is only available to non-reporting issuers, securities sold pursuant to the Start-up Exemption would be subject to an indefinite hold period, and could only be resold under another prospectus exemption or after the issuer becomes a reporting issuer.

Conclusion

The introduction of a Crowdfunding Exemption and Start-up Exemption in certain jurisdictions in Canada would broaden the capital raising alternatives for many start-ups and small and medium-sized businesses. Although the regulatory regime as currently proposed would vary somewhat by province, crowdfunding may lower the cost of raising funds for many businesses encountering capital raising difficulties, create opportunities for non-accredited investors to participate in the exempt market, and provide issuers with access to a larger group of investors from whom to raise capital.

The Crowdfunding Exemption and related portal would be given effect through the introduction of Multilateral Instrument 45-108 Crowdfunding and related Companion Policy 45-108CP Crowdfunding, along with proposed Form 45-108F1 Crowdfunding Offering Document and Form 45-108F2 Risk Acknowledgement Form for Crowdfunding Investors. The Start-up Exemption would be given effect in the relevant jurisdictions by way of a blanket order.

The comment period for the Crowdfunding Exemption and Start-up Exemption will close on June 18, 2014.

This article is the second in a series of posts discussing the prospectus exemptions proposed in Ontario. Our first post on the existing security holder exemption can be found here.

Ontario's proposed prospectus exemptions: existing security holder exemption

Emma Parker and Simon Romano -

Of the new prospectus exemptions proposed to be adopted by the Ontario Securities Commission (OSC), the “existing security holder” exemption represents, in many ways, a significantly streamlined avenue for reporting issuers to raise funds from their existing securityholders. While similar in many ways to the corresponding exemption that recently came into force in other Canadian jurisdictions (the “Counterpart Exemption”), the “Ontario Exemption” as proposed includes certain additional requirements, which we examine in detail below.

As we previously discussed, on March 20, 2014, the OSC published for comment the Ontario Exemption along with three other proposed prospectus exemptions. These new exemptions flow from the key themes noted in OSC Notice 45-712 Progress Report on Review of Prospectus Exemptions to Facilitate Capital Raising, including the need to facilitate capital raising for small and medium-sized enterprises, the importance of harmonizing exemptions across Canada and the importance of regulatory monitoring and oversight in the exempt market.

The proposed Ontario Exemption would allow issuers listed on the Toronto Stock Exchange, TSX Venture Exchange or Canadian Securities Exchange to raise capital from existing security holders.  The OSC lists two primary policy rationales for the exemption, namely (i) allowing existing security holders to invest in reliance on reporting issuer disclosure and (ii) enhancing retail security holder access to primary offerings.

The Ontario Exemption is largely based on the Counterpart Exemption adopted by securities regulatory authorities in all Canadian jurisdictions, other than Ontario and Newfoundland and Labrador, on March 13, 2014; however, there are some notable differences. Under both exemptions (as discussed in our March 14 post), issuers will have to satisfy the following requirements:

  • All of the issuer’s periodic and timely disclosure filing obligations must be satisfied;
     
  • An offering news release must be issued and filed, containing reasonable details of the offering and the proposed use of proceeds including details with respect to the proposed allocation of the securities;
     
  • The offering may only consist of a listed security or a unit consisting of a listed security and a warrant;
     
  • The offering must be made available to all persons who reside in jurisdictions where the exemption or a similar exemption is available and who, as of the record date (which must be at least one day prior to the day the issuer issues its offering news release), held a listed security of the issuer of the same type as the listed security being offered; and
     
  • The subscription agreement must provide investors with a contractual right of action in the event of a misrepresentation in the issuer’s continuous disclosure record.

Under the Ontario Exemption, the following additional conditions would apply:

  • The issuer must have been a reporting issuer for not less than 12 months, or have become a reporting issuer by filing and obtaining a receipt for a prospectus;
     
  • Subject to the investment limits described below, the issuer must allocate existing security holders a pro rata portion of the offering – any securities that are not taken up by existing security holders in accordance with the foregoing may then be allocated to other existing security holders at the discretion of the issuer;
     
  • The issuer must file a report of exempt distribution in proposed Form 45-106F11.

The OSC has proposed the first requirement above on the grounds of investor protection, to ensure that the issuer has a base disclosure record. As the OSC is concerned that the exemption could be used in a manner that results in security holders suffering significant dilution, the second requirement has been proposed to provide existing security holders with the right to avoid dilution and to ensure that the issuer does not unfairly “cherry pick” specific existing security holders for additional investment opportunities. We note, however, that issuers would not be bound by the pro rata requirement with respect to any securities not taken up under the original allocation.

With respect to the requirement to provide investors with a contractual right of action, issuers must represent to purchasers in the subscription agreement that the issuer’s “core documents” and “documents” (as defined under Section 138.1 of the Securities Act (Ontario)) do not contain a misrepresentation and that there is no material fact or material change related to the issuer which has not generally been disclosed.  Further, the OSC is considering extending the application of the statutory secondary market civil liability provisions in the Act and those that apply to misrepresentations in prescribed offering memoranda, to an offering under the Ontario Exemption and any related offering documents.

Unlike the Counterpart Exemption, the Ontario Exemption is not available to investment fund issuers. The OSC has noted that the exclusion of investment funds is consistent with the objective of facilitating capital raising for start-ups and small and medium-sized enterprises.

Although there is no requirement for securities sold under the Ontario Exemption to be sold through a registrant, provided that the issuer does not carry on the business of trading in securities (and is therefore itself required to register), IIROC dealers and EMDs involved in any distribution under the Ontario Exemption will have to comply with “know your client” and “suitability” obligations. In addition, an existing security holder will be limited to investing no more than $15,000 per year in the issuer under the Ontario Exemption, unless the security holder has obtained suitability advice from a registered investment dealer. The $15,000 cap is higher than the cap for each of the proposed offering memorandum and crowdfunding exemptions on the grounds that the issuer will be a reporting issuer and existing security holders will already have made a decision to invest in the issuer’s securities. This cap is harmonized with the cap under the Counterpart Exemption. The aggregate offering size would also be limited to 100% of the issuer’s outstanding securities of the same class.

Issuers relying on the Ontario Exemption will not technically have to provide an offering document; however, as described above, issuers will have to extend a contractual right of action for misrepresentations.  Any offering materials (other than a subscription agreement) must also be filed on the same day that they are provided to existing security holders and the issuer will be required to file a material change report.  As well, the need for all material facts to be disclosed, may well require additional disclosure to prospective investors.

Similar to the “accredited investor” exemption, the issuer will be required to file a report of exempt distribution within 10 days of the offering. A report of exempt distribution in proposed Form 45-106F11 will need to be filed by issuers relying on the Ontario Exemption. The proposed new form is intended to provide increased information on exempt market activity and to assist in monitoring compliance. As is the case under the “accredited investor” and other capital raising exemptions, the first trade of a security acquired under the Ontario Exemption will be subject to a four month hold.

The Ontario Exemption would be given effect by amendments to OSC Rule 45-501 Ontario Prospectus and Registration Exemptions, along with amendments to National Instrument 45-106 Prospectus and Registration Exemptions. Comments are due by June 18, 2014. 

Exchange of Letters to facilitate Canadian issuer offerings in Chile

The OSC, AMF, ASC and BCSC have entered into an Exchange of Letters with Chile's Superintendencia de Valores y Seguros intended to facilitate the public offering of securities of Canadian reporting issuers in Chile on an exempt basis.

Pursuant to Chilean law, SVS Chile may exempt from its securities registration requirements public offerings of any foreign securities, including securities issued by Canadian-based issuers, provided such securities are issued by issuers under the supervision of a regulator with whom the SVS Chile has entered into a cooperation arrangement, which supports Chilean investors having access to public information regarding the foreign issuer and its securities.

According to the Exchange of Letters, SVS Chile has agreed to provide Canadian regulators with information and trade data in the case of concerns regarding market manipulation, abuse or fraud involving Canadian issuers listed in Chile. Other members of the CSA wishing to become a participant to the Exchange of Letters may do so at any time by executing a counterpart of the letter and providing notice to the SVS Chile and the other Canadian participating regulators.

Crowdfunding and other prospectus exemptions proposed by the OSC and other CSA regulators

The Ontario Securities Commission today published for comment four new prospectus exemptions intended to assist companies that are seeking to raise capital, while maintaining an appropriate level of investor protection. As we've previously discussed, the OSC initiated a consultation process in December 2012 to consider potential prospectus exemptions, with updates released in August and December of 2013.

As discussed in detail below, the proposed exemptions announced today consist of an offering memorandum and family friends and business associates exemption, which are available in other provinces but would be new for Ontario, and an existing securityholder exemption, similar to that which was adopted by other Canadian regulators last week. With respect to crowdfunding, the OSC has also published its own proposed exemption, with some of its counterpart regulators proposing a similar but separate exemption.

  1. Offering memorandum exemption. This proposed exemption is based on the existing offering memorandum exemption currently found in section 2.9(2) of NI 45-106 Prospectus and Registration Exemptions that is not available in Ontario. While the proposed exemption would not place limits on the size or frequency of offerings an issuer could make, there would be limits for individual investors, namely $30,000 for eligible investors and $10,000 for non-eligible investors. In addition, individual investors would be required to sign a risk acknowledgement form prior to or at the time of purchasing a security in reliance on this exemption.

    Meanwhile, Alberta, Quebec, and Saskatchewan have also published for comment proposed amendments to NI 45-106 relating to the OM exemption that is currently available in those provinces, intended to generally align the exemption with Ontario's proposal and New Brunswick has proposed amending its OM exemption to conform to that proposed by the OSC.
     
  2. Family, friends and business associates exemption. This proposed exemption is based on the existing family, friends and business associates exemption currently found in section 2.5(1) of NI 45-106 that is not available in Ontario. No limit has been proposed on the size of an offering made under this exemption but only certain types of securities could be distributed. In addition, there would be expanded guidance on the meaning of close personal friend and close business associate, with the onus of establishing the existence of such relationships would be on the issuer.

    Similar to the proposed OM exemption, individual investors would be required to sign a risk acknowledgement form prior to or at the time of purchasing a security in reliance on this exemption. Also of note, in connection with the proposed implementation of this exemption, the OSC is also proposing the repeal of the existing founder, control person and family exemption in section 2.7 of NI 45-106. 
  1. Existing security holder exemption. This exemption would allow companies listed on the TSX, TSX-V or Canadian Securities Exchange to raise capital from existing security holders based on the issuer's existing continuous disclosure. Offerings under this exemption would be limited to 100% of the issuer’s outstanding securities of the same class and investors would be limited to investments of no more than $15,000 every 12 months unless they obtain suitability advice in respect of the investment. As we discussed last week, regulators in most other Canadian jurisdictions recently adopted a similar exemption. 
     
  2. Crowdfunding exemption. Under this exemption, both reporting and non-reporting issuers and their affiliates would be able to raise up to $1.5 million per year. Investors would also be limited to investing no more than $2,500 in a single investment, and no more than $10,000 in a year under the exemption. However, the exemption would not be available to investment funds or real estate issuers, nor in respect of novel or complex securities. Corresponding requirements for crowdfunding portals have also been proposed.

    Meanwhile, Quebec, Saskatchewan, Manitoba, New Brunswick and Nova Scotia also published a similar proposed crowdfunding exemption for both reporting issuers and non-reporting issuers with similar compliance requirements. However, with respect to start-up companies specifically, these regulators have also proposed a different and less onerous exemption that would target very early stage companies that are non-reporting issuers. This exemption is similar to that which is currently available in Saskatchewan.

    Under the start-up exemption, non-reporting issuers would be limited to raising no more than $150,000 per offering and investors would not be able to invest more than $1,500 in a single investment. The exemption would also be subject to less onerous compliance requirements. British Columbia has also published for comment its own start-up exemption proposal applicable to non-reporting issuers with similar (lower) investment limits.

Certain amendments are also proposed in respect of reports of trade required to be filed in connection with prospectus exempt distributions. Among other changes, the OSC along with regulators in Alberta, New Brunswick and Saskatchewan is proposing new forms of report that differentiate between investment funds and non-investment fund issuers. In these jurisdictions, the year-end filing exemption currently available to investment fund issuers would also be reduced to require filings within 30 days of each quarter.

The OSC and other regulators are accepting comments on their proposed prospectus exemptions until June 18, 2014.

CSA members adopt new "existing security holders" prospectus exemption

The CSA announced yesterday that the securities regulatory authorities in all Canadian jurisdictions, other than Ontario and Newfoundland and Labrador, have adopted a prospectus exemption that, subject to certain conditions, allows issuers listed on the Toronto Stock Exchange (TSX), TSX Venture Exchange (TSX-V), and the Canadian Securities Exchange (CSE) to raise money by issuing securities to their existing security holders.

This new exemption has a significantly broader scope than initially suggested last November in Multilateral CSA Notice 45-312 Proposed Prospectus Exemption for Distributions to Existing Security Holders, which proposed an exemption for TSX-V-listed issuers only. In keeping with several comments received during the consultation period, the final exemption was modified to be available to issuers with equity securities listed on the TSX and the CSE, in addition to those listed on the TSX-V.

The exemption for existing security holders will be available to an issuer on the following conditions:

  • All periodic and timely disclosure filing obligations are met;
     
  • An offering news release is issued and filed. The news release must contain reasonable detail of the offering and proposed use of proceeds, including a description of how any oversubscriptions would be allocated;
     
  • The offering consists of a listed security or a unit consisting of a listed security and a warrant;
     
  • The offering is made available to all persons who, as of the record date (which must be at least one day prior to the day the issuer issues its offering news release), held a listed security of the issuer of the same type as the listed security being offered; it needs to be available, however, only to security holders who reside in jurisdictions where the exemption or a similar exemption is available; and
     
  • The subscription agreement provides an investor with certain rights of action in the event of a misrepresentation in the issuer’s continuous disclosure record.

In order to acquire securities under the exemption, an investor must also be purchasing as principal and confirm in writing to the issuer that, on or before the record date, the investor held a listed security of the same type as the listed security that the investor is acquiring under the exemption. An investor is limited to investing no more than $15,000 per year under the exemption unless suitability advice from a registered investment dealer is obtained.

The exemption is also subject to other conditions, including the requirement to file a report of exempt distribution within 10 days of the offering, and resale restrictions will also apply to the first trade of a security acquired under the exemption.

Though harmonized across the participating jurisdictions, the exemption has been, or is expected to be, implemented by way of rules in Alberta and Quebec, and by way of blanket orders in the other jurisdictions. While the exemption has not been adopted in Ontario, the Ontario Securities Commission indicated in December that it would be releasing proposals for four new capital raising prospectus exemptions in the first quarter of 2014, including an exemption for distributions to existing security holders.

For more information, see Multilateral CSA Notice 45-313.

BC dealer registration exemption for trades in MIEs extended

The British Columbia Securities Commission announced earlier this week that it is extending to BC Instrument 32-517, which provides a dealer registration exemption related to trades in prospectus-exempt securities of mortgage investment entities, to June 30, 2015.

CSA propose amendments to accredited investor and $150k exemptions

Tim McCormick and Ramandeep Grewal -

On February 27, the Canadian Securities Administrators published for comment proposed amendments to prospectus exemption rules, including the “accredited investor” (AI) and “$150,000 minimum investment” ($150K) exemptions. These proposals follow a comprehensive public consultation process and are intended to address the CSA’s concerns that individual investors may not appreciate the risks of investing under the AI exemption, and that the $150K threshold may not provide an adequate proxy for sophistication or the ability to withstand loss.

As such, the CSA’s proposed amendments to the AI exemption would require that individual investors be presented with, and complete and sign, a new risk acknowledgement form (RAF). However, the income and asset thresholds used in the definition of accredited investor would not be changed, with the CSA specifically noting that many responses to its earlier consultation expressed concerns that potential changes to the exemption could limit access to capital. Meanwhile, proposed changes to the $150K exemption would allow only non-individuals to use the exemption. According to the CSA, while this exemption is relied on in respect to less than 1% of distributions, it provides an inexpensive alternative to non-accredited investors and works well in certain circumstances, such as in respect of real estate securities.

Risk Acknowledgment Form

Under the proposed amendments, the new RAF would have to be completed by all categories of individual accredited investors, being those qualifying under the net income, financial assets or net assets tests. However, it would not apply to those individuals qualifying under a new “permitted client” category, which would require that an individual have over $5 million in his or her own financial assets. This is in contrast to the existing $5 million category, which applies to an individual who alone, or together with a spouse, has net assets of at least $5 million, and the $1 million category, which applies to a person or couple who beneficially own financial assets of over $1 million. Notably, the “permitted client” category of investors are also entitled to waive suitability requirements under dealer registration rules. 

The RAF is proposed to include specific sections advising purchasers of the risks of investing in prospectus exempt securities, having them acknowledge exactly how they satisfy the AI exemption and confirming what they are purchasing, including the amount of their investment that is being paid as a fee or commission.  Any person involved in selling the securities must also sign and date the form, including particulars as to how they may be contacted and their registration status. The form further advises investors that they can check for the seller’s registration status and history at www.aretheyregistered.ca. The RAF is strictly required to be presented on one double-sided page, with each of the purchaser, issuer and salesperson (if any) required to sign two copies to be retained by the purchaser and the issuer (and in the case of the issuer, for eight years). It remains to be seen what modifications may be made by the CSA to facilitate the use of electronic communications, including signature and retention, to satisfy these requirements.

On a related note, the CSA have launched www.aretheyregistered.ca as a coordinated website where registration status can be searched across all Canadian jurisdictions.   This search was fragmented for many years with investors being forced to search Ontario separately from other CSA jurisdictions, and with search parameters not available for all categories of registration.

The definition of accredited investor would also be amended to include family trusts established by an accredited investor, provided that the majority of trustees were accredited investors. As set out above, availability of the $150K would also be narrowed such that it would no longer be available to individuals.

Exempt Trade Reports

Significant amendments are also proposed to the form of report required to be filed following a private placement (the Exempt Trade Report).   These amendments include having to specifically identify each category of purchaser under a prospectus exemption (for example, the specific category of AI for each purchaser). The stated purpose of the CSA in asking for such additional information is to assist CSA members with compliance and enforcement. 

Correspondingly, the CSA state in proposed new companion policy guidance that it will not be sufficient to accept standard representations in a subscription agreement or RAF regarding a purchaser’s exempt status, unless the person relying in the exemption has taken reasonable steps to verify the representation. While appropriate procedures will be fact specific, the CSA underscore that the focus should be ensuring that both the seller and prospective purchaser understand the relevant financial tests, and where necessary, the purchaser is asked additional questions to verify how they satisfy the exemption. The CSA also suggest that persons relying on the exemption may need to take further steps to collect additional information depending on the circumstances, including asking for confirmatory documentation such as income tax and bank statements and appraisal reports.

The Exempt Trade Report is proposed to be amended to clarify that each Canadian and foreign jurisdiction where purchasers reside must be identified and that purchasers must be listed by jurisdiction. However, the CSA have not taken the opportunity to provide any additional clarification on when a distribution is deemed to be taking place in a province when the purchaser does not reside in that province. While this issue was been clarified under local rules in certain provinces, such as Alberta and British Columbia, that is not the case for all CSA jurisdictions. In Ontario, for example, market participants have relied primarily on an interpretation note based on former Policy 1.5, which goes back more than twenty years and is often difficult to apply and is arguably outdated given, among other things, developments in technology and capital markets activity generally.

As we previously discussed, the CSA initiated a consultation on proposed changes to these exemptions in November 2011, and provided an update on progress in June 2012.

The CSA are accepting comments on the proposed amendments until May 28, 2014.

IOSCO considers trends in crowdfunding

The IOSCO Research Department recently released a staff working paper that considers the emerging growth of crowdfunding. In addition to analyzing the benefits and risk of crowdfunding, the paper considers platform business models, current regulatory regimes and trends, and potential regulatory next steps.

As we previously noted, the Ontario Securities Commission intends to release proposed new prospectus exemptions for comment in the first quarter of this year. A crowdfunding exemption is one of four exemptions under consideration.

CSA propose changes to current short-term debt exemption and new rules for exempt trading of short-term securitized products

The CSA yesterday released proposed two sets of amendments to National Instrument 45-106 Prospectus and Registration Exemptions that would introduce a bifurcated approach to how they will treat asset-backed commercial paper (ABCP) as opposed to commercial paper (CP). 

With respect to CP,  the proposed amendments would remove the current “split rating condition” that requires CP to have a designated rating at or above the designated ratings thresholds, and if a second rating is obtained, require that it not be below any of the same designated rating thresholds. Instead, a “modified split rating condition” is proposed that would require that CP not having any rating below a different (and generally lower) set of designated rating thresholds. Among other things, this is intended to remove the disincentive for issuers of commercial paper to seek additional ratings. According to the CSA, the modified condition would also provide for consistent treatment of commercial paper issuers with similar credit risk and maintain the current credit quality of commercial paper distributed under the exemption.

Meanwhile, the CSA announced that since securitization activity in Canada, with the exception of non-bank ABCP, does not raise systemic risk or investor protection concerns, they do not intend to proceed with their 2011 proposals to introduce a new framework for the regulation of securitized products. However, more targeted amendments focusing on short-term securitized products were included as part of the proposal released yesterday. (For more comprehensive commentary on the various aspects of the earlier proposals, see our Canadian Structured Finance Law blog posts from 2011)

Specifically, the CSA proposal would exclude short-term securitized products from being distributed under the short-term debt exemption (discussed above), as well as the private issuer, friends and family, founders, and OM prospectus exemptions. However, a new prospectus exemption for short-term securitized products would be introduced that would only be available to ABCP backed by conventional or traditional assets. The proposed exemption would also be subject to the satisfaction of a number of new conditions, including the requirement to have ratings from at least two designated rating organizations and prescribed liquidity support and asset pool requirements. In addition, the conduit would be required to prepare an information memorandum in a prescribed form to be made available to investors prior to the investor purchasing the short-term securitized product and would be subject to certain other timely and ongoing disclosure obligations.

Comments on the proposals are being accepted until April 23, 2014.

Implications of the new marketing rules for prospectus distributions

Jeffrey Singer and Ramandeep K. Grewal -

Rules governing the marketing of prospectus offerings were amended by the Canadian Securities Administrators in August 2013, in some respects in a significant manner. Intended to ease marketing restrictions and complement existing market practices, the new rules provided some much needed clarity in respect of activities that are commonly undertaken in marketing prospectus offerings. However, they have also given rise to various questions as issuers and underwriters worked through the ramifications of these new requirements in the first few months since their implementation. 

Amendments were made primarily to National Instrument 41-101 General Prospectus Requirements and National Instrument 44-101 Short Form Prospectus Distributions and expressly codified permissible “pre-marketing” and “marketing” activities that can be conducted prior to and after the filing of a preliminary prospectus.

As discussed in detail below, the amendments included a new exemption to permit registered dealers to “test the waters” in connection with an initial public offering (IPO), as well as express rules relating to the use of “standard term sheets” and “marketing materials” and to the conduct of “road shows” during and after the waiting period. Amendments were also made to existing exemptions that permit pre-marketing in connection with a “bought deal agreement” that, among other things, impose new requirements on what will be considered a “bought deal agreement” for the purposes of the exemption. Specific requirements were also imposed on amending the terms of a bought deal agreement, including increasing or decreasing the size of the offering. While these changes have been characterized by the regulators as an easing of restrictions, as discussed below, these accommodations come at the price of specific rules and express policy bias that may cast some doubts on “street” practices that routinely took place. In this article, we review these changes and examine some practical issues faced in their application.

New “Testing of the Waters” Exemption for IPOs

With respect to pre-marketing in connection with a prospectus offering, the CSA implemented a new exemption from the prospectus requirement that permits the solicitation of expressions of interest where the issuer has a reasonable expectation of filing a preliminary long form prospectus in respect of an IPO. Pursuant to this exemption, an investment dealer that is authorized in writing to do so by the issuer is permitted to make solicitations to “accredited investors” (as defined in National Instrument 45-106 Prospectus and Registration Exemptions).

When relying on this exemption, both the issuer and the investment dealer must keep information about the proposed offering confidential, written materials provided to potential investors must be marked confidential and contain a prescribed legend, and prior to providing any information about the proposed offering, the investment dealer must obtain a written confidentiality confirmation from the investor. Guidance in the Companion Policy to NI 41-101 advises that this confirmation may be obtained through e-mail.

Any issuer relying on this exemption must keep a written record of the investment dealers it authorizes to act on its behalf as well as a copy of the written authorization itself. To comply with this requirement, the CSA would expect the issuer to record the name and contact information for a contact person with each investment dealer that it authorizes. The investment dealer is also subject to record-keeping requirements and must keep a written record of any accredited investor that it solicits, as well as a copy of any written materials it provides to them and the confidentiality confirmations it obtains from them. 

This “testing the waters” exemption is not available to any issuer that is a reporting issuer in any other jurisdiction prior to filing a preliminary prospectus in Canada, nor is it available to SEC issuers, whose securities have been assigned a ticker symbol by FINRA for use on any OTC market in the United States or whose securities have been traded on an OTC market where trade data is publicly reported, or those that have had any securities listed, quoted or traded on a marketplace or similar facility outside of Canada where trade data is publicly reported.   The exemption is also not available where a “control person” of the issuer is a public issuer and the IPO would be a material fact or material change with respect to such control person. In addition, the preliminary prospectus cannot be filed until 15 days after the last of such solicitations is made.

As discussed below, specific requirements now apply to the use of written materials in connection with a distribution and to the conduct of a “road show”. This will require greater scrutiny of “non-deal” road shows and similar presentations to ensure they are not, in fact, being undertaken in connection with a distribution. While they were specifically asked through comments, the regulators opted not to provide any bright-line threshold for a “cooling-off” period between a non-deal roadshow and the commencement of an offering, leaving the determination to one based on facts as to whether a distribution was contemplated. As a consequence, there is undoubtedly a greater focus on making such a determination given that for deal-related roadshows there is the potential to be offside both applicable pre-marketing restrictions as well as the new requirements. Market practice on this issue has also been influenced by the 15-day cooling off period for the “testing the waters” exemption, notwithstanding that has been prescribed in a very specific context.

Use of Written Marketing Materials During and After the Waiting Period

After a preliminary prospectus has been filed and receipted (starting the “waiting period”), Canadian securities laws expressly permitted only for the distribution of the preliminary prospectus or the solicitation of expressions of interest from prospective purchasers provided that, prior to making the solicitation or forthwith after the purchaser indicates an interest in purchasing, a copy of the preliminary prospectus is provided. The distribution of certain limited communications, referred to in the new rule as a preliminary or final “prospectus notice” is also permitted. However, in addition to identifying the person from whom a copy of a preliminary prospectus may be obtained, such notices permit only the identification of the security proposed to be issued, the price (if then determined), and the name and address of the person from whom the securities may be purchased.

Under the new rules, written communications outside of the prospectus itself and such notices must be either a “standard term sheet” or “marketing materials". Both of these terms have specific defined meanings under the new rules and are accompanied by specified filing and other requirements and restrictions.

Standard Term Sheets

With respect to “standard term sheets” other than contact information for the dealer, all information concerning the issuer, securities or the offering must be disclosed in or derived from the relevant prospectus and the standard term sheet must be dated and contain a prescribed legend. The type of information permitted to be in a “standard term sheet” is very limited and specifically prescribed in NI 41-101. Information such as a description of the business of the issuer, the securities and the use of proceeds, for example, is limited to no more than three lines of text. Significantly, information such as credit ratings are not included in the prescribed line items and therefore cannot be included in a “standard term sheet.” In contrast to “marketing materials,” a standard term sheet is not required to be incorporated by reference into the prospectus or filed on SEDAR. While the new exemption to expressly allow for the provision of a “standard term sheet” is intended to provide greater flexibility in marketing an offering, it raises questions about certain existing practices, including those involving the provision of terms sheets and other written materials that may no longer strictly comply with the prescribed requirements. This has required dealers to review their documentation and procedures to ensure that written communications that are intended to be used only as a term sheet comply with the applicable requirements. As discussed below, written communication beyond a permitted “standard term sheet” will likely constitute marketing materials and be subject to additional requirements where used. Given the very limited nature of "standard term sheets", the result is that the bulk of written materials used have had to be modified to ensure they qualify as "marketing materials".

Marketing Materials and Road Shows

With respect to “marketing materials,” like standard term sheets, generally all information concerning the issuer, securities or the offering must also be disclosed in or derived from the applicable prospectus. However, this requirement does not apply to any comparables that may be included in marketing materials. As discussed above, marketing materials are required to be included or incorporated by reference in the final prospectus, which includes filing on SEDAR and translation to French where applicable.   Information relating to comparables may, however, be redacted from the version filed on SEDAR provided certain related disclosure requirements are satisfied and a complete version is delivered confidentially to the relevant securities regulators. A version, referred to in the new rules as a “template version” of the marketing materials, must also be approved in writing prior to use. The provision of a “template version” means that excerpted portions may be used where the template version in its entirety is not required. A copy of the relevant prospectus must also be provided along with the marketing materials.

Given the broad coverage of “written communications,” presentations and other written materials used for road shows and similar activities must comply with the above requirements. New Companion Policy guidance clarifies that this applies regardless of whether or not a copy of the road show presentation is left with a prospective investor. However, the ambit of “written communications” does not include cover e-mails or similar types of cover communications that may be used to transmit marketing materials to a prospective investor. When conducting road shows in connection with an offering, the dealer is required to ask each investor for their name and contact information, record any such information provided and provide the investor with a copy of the applicable prospectus. If the road show is not restricted to “accredited investors,” a prescribed oral warning must also be read out loud to attendees.

Any written materials used also continue to be subject to other securities laws restrictions and requirements relating to advertising and promotional disclosure, such as prohibited representations regarding resales or the future value of the securities.

While dealers are still permitted to prepare summaries of the principal terms of an offering for distribution to their registered representatives, any such “green sheet” that is distributed to the public must be either a “standard term sheet” or “marketing materials”  under the new rules, and  is therefore subject to the relevant requirements.  The implication of including material information in a green sheet or other marketing communication that is not contained in the prospectus is the same as it has always been, in that it could indicate a failure to provide full, true and plain disclosure in the prospectus.

Pre-Marketing of Bought Deals

As discussed above, the new rules expand the range of pre-marketing activities that can be undertaken in connection with bought deals and ease other restrictions applicable to bought deals. These include exemptions to allow for the provision of both “standard term sheets”  and “marketing materials” prior to filing a preliminary short form prospectus (i.e., during the “pre-marketing period”). The CSA explain that “pre-marketing” occurs when a dealer communicates with potential investors before a public offering and includes other promotional activities that occur before a preliminary prospectus is filed. Unless relying on the very narrow exemption available in the context of bought deals, pre-marketing is generally prohibited in Canada. The pre-marketing exemption for bought deals is therefore described as a “limited accommodation” for issuers seeking certainty of financing.

Use of standard term sheets and marketing materials in bought deals

Under the new rules, both “standard term sheets” and “marketing materials” are permitted to be used both prior to and after the filing of a preliminary or final short form prospectus. Generally, similar requirements as described above will apply. Notably with bought deals, when used prior to the filing of a preliminary short form prospectus, information contained in the standard term sheet or marketing materials must be disclosed in or derived from the bought deal news release or the issuer’s continuous disclosure record. While marketing materials used during the pre-marketing period still need to be filed on SEDAR, they will not be made public until the preliminary prospectus is filed and receipted.  

Termination provisions, upsizing bought deals and expanding bought deal syndicates

In addition to easing marketing restrictions, the new rules contain some significant new requirements on what may or may not be contained in a “bought deal agreement”. Specifically, such an agreement cannot contain a “market out” clause which permits termination of the agreement in the event that the securities cannot be marketed profitably due to market conditions. While not contained in the rules, Companion Policy guidance also cautions that since the policy rationale for the “bought deal exemption” is to facilitate issuers seeking certainty of financing, certain types of other termination “outs” such as a due diligence out or a failure to obtain a final prospectus receipt by a specified date may not be permitted or could be subject to objection. While the regulators understandably want certainty, shifting the risk to the dealers may come with its own costs. The early experience demonstrates an attempt to push the risk back onto the issuer, but it remains to be seen how this may ultimately impact pricing, commissions and other deal elements.  

A bought deal agreement also may not be conditional on syndication, although a prescribed form of “confirmation clause” is permitted, provided certain conditions are satisfied. For these purposes, a “confirmation” is defined as a provision that provides that the agreement is conditional on the lead underwriter confirming that one or more additional underwriters have agreed to purchase and a confirmation clause is only permitted if the issuer signs back the bought deal agreement on the same day it is presented by the lead underwriter, and the lead underwriter provides notice to the issuer in writing either confirming or terminating the agreement on the next business day.

An increase in the number of securities proposed to be purchased under a bought deal agreement is limited to 100% of the original offering, and must pertain to the same type of securities and price. The new rules also require that a preliminary short form prospectus for the increased number be filed within four business days of entering into the original bought deal agreement. However, filing the preliminary prospectus is sufficient, it is no longer required that it be receipted within the four days.

With respect to decreases, a decrease in price or number of securities is only permitted on or after the date that is four business days after entering into the original agreement, in other words, after the short form prospectus is required to have been filed. The bought deal agreement may only be amended to encompass a different type of securities if the aggregate dollar amount to be purchased by the underwriters remains the same and the issuer issues and files a new release upon amendment of the bought deal agreement and before any solicitations can be made. The issuer is also required to file a preliminary short form prospectus for the different type of securities within four days of entering into the original bought deal agreement.

Conclusion

Overall these rules can best be characterized as imposing new compliance obligations on activities that were routinely undertaken to market prospectus offerings. While such activities, arguably, may not expressly have been sanctioned under securities laws, they were undertaken as a matter of market practice. Ultimately, while they provide certainty and some clarity, the new rules also give rise to new questions and additional compliance requirements. Their impact on market practice has already been observed in the first months since adoption, although the long-term effects, including on substantive issues such as increased investor protection, enhanced disclosure, efficiency and deal certainty, remain to be seen. 

This article was previously published by Federated Press in Volume XVIII, No. 4 of Corporate Financing.

OSC to release proposed capital raising prospectus exemptions in Q1 2014

The Ontario Securities Commission announced last week that it will be releasing proposals for new capital raising prospectus exemptions during the first quarter of 2014.

As we've discussed in previous posts, the OSC initiated a consultative process to consider potential new exemptions in December 2012. More recently, the OSC narrowed its consideration to four exemptions, namely: (i) a crowdfunding exemption; (ii) a family, friends and business associates exemption; (iii) a streamlined rights offering exemption and a possible exemption for distributions to a reporting issuer's existing security holders based on the issuer's continuous disclosure obligations; and (iv) an offering memorandum exemption.

According to the OSC's latest update, the regulator intends to publish proposals for comment in respect of the above mentioned four exemptions during the first quarter of 2014. Notably, the OSC also stated that it supports the current CSA proposal of a prospectus exemption for distributions to existing TSX-V issuer security holders and will consider comments in response to the CSA initiative in developing its proposed existing security holder exemption, with a goal of harmonizing the proposals.

OSC continues to consider new capital raising prospectus exemptions, including crowdfunding exemption

Rhoda Aylward, Laura Levine and Chad Bass-Meldrum -

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.

International regulation

Currently crowdfunding is being used to finance companies in the United Kingdom without much regulatory oversight. According to the Financial Conduct Authority, most crowdfunding in the U.K. occurs without FCA authorization. The FCA has, however, authorized several securities based crowdfunding platforms.

Meanwhile, according to the Commissioner of the Australian Securities and Investments Commission, “crowdfunding, as a discrete activity, is not prohibited in Australia nor is it generally regulated by [the] ASIC.” That said, crowdfunding that involves offering or advertising financial products, providing financial services, or fundraising through securities requiring disclosure documents is regulated by the ASIC under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001. The ASIC’s Class Order 02/273 – Business Introduction and Matching Services nevertheless provides exemptions from certain provisions of the aforementioned acts, effectively permitting funding portals to act as “introduction services” that bring together issuers seeking capital and investors, provided the terms of the Class Order are complied with.

As we discussed in October, the U.S. Securities and Exchange Commission recently proposed rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding. Generally, the proposed rules limit the aggregate amount an issuer can raise through crowdfunding offerings to $1 million in any 12-month period. Investors with an annual income and net worth of less than $100,000 would be able to annually invest up to $2,000 or 5% of their annual income or net worth (whichever was greater). Investors with either annual income or net worth of at least $100,000 would be able to annually invest 10% of the greater of their annual income and net worth, up to $100,000.

Crowdfunding offerings would have to be conducted through a registered internet intermediary, either a broker-dealer or a funding portal, which would  be prohibited from soliciting investments, offering investment advice, or compensating people for solicitations, and companies conducting crowdfunding offerings would be required to file certain information with the SEC, including among other things disclosure documents, financial statements and annual reports, all of which must be made available to the public.

The SEC is currently seeking public comment on the proposed rules. The Financial Industry Regulatory Authority is also soliciting public comment on a set of proposed funding portal rules and related forms.

Ultimately, the introduction of crowdfunding in the U.S., Australia, and the U.K. has prompted considerable discussion among the media, stakeholders, and securities regulators with respect to the opportunities and challenges of regulating crowdfunding in Canada.

Crowdfunding in Canada

While crowdfunding is not prohibited in Canada, companies issuing securities in exchange for capital are currently subject to prospectus requirements and intermediary online portals are subject to registration requirements, unless they can rely on existing exemptions. Pursuant to Canadian securities legislation and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations, any person or company “in the business” of trading in securities (e.g. an internet portal intermediary) must register with the applicable securities regulator. According to Companion Policy 31-103CP, intermediating a trade between a seller and a buyer of securities, soliciting the buying and selling of securities, and being compensated for these services is considered to be engaging “in the business.”

Internet portals soliciting securities and intermediating trades between buyers and sellers for commissions are arguably in the business of trading in securities and must register, unless they are exempt. Pursuant to Canadian securities legislation, any person or company “distributing” securities (e.g. an issuing company) must file a prospectus providing full, true and plain disclosure of all material facts relating to the securities issued. That is, unless they are exempt under National Instrument 45-106 Prospectus and Registration Exemptions, for example.

Common exemptions for startup companies include the private issuer exemption for companies with less than 50 security holders who also satisfy certain other prescribed criteria; the accredited investor exemption for companies selling securities to institutional, high net worth, or higher income investors; and the minimum amount exemption for companies distributing securities to an investor who invests at least $150,000 in a single investment. Crowdfunding does not by definition directly fit within these capital raising exemptions.

Regulatory Changes Necessary for Crowdfunding in Canada and in Ontario Specifically

As a result of the  prospectus requirements for issuers and the registration requirements for intermediary portals, regulatory changes are necessary to facilitate crowdfunding in Canada. Changing the regulatory regime is, however, particularly challenging in Canada, as securities currently fall under provincial jurisdiction. That said, on December 20, 2012, the Canadian Securities Administrators issued Multilateral CSA Notice 45-311 Exemptions from Certain Financial Statement-Related Requirements in the Offering Memorandum Exemption to Facilitate Access to Capital by Small Businesses. This harmonized interim local order, published by each of the provinces and territories with the exception of British Columbia and Ontario, provides exemptions from certain requirements set forth in Form 45-106F2, which is the required form under the “offering memorandum” exemption in NI 45-106.

The offering memorandum exemption is available in all of the provinces and territories other than Ontario. That province, meanwhile, is currently engaged in its own review of potential prospectus exemptions that could facilitate securities-based crowdfunding, with OSC Staff Consultation Paper 45-710 released on December 14, 2012 (the Consultation Paper), and OSC Notice 45-712 published on August 28, 2013 (the Progress Report).

Essentially, the Consultation Paper  canvassed the crowdfunding exemptions available in other jurisdictions, including the U.S., Australia, and the U.K. With respect to crowdfunding in Canada, the paper addressed, among other things, the issuer prospectus requirements and portal registration requirements discussed above. The Consultation Paper concluded by recognizing that increased access to capital for issuers—by way of a crowdfunding exemption for example—must be balanced with concerns for investor protection. In light of the proposed capital prospectus exemptions under consideration, the OSC called for comments from various interested stakeholders on a number of issues.

According to the OSC’s Progress Report, which summarized the OSC’s progress thus far and outlined its plan for the future, four new capital raising prospectus exemptions are now being considered, 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 and a possible exemption for distributions to a reporting issuer’s existing security holders based on the issuer’s continuous disclosure obligations.

In short, the crowdfunding exemption currently contemplated by the OSC would, among other things: (a) limit issuer offerings in any 12-month period; (b) limit individual investments to $2,500 for a single investment or $10,000 in total over a 12-month period; and (c) limit intermediaries that bring issuers and investors together to registered funding portals. In addition to these limits, the Progress Report suggests that any crowdfunding exemption would require investors to sign a risk acknowledgment confirming that they understand the risk of loss, they fall within the investment limits outlined above and they understand the illiquid nature of investing in securities of a non-reporting issuer. Investors would likely also have a two business day “cooling off” period within which they would be able to withdraw from the investments.

These concept ideas for a crowdfunding exemption—which were first outlined in the Consultation Paper along with possible limits on advertising, issuer qualification criteria, and ongoing disclosure requirements—are currently being reviewed and revised by the OSC. Notwithstanding its progress thus far, the OSC is still fleshing out registration requirements for funding portals, which would be expected to vet investors and conduct due diligence on the issuer, its directors and executives, as well as refining issuer restrictions and investor protection measures with respect to annual offering limits and disclosure requirements. The OSC recognizes that for crowdfunding to be a viable method of raising capital, the regulatory framework and any exemptions must provide investors with adequate protections, while at the same time not imposing excessive regulatory costs on issuers and funding portals.

Other capital raising prospectus exemptions under consideration

Aside from the concept idea for a crowdfunding prospectus exemption, the OSC will continue to consider adopting a harmonized family, friends and business associates exemption, an offering memorandum exemption, and a streamlined rights offering exemption.

In Ontario, small and medium-sized companies can currently use the private issuer exemption in section 2.4 of NI 45-106 or the founder, control person and family exemption in section 2.7 of NI 45-106 to raise capital from specified family members of its executive officers, directors or founders without filing a prospectus. The rest of Canada has, however, adopted a broader family, friends and business associates exemption set out in section 2.5 of NI 45-106 that allows companies to raise capital from a wider range of family members in addition to close personal friends and close business associates of its executive officers, directors or control persons. Accordingly, the OSC will consider adopting a broader family, friends and business associates exemption, assuming the OSC can address certain concerns which have been raised with respect to the undefined scope of “close personal friends” and “close business associates.”

The offering memorandum exemption currently contemplated by the OSC, which would permit companies to distribute securities pursuant to limited disclosure documents, is in several respects similar to the crowdfunding exemption concept outlined above, only there will be no requirement for a registrant or funding portal.

In terms of a streamlined rights offering exemption, the OSC has said that it will work with other CSA members to streamline the existing rights offering exemption available across Canada pursuant to section 2.1 of NI 45-106, which allows issuers to distribute rights to acquire securities to existing security holders without a prospectus subject to certain conditions, in an effort to improve its efficiency and effectiveness for reporting issuers. To this end, the OSC intends to revise the conditions currently set out in section 2.1 of NI 45-106 by: (a) reducing the CSA review period of 10 days for rights offering circulars; (b) increasing the current dilution ceiling of 25% for rights offerings; and (c) reducing the prescribed time period of 21 days for the exercise of rights pursuant to prospectus-exempt rights offerings. Other Canadian securities regulators meanwhile recently proposed their own streamlined alternative rights offering exemption for TSX-V listed companies on November 21, 2013 under Multilateral CSA Staff Notice 45-312.  

According to the Progress Report, the OSC is not considering any of the following prospectus exemptions contemplated in the Consultation Paper: (1) an investor sophistication exemption; (2) a registrant advice exemption; (3) changes to the existing private issuer exemption; and (4) the re-introduction of the closely-held issuer exemption.

Conclusion

The Progress Report identified the following key themes to guide the OSC’s work going forward:

  • the need to facilitate small and medium-sized companies’ access to capital through expanded prospectus exemptions while maintaining adequate investor protections;
     
  • the importance of harmonizing capital raising prospectus exemptions across Canada;
     
  • the emergence of crowdfunding as a new way for startup companies and other small and medium-sized companies to raise capital; and
     
  • the importance of regulatory monitoring and compliance oversight in the exempt market.

Unfortunately, the Progress Report did not set forth any timeframe for the completion of the OSC’s exempt market review or the release of a proposed crowdfunding regulatory regime. The OSC also reiterated that notwithstanding the consultation process and review, crowdfunding issuers, investors and intermediaries alike should not rely on the adoption of any new prospectus exemptions or amendments in Ontario for their capital raising needs.

That said, even in the absence of any new capital raising prospectus exemptions, there have been some recent developments with respect to the regulation of crowdfunding in Ontario. On June 17, 2013, the OSC granted MaRS VX—a not-for-profit crowdfunding platform with the stated goal of bridging the gap between impact issuers that aim to solve social or environmental problems in Ontario and accredited investors—exemptive relief from certain know-your-client and suitability requirements provided in Part 13 of NI 31-103, subject to investment limits and other conditions set out in the decision. These requirements oblige restricted dealers in Ontario to obtain information on each of their clients so as to determine their individual risk tolerance as well as the suitability of the securities that they are proposing to sell to such clients, unless of course an exemption is available as was the case in the matter of MaRS VX.

As we’ve discussed in the past, this ruling to exempt an online platform from the aforementioned know-your-client and suitability requirements, though relatively limited in scope, effectively opens the doors to crowdfunding in Ontario.

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.

OSC issues guidance regarding filing of exempt distribution reports

The Ontario Securities Commission today published guidance to assist issuers and underwriters in complying with filing requirements in respect of exempt distribution reports.

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.

SEC proposes crowdfunding rules

The U.S. Securities and Exchange Commission yesterday released proposed rules that would allow companies to raise capital through crowdfunded offerings.

The proposed rules, which are part of the rulemaking required by the adoption of the JOBS Act, would allow companies to raise a maximum aggregate amount of $1 million annually through crowdfunding. Investors with an annual income and net worth of less than $100,000 would be able to annually invest up to $2,000 or 5% of their annual income or net worth (whichever was greater). Investors with either annual income or net worth of at least $100,000 would be able to annually invest 10% of the greater of their annual income and net worth, up to $100,000.

Companies conducting crowdfunded offerings would be subject to certain disclosure requirements and would have to conduct crowdfunding transactions through an SEC-registered intermediary. Further, non-U.S. companies would not be eligible to use the crowdfunding rules. The SEC is accepting comments on its proposal for 90 days from the date of publication of the draft rules in the Federal Register. For more information, see SEC Release No. 33-9470. Also see FINRA's recent request for comment on proposed rules for funding portals.

On the Canadian side, the Saskatchewan Financial and Consumer Affairs Authority (FCAA) published a proposed framework earlier this month for crowdfunding in the province. Under the proposal, businesses would be able to make two six-month offerings of $150,000 each annually, and individuals would be limited to an investment of no more than $1,500 per offering. The FCAA is accepting comments on its proposal until November 6.

Meanwhile, the Ontario Securities Commission is continuing its consideration of crowdfunding as part of its work towards potentially introducing a number of new prospectus exemptions.

Capital Crowdfunding in Canada: Recent developments (Part 1)

Pierre Fournier-Simard -

The recent arrival of the KickStarter platform in Canada serves as a reminder that some interesting developments in the regulation of “crowdfunding” have been occurring in the last several months. This article focuses on the exemption granted to MaRS VX by the Ontario Securities Commission, which recently authorized the very first capital crowdfunding platform in Canada.

Crowdfunding is a way of financing a project or business by pooling small financial contributions obtained through Web platforms (such as La Ruche in the Quebec City region) and making use of social media for advertising and solicitation. A person seeking financing can present the project to the “crowd” using the Web platform and request small contributions from a large number of individuals, thereby raising a sizable sum.

In Canada, some platforms already offer the opportunity to entrepreneurs to obtain financing through crowdfunding in the form of donations or in exchange for rewards, but in the absence of an exemption from the obligation to file a prospectus, the offering of equity is prohibited. Nevertheless, over the course of the last few months, securities commissions across the country have shown some degree of open-mindedness, hinting at the possibility that exemptions from the obligation to file a prospectus may ultimately be granted to businesses that wish to raise capital through crowdfunding. In this regard, capital crowdfunding will soon be permitted in the United States, and is already permitted in Australia and Great Britain (subject, in each of these cases, to various conditions).

Decision of the OSC in the MaRS VX case

On June 17, 2013, the OSC rendered an interesting decision granting MaRS VX, an online crowdfunding platform, the authorization to be registered as a restricted dealer. MaRS VX had submitted an application to the OSC for registration with the objective of facilitating “impact investing”. The Web platform’s stated goal was to act as a bridge between “impact issuers” (defined as issuers with a mission of solving social or environmental problems in Ontario and less than $25 million in revenues) and “accredited investors” (within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions).

With the objective of facilitating the use of the Web platform, MaRS VX was seeking an exemption from certain “know-your-client” and “suitability” requirements provided for in Part 13 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Those requirements in effect require all restricted dealers to obtain information on each of their clients so as to determine their individual risk tolerance and to ensure the suitability of the securities that they are proposing to sell to such clients.

While those requirements are crucial for the protection of investors and the integrity of the market, they present significant obstacles in the context of crowdfunding. The OSC has thus decided to exempt MaRS VX from the know-your-client and investment suitability requirements, subject to certain conditions summarized here.

Ultimately, the OSC ruling has a relatively limited scope, since only accredited investors and “impact issuers” are contemplated by the exemption. Nevertheless, the ruling does open the door to capital crowdfunding in Canada.

As well, It will be interesting to see what impact the SFCAA’s proposal to legalize capital crowdfunding will have across Canada

A version of this post originally appeared in the Edilex legal blog.

SEC eliminates private placement solicitation and advertising prohibitions

The U.S. Securities and Exchange Commission (SEC) announced last week that it is eliminating the prohibition against general solicitation and advertising in respect of issuers taking advantage of the registration exemptions associated with offering securities to accredited investors and qualified institutional buyers. The amendments, first proposed in August 2012, are being implemented under the rulemaking required under the JOBS Act. The amendments will become effective 60 days after publication in the Federal Register.

OSC's upcoming priorities include shareholder democracy and access to capital

The Ontario Securities Commission yesterday released its statement of priorities for the fiscal year ending March 31, 2014. The statement follows the OSC's publication of a draft in April, and takes into account stakeholder comments received in response to the draft.

Of note, among the priorities listed for the upcoming year, will be a focus on improving shareholder democracy by facilitating the adoption of majority voting by TSX-listed issuers and publishing a consultation paper on key proxy voting infrastructure issues. The TSX announced in October 2012 that it intends to impose majority voting on all of its listed issuers as of December 31st of this year. The OSC states in its statement that it is supportive of the TSX’s initiative and that numerous commentators encouraged the OSC to continue to review shareholder democracy issues as outlined in 2011 in OSC Staff Notice 54-701. With respect to proxy voting infrastructure, the CSA plan to publish a concept paper this summer to outline and seek feedback on key issues.

Other priorities include a focus on disclosure, mainly through cost disclosure and performance reporting by advisers and dealers, delivery of fund facts in the place of a mutual fund prospectus and developing a summary disclosure document for exchange-traded funds or ETFs.

The OSC will also continue its study of a best interest duty on dealers and advisers and its discussion of mutual fund fees and fees for other investment products. Capital market structure and capital raising will be on the agenda as well, with the aim of completing stakeholder consultations on last year's prospectus exemption consultation paper and looking at options to expand access to capital for Ontario issuers, including an examination of Canada's capital market structure and the impact of the order protection rule, electronic trading and market data fees. Finally, as has been the focus for the last few years, in accordance with its G20 commitments, the OSC will also continue working with other CSA members towards implementation of an OTC derivatives regime, including with respect to clearing and trade reporting.

OSC to hold crowdfunding roundtable

The Ontario Securities Commission has announced that it will be hosting a roundtable discussion on June 11 to obtain input from investors regarding investing in small and medium sized enterprises and start-ups. As we discussed in December, the OSC is currently considering a number of new capital raising prospectus exemptions to address the desire among some in the investing community to increase access to capital for issuers and to increase investment opportunities. The comment period in respect of the OSC's most recent consultation paper on the subject ended on March 8. The topics for discussion at the roundtable, meanwhile, include crowdfunding, as well as the type of information investors would require in order to make investment decisions.

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.

Highlights

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:

  1. is incorporated, formed or created under the laws of a jurisdiction other than Canada or a province or territory of Canada,
  2. whose head office and principal place of business is located outside of Canada, and
  3. 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:

(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.

Summary

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.

Regulators provide limited relief to select applicants from certain disclosure requirements applicable to private placements and propose related rule amendments

Ken Ottenbreit -

On April 23, 2013, the Ontario Securities Commission issued an exemptive relief order exempting certain U.S. broker-dealers from having to provide certain stipulated “wrapper” disclosure in connection with specified private placements. Typically, when securities are offered to Canadian purchasers on a prospectus exempt basis and an offering document constituting an “offering memorandum” is provided, disclosure that is required to be included in the offering memorandum under Canadian securities laws is provided in a Canadian wrapper.

Under the Order, the OSC (on behalf of other Canadian regulators) has exempted the applicant dealers from the requirement to include certain prescribed disclosure relating to statutory rights of action and underwriting conflicts. Notably, the relief is only available if the purchaser is a “permitted client” (as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations), the securities are offered primarily in a foreign jurisdiction and (i) the issuer is incorporated, formed or created under the laws of a foreign jurisdiction, has its head office or principal executive office outside of Canada and is not a reporting issuer in Canada, or (ii) the securities are issued or guaranteed by a foreign government.

Additional conditions include the requirement to deliver a prescribed form of notice to each prospective purchaser and obtain from the purchaser a written acknowledgement of and consent to the dealer’s reliance on the exemption, compliance in certain circumstances with disclosure requirements applicable to U.S. registered offerings, reporting on a monthly basis of the applicant’s reliance on the Order and filing of a report of trade in electronic format only. The Director of the OSC has also separately given the applicants permission to make certain (otherwise prohibited) listing representations and acknowledged that the requirement to notify purchasers of the collection of personal information only applies to individuals.

The relief will take effect sixty days after April 23, 2013 and will expire on the earlier of three years after the effective date or the date on which amendments are made to relevant securities legislation to provide substantially similar relief.

In the same context, earlier today the OSC published proposed amendments to OSC Rule 45-501 Ontario Prospectus Registration Exemptions and National Instrument 45-106 Prospectus and Registration Exemptions that would codify, to a large extent, the relief granted under the Order.

The proposed amendments would provide exemptions from the requirement to disclose the statutory rights of action available under the Securities Act (Ontario), the prohibition against making certain representations regarding listing or quotation of securities, and the requirement to provide notice to and obtain authorization from non-individual purchasers regarding the collection of personal information. Reliance on these exemptions would be subject to conditions similar to those set out in the Order. Relief from disclosure requirements relating to underwriting conflicts is not included in the proposals but will be separately considered.

While other Canadian regulators also confer statutory rights of action for misrepresentations in offering memoranda, disclosure of such rights is only mandated, in addition to Ontario, in Saskatchewan, Nova Scotia and New Brunswick. It remains to be seen whether the securities regulators in these jurisdictions will follow the OSC’s lead.

The OSC is accepting comments on the proposed amendments until July 24, 2013.

BCSC releases proposed prospectus exemption

Earlier this week, the British Columbia Securities Commission released for comment a proposed new prospectus exemption similar to the offering memorandum exemption found in NI 45-106 Prospectus and Registration Exemptions that would allow issuers (excluding reporting issuers, investment funds, mortgage investment entities and real estate issuers) to raise up to $500,000 without a prospectus. 

Issuers relying on the exemption would only have to provide unaudited financial statements, so long as certain conditions were met. Specifically, issuers would have to include a bold warning on the front page of the offering memorandum and would not be able to distribute complex securities. Further, the exemption would limit investors to investments of no more than $2,000 in any 12-month period. According to the BCSC, the new exemption would address the cost of complying with the OM exemption's financial statement requirements, and would be consistent with the CSA's new OM-form exemption announced in December 2012, with the exception that British Columbia's proposal would require the issuer to identify use of the exemption when filing Form 45-106F6. The CSA's OM-form exemption does not apply to British Columbia or Ontario.

The BCSC is accepting comments on the proposed exemption until April 12, and is specifically asking a number of questions regarding respondents' experience with current exemptions.

As we've discussed in the past, the Canadian Securities Administrators are currently reviewing potential prospectus exemptions, as is the Ontario Securities Commission. Whether British Columbia intends to continue to participate with the CSA's consideration of potential exemptions, or whether it will strike out on its own, remains to be seen.

OSC extends consultation period on potential prospectus exemptions

The Ontario Securities Commission announced yesterday that it is extending the consultation period on potential new capital-raising prospectus exemptions. As we've previously discussed, the OSC initiated a consultative process in December with release of a paper on the subject. For more information, see OSC Staff Notice 45-711.

TSX-V extends relief related to private placement pricing

In mid-December, the Toronto Venture Exchange extended temporary relief from certain pricing requirements related to private placements. Under the relief, issuers conducting private placements may, under certain conditions, offer shares at a price below the regulated minimum of $0.05 per share, or convertible debentures below the regulated minimum of $0.10 per share.

In order to rely on the relief, an issuer must, among other things, demonstrate immediate or imminent financial hardship and that it does not have the time or resources necessary to complete a share consolidation prior to closing of the private placement, disseminate a news release providing an itemized breakdown of the use of proceeds and provide the TSX-V with a certificate in prescribed form, signed by the CEO or CFO attesting to the need for relief. At least 75% of the private placement must be subscribed for by parties that are not related to the issuer, and up to $50,000 of the gross proceeds raised in reliance on the relief may be used for general working capital purposes.

The relief, initially issued in August 2012 will expire on April 30, 2013.

BCSC proposes revoking certain trade-based and MIE registration exemptions

Last week, the British Columbia Securities Commission proposed revoking BC Instrument 32-513, which currently provides a registration exemption in respect of those that trade in certain prospectus-exempt securities. Similarly, the regulator also proposed revoking BC Instrument 32-517, which provides a dealer registration exemption related to trades in the prospectus-exempt securities of mortgage investment entities.

According to the BCSC, while it initially adopted the exemptions due to a lack of information on the impact of the EMD registration requirement, it has now determined that revoking the exemptions would have a "negligible impact" on capital raising. Further, the BCSC cites non-compliance with the exemptions, as well as the need to better protect investors as reasons for revocation.

The BCSC is accepting comments on its proposals until February 4, 2013. For more information, see BCN 2013/01.

Canadian crowdfunding? OSC releases consultation paper on potential prospectus exemptions

Simon Romano -

The Ontario Securities Commission released a paper today intended to initiate a broad consultative process to consider a number of potential new capital raising prospectus exemptions.  

Specifically, the consultation paper canvasses the exemptions currently available in various jurisdictions, including the U.S., Australia and the U.K. These exemptions are generally based on (i) investor attributes (such as income and financial assets); (ii) relationships with the issuer (such as the family, friends and business associates exemption available in jurisdictions other than Ontario); (iii) investment size (such as Ontario's $150,000 minimum investment amount exemption); (iv) disclosure; (v) "crowdfunding"; and (vi) offering size.

With respect to "crowdfunding" (which is the popular term for funding a project or venture through small amounts of money raised from a large number of people over the internet via an internet portal intermediary), the potential for an exemption is examined using the provisions of the U.S. JOBS Act as a basis for discussion. Issues considered include issuer restrictions, investor protection measures, and the registration of funding portals. The paper also explores a potential OM exemption (which, unlike other Canadian jurisdictions, is not available in Ontario under NI 45-106) with a $1.5 million limit on the amount of capital that could be raised by an issuer in a 12-month period and a limit on a purchaser's annual investment of $10,000. The concept OM exemption is not intended to be a recommendation and was provided by the OSC for discussion purposes.

Ultimately, the paper recognizes that a desire to increase access to capital for issuers and to increase investment opportunities must be balanced with the need to protect investors. The paper thus acts a number of specific questions regarding the various options being considered, and the OSC states that no decisions will be made without "broad public consultation and discussion." According to the OSC, the paper is an initial step in the public solicitation process.

As we've discussed previously, the OSC has been reviewing the accredited investor and other exemptions for some time. Meanwhile, the introduction of crowdfunding in the U.S. has prompted considerable discussion among stakeholders and in the media with respect to the opportunities and challenges of adopting similar policies domestically.

Ultimately, while the paper demonstrates that regulators may be willing to consider various options to increase the availability of capital, it is yet unclear whether any new exemptions will be adopted. Comments are being accepted until February 12, 2013.

SEC proposes eliminating solicitation and advertising prohibitions in private placements

On August 29, the U.S. Securities and Exchange Commission (SEC) proposed amendments to current rules that would provide an exemption to the prohibitions on general solicitation and general advertising in cases of offerings on a registration exempt basis under Regulation D and Rule 144A.

Under current rules, companies looking to sell securities to raise capital must either register the offering or rely on an exemption. Most registration exemptions, however, prohibit companies from engaging in general solicitation or general advertising in connection with the offering.

The proposal, part of the rulemaking required under the JOBS Act enacted earlier this year, would amend Rule 506 of Regulation D, which governs private placements, to permit companies to use general solicitation and general advertising to offer securities provided that the purchasers are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors. Meanwhile, Rule 144A, which provides an exemption for resales of certain restricted securities to qualified institutional buyers, would be amended to provide that securities sold pursuant to the rule may be offered to persons other than QIBs, provided that the securities are sold only to persons that the seller and any person acting on the seller's behalf reasonably believe are QIBs.

According to the SEC Chairman Mary Schapiro, the proposed rules "fulfill Congress's clear directive that issuers be given the ability to communicate freely to attract capital, while obligating them to take steps to ensure that this ability is not used to sell securities to those who are not qualified to participate in such offerings."

The proposed rules are the latest in the SEC's moves to implement rules consistent with the JOBS Act. As we've previously discussed, the Act's provisions respecting emerging growth companies apply to foreign private issuers and, thus, the changes would potentially affect Canadian companies looking to raise capital in the U.S. Meanwhile, the CSA and OSC continue to review exemptions concerning private placements in Canada.

OSC revisits shareholder democracy issues in its 2012 Annual Report

Ramandeep Grewal -

The Ontario Securities Commission (OSC) yesterday announced the publication of its 2012 Annual Report. The report reviews the OSC's activities in 2011-12, including with respect to policy initiatives and enforcement.

Our readers will recall that, as we discussed in January of 2011, the OSC published a staff notice earlier this year advising of its review of shareholder democracy issues, including director elections, say-on-pay and the effectiveness of the process voting system. This was followed by the TSX’s publication of proposed amendments its rules to, among other things, require issuers listed on the TSX to elect directors individually, hold annual elections for all directors, disclose annually whether they have adopted a majority voting policy and if not, explain why not, and advise the TSX if a director receives a majority of "withhold" votes.

The OSC revisits these issues in its Annual Report, highlighting that shareholders “want the OSC to facilitate shareholder empowerment concerning significant decisions about governance, compensation and transactional matters involving reporting issuers” and that the OSC is considering specific policy initiatives that would strengthen the role of shareholders in uncontested director elections. Stating that reporting issuers are “encouraged to adopt majority-voting polices” and that it supports the TSX’s initiatives, the report notes that the OSC and TSX are discussing further steps to ensure that all TSX-listed issuers adopt majority-voting polices within a reasonable time frame.

The report also notes that the OSC is currently investigating concerns about the transparency, efficiency and accountability of the proxy-voting system and believes that there is a need for “greater regulatory involvement” so as to identify specific concerns and potential solutions that may require regulatory action.

With respect to other policy initiatives, the report discusses the creation of a new Research and Analysis Group whose aim is to increase the OSC’s understanding of activities, trends and risks in the market and issues facing investors. Projects currently in progress under the mandate of this group include:

  • Research on how many Canadians qualify for the current accredited investor thresholds;
  • A review of exempt market activity to better understand how the exempt market is used to raise capital; and
  • A project to gauge the extent of broker internalization of order flows in Canada

Other activities reviewed include the OSC’s Emerging Markets Issuers Review and the Maple Group Acquisition of the TMX Group. The report also includes useful statistics on the financial wealth of Ontario investors, comparative volumes and activities represented by securities marketplaces generally and specifically the derivatives market in Ontario, and the concentration of TSX-listed exchange-traded funds or ETFs.

Specifically on the topic of enforcement, the OSC notes that its staff have made it a priority to pursue cases in court where appropriate and that during the last year, staff secured ten jail sentences for breaches of OSC orders or violations of the Securities Act. Meanwhile, staff commenced 24 proceedings before OSC administrative tribunals in 2011-12 and concluded 39 settlements and contested hearings, imposing a total of $39 million in administrative penalties, disgorgement orders and settlement amounts. To assist parties appearing before adjudicative panels, the report reminds market participants of the OSC’s Guide to Enforcement Proceedings and Frequently Asked Questions Regarding Hearings that were published in 2011-2012.

OSC releases tips for filing reports of exempt distribution

The OSC today released a notice providing guidance for issuers and advisors preparing and filing reports of exempt distribution under NI 45-106 Prospectus and Registration Exemptions. Among other things, the notice reminds filers to identify the correct prospectus exemption relied on for the distribution in Ontario (and specifically notes that certain exemptions, like the family, friends and business associates exemption, are not available in the province) and states that an explanation should be provided if the purchase price for the securities distributed is $0. As we discussed in April, CSA staff recently released a notice highlighting issues identified in reports of exempt distributions and providing guidance relevant to the preparation of the form.

The OSC also announced that an electronic version of Form 45-106F1 Report of Exempt Distribution will now be available on its website. The form, which is required in respect of distributions made in reliance on certain specified prospectus exemptions, can now be filled out and submitted online.

For more information, see Staff Notice 45-708 and Staff Notice 45-709.

Securities regulators continue their review of the "accredited investor" and other prospectus exemptions

Ramandeep Grewal -

The Canadian Securities Administrators today published an update on the status of their review of the “$150,000 minimum amount” and “accredited investor” exemptions. As we discussed in a blog post last year, CSA staff published a consultation paper in November, 2011 on the subject and requested feedback from market participants.

Today's update provides a short overview of some of the comments received in response to the consultation paper, including with respect to the impact that any changes to the exemptions would have on capital raising and investment opportunities. As expected, the CSA received mixed feedback. With respect to the accredited investor exemption, some respondents urged the CSA to keep the status quo, while others suggested a broader exemption to provide better access to capital for business and investment opportunities for the exempt market. Some of the suggestions included lowering the prescribed income and asset thresholds or adding new categories based on an investor’s education, work experience or investment experience.

Respondents also gave mixed feedback on the $150,000 minimum investment amount exemption, ranging from criticism of it being a flawed basis on which to measure investor sophistication to support on the basis of its simplicity and usefulness when no other exemption is available. As we discussed back in January of this year, the SEC undertook a similar review of exemptions available under the Securities Act of 1933, adopting an amended “accredited investor” net worth standard.

Moving forward, the CSA also intend to analyze information from exempt distribution reports before making any further recommendations and expect to publish their conclusions later this year. Of particular note, the notice suggests that some CSA jurisdictions are also considering expanding their review to include other capital raising exemptions, including the “offering memorandum” exemption, which we note is not universally available throughout Canada. The OSC also announced today that it is broadening the scope of its exempt market review to consider the introduction of new prospectus exemptions, and intends to publish a second consultation notice seeking additional public feedback.

While it is unclear whether any specific exemptions will be formally considered, as we noted in a post last month, a "crowdsourcing" exemption in the U.S. has recently garnered much publicity. Whether any additional exemptions are ultimately adopted, however, remains to be seen.

CSA Staff identify issues in exempt distribution form filings

Staff of the Canadian Securities Administrators published a staff notice yesterday to highlight issues identified in reports of exempt distributions (private placements) filed under Form 45-106F1, and providing guidance relevant to the preparation of the form.

Issues identified by CSA Staff include: filing of the BC Form 45-106F6 outside of BC, failing to file on time or pay the required filing fee, failing to include a complete list of purchasers and to reconcile information in the form with what is reported in the schedule to the form, failing to disclose compensation that should be considered a "commission" or "finder's fee" and failing to certify the form. As we discussed in December, British Columbia recently adopted its own form of exempt trade report under Form 45-106F6, which requires more information than what is required in the F1 in certain circumstances.

Meanwhile, members of the CSA except Ontario also released a staff notice yesterday identifying deficiencies in offering memoranda prepared in accordance with Form 45-106F2 when relying on the "offering memorandum" exemption under section 2.9 of NI 45-106. Common deficiencies included failing to include sufficient information to allow a prospective purchaser to make an informed investment decision, inadequately disclosing available funds and use of available funds and omitting to include, among other things, key terms of material agreements. The notice also provides guidance for those intending to rely on the OM exemption of NI 45-106.

For more information, see CSA Staff Notice 45-308 and Multilateral CSA Staff Notice 45-309.

BCSC excludes former registrants from EMD registration relief

The British Columbia Securities Commission (BCSC) today published revisions to BC Instrument 32-513, which provides certain limited trade-based registration exemptions to persons that would otherwise be required to register as exempt market dealers in BC. Specifically, the amendments, effective April 16, 2012, would exclude former registrants and persons who have provided financial services to the purchaser from relying on the exemptions.

SEC excludes primary residence from "accredited investor" net worth standard

The U.S. Securities and Exchange Commission has adopted an amended "accredited investor" net worth standard that, in accordance with the Dodd-Frank Act, excludes the value of an individual's primary residence. The definition of accredited investor, used to determine the availability of certain exemptions from the Securities Act of 1933 for private and other limited offerings, currently includes individuals exceeding $1 million in net worth. The recently-adopted changes would maintain the $1 million threshold, but no longer allow for a primary residence to be included in calculating net worth. As we described in a blog post last year, the SEC first proposed the change in January 2011. The amended standard will become effective on February 27, 2012.

The accredited investor exemption has also garnered attention north of the border. Specifically, the OSC expressed concern last year that issuers and dealers were improperly relying on the accredited investor exemption to ineligible investors. As we discussed in a November 2011 post, Canadian regulators have now also launched a review of the domestic accredited investor and minimum investment amount exemptions. Under Canadian rules, the accredited investor standard for individual investors includes both a $1,000,000 financial asset test and a $5,000,000 net asset test, with only the latter including an investor’s personal residence (minus liabilities). Depending on the feedback (the consultation period ends on February 29th), possible options include keeping the status quo, retaining the exemptions with adjusted thresholds, limiting the use to certain investors (such as institutional investors), using alternative qualification criteria or imposing other investment limitations.

BCSC expands exemptions to new private placement disclosure requirements

Ramandeep Grewal -

The British Columbia Securities Commission has now replaced BC Instrument 45-533, which granted limited relief from its new private placement disclosure form (Form 45-106F6 or the "BC Form") with a new version of the Instrument. As we've discussed in earlier posts, private placements in British Columbia have been subject to expanded post-trade disclosure requirements since October 3rd. The new version of the Instrument expands on the range of circumstances under which an issuer or underwriter can avoid having to file Form 45-106F6. Exemptions from certain parts of the BC Form are also provided.

Specifically, all investment funds (not just those managed by a Canadian registered manager) are now exempt from filing the BC Form (and can instead file a Form 45-106F1 or the "National Form"). Issuers or underwriters distributing securities of a non-reporting issuer only to permitted clients (as defined in NI 31-103) are also exempt from filing the BC Form provided they file the National Form and provide notice of their reliance on the filing exemption. Meanwhile, foreign public issuers and their subsidiaries, as well as subsidiaries of reporting issuers, are now exempt from having to provide information in item 4 of the BC Form (which is the item that requires detailed information about insiders and their holdings). Further, "insider information" under item 4 will now only be required for directors, executive officers, promoters and control persons.

The new Instrument came into force on December 9, 2011.

Securities regulators launch consultation on changes to $150,000 and accredited investor exemptions

Ramandeep Grewal -

The Canadian Securities Administrators (CSA) announced yesterday that they are undertaking a review of the “$150,000 minimum investment amount” and the “accredited investor” exemptions that are commonly used to raise financing on a prospectus exempt basis.   The publication of CSA Staff Consultation Note 45-401 (Consultation Note) commenced a public consultation process intended to solicit feedback from investors, issuers and others on a number of possible changes to these exemptions.

The Consultation Note raises a number of questions, including whether these exemptions should be premised on financial resources (ability to withstand financial loss or obtain expert advice), access to financial and other key information about the issuer, educational background, work experience, investment experience, or some other criteria, and whether the involvement of a registrant (who has an obligation to recommend only suitable investments) addresses any concerns.

Issues highlighted

Some issues cited with the $150,000 minimum investment amount exemption include that:

  • the size of investment alone does not assure investor sophistication or access to information, particularly where the exemption is used to sell novel or complex products without accompanying disclosure;
     
  • the $150,000 threshold was set in 1987 and has not been changed or adjusted for inflation since (and would be $265,000 in 2011 dollars); and
     
  • investors may resort to investing more or investing all upfront in order to meet the threshold even if business or investment considerations may call for a lower amount or staggered investments.

Similarly, issues cited with the accredited investor exemption include that:

  • the current thresholds for the income and asset tests have not been changed or adjusted since they were set in the early 2000s;
     
  • the thresholds may be too low and allow unsophisticated, retail investors to participate in the exempt market;  and
     
  • the income and asset thresholds may not be adequate proxies for sophistication.

The CSA also reiterate a concern raised in OSC Staff Notice 33-735, that some individuals purchasing securities under the exemption are not, in fact, accredited investors. One option proposed to address this issue is to require an investor’s accredited investor status to be certified by an independent third party, such as a lawyer or qualified accountant.

Possible Amendments

Definitive proposals for amendments will be made after feedback is received. Depending on the feedback, possible options include keeping the status quo, retaining the exemptions with adjusted thresholds, limiting the use to certain investors (such as institutional investors), using alternative qualification criteria or imposing other investment limitations.

The CSA also specifically ask whether stakeholders’ views on possible changes to these exemptions would be affected by factors such as the provision of disclosure (including risk factor disclosure), involvement of registrant and whether the security is novel or complex or the issuer is a reporting issuer.

With respect to the accredited investor exemption specifically, the Consultation Note asks whether alternative qualification criteria should be required for individual investors, such as investment experience (citing the example of an investor who has carried out transactions of a significant size in securities markets at a given frequency), investment portfolio size, work experience  and / or education (such as having completed the Canadian Securities Course, achieved a CFA designation or received an advanced degree in business or finance).

While highlighting their concerns, the CSA also acknowledge that these exemptions are widely used and any that repeal or limitation could affect capital raising, especially by small and medium sized enterprises. The Consultation Note also includes the terms and a background discussion of these exemptions along with a summary of comparable exemptions available outside of Canada. Citing their recent Notice of Proposed National Instrument 41-103, the CSA also state in the Consultation Note that while that proposal is focused on the distribution of securitized products, they will consider the comments received in response to that notice as part of their general review of the minimum amount exemption and the accredited investor exemption.

The consultation period ends on February 29, 2012.

FINRA proposes requiring further disclosure of private placement proceeds

Last week, the U.S. Financial Industry Regulatory Authority published proposed amendments to its rules that would require its members and associated persons that offer or sell private placements, as well as those that participate in the preparation of private placement memoranda, term sheets or other related disclosure documents in connection with a private placement, to provide disclosure to investors regarding the anticipated use of the offering proceeds prior to sale. The disclosure to investors would also have to include information regarding the amount and type of offering expenses, as well as the amount and type of compensation provided to sponsors, consultants and members in connection with the offering.

The disclosure documentation would have to be filed with FINRA within 15 days of the first sale. Certain offerings, however, would be exempted from the new requirements, including those sold solely to qualified purchasers, qualified institutional buyers and investment companies, meeting the applicable statutory definitions. According to FINRA, its proposals will "provide important investor protections in connection with private placements without unduly restricting capital formation through the private placement offering process" while also assisting in efforts to "identify problematic terms and conditions in private placements, thereby helping to detect and prevent fraud in connection with private placements."

Comments on the proposals are being accepted for 21 days from the date of publication in the Federal Register.

CSA's proposed venture regime seeks to tailor regulation

Tim McCormick -

The Canadian Securities Administrators (CSA) have introduced a new mandatory regulatory regime for venture issuers intended to provide a more tailored approach to the regulation of the venture market.  As discussed in an earlier blog post, on July 29, the CSA published for comment proposed rules and rule amendments in the form of Proposed National Instrument 51-103 Ongoing Governance and Disclosure Requirements for Venture Issuers (NI 51-103), which represents a comprehensive overhaul of the prospectus and private placement requirements, as well as continuous disclosure and governance obligations currently applicable to venture issuers.

The CSA’s proposals are ultimately intended to streamline venture issuer disclosure to reflect the needs of investors, while making disclosure requirements more suitable and manageable for issuers.  The highlights of the proposals include replacing all current continuous disclosure and governance requirements (including audit committee and certification requirements) and modifying disclosure requirements in connection with long form prospectus offerings and rules for incorporation by reference in short form prospectuses and other documents. The proposals also introduce substantive corporate governance requirements relating to conflicts of interest, related party transactions and insider trading and propose to require delivery of disclosure documents on request only in lieu of mandatory delivery.  Some of these changes are discussed in detail below.

Governance and Continuous Disclosure

With respect to governance and continuous disclosure, the proposals introduce an annual report requirement, which would combine business, governance and executive compensation disclosure, audited financial statements, MD&A and CEO/CFO certifications into one document, to be filed within 120 days of the financial year-end. A mid-year report requirement is also introduced, which would include an interim financial report, associated MD&A and CEO/CFO certifications.

The filing of three and nine month interim financial reports would be voluntary, but any such report would have to be filed on or before 60 days after the end of the interim period and be approved by the board or audit committee. In the event an issuer voluntarily elects to provide three and nine month interim reports, it would have to report on this basis for at least two financial years.

The current information circular requirements would also be streamlined and the governance and executive compensation disclosure moved to the annual report. Additionally, an optional significance test would be introduced to permit significance to be calculated using market capitalization on the acquisition date rather than the on the date of announcement for significant transactions. Director and executive compensation disclosure would be tailored to venture issuers, who would also be required to disclose whether their directors and officers are subject to any statutory or contractual obligations requiring them to act honestly and in good faith and to exercise the care, skill and diligence of a reasonably prudent person.

Of particular interest to mining issuers, the CSA clarified that the requirement to file a technical report under NI 43-101 would only be triggered if the venture issuer files a short form prospectus or, in the case of the annual report, if it contains first time disclosure of mineral resources, mineral reserves or a preliminary economic assessment, or a change to that disclosure, if that change is material to the venture issuer.

Prospectus and exempt offerings

In the case of prospectus offerings, the proposals would introduce a new Form 41-101F1 to conform to the disclosure required by the annual report and remove the requirement for business acquisition report (BARs) in connection with an offering, although financial statements would still be required for reverse take-overs and acquisitions that are 100% significant. Additionally, the proposals would require only two years of historical financial statements for IPOs.  Disclosure of three and nine month interim financial statements and related MD&A would also be eliminated.  Corresponding changes are also being proposed to the qualifying issuer offering memorandum and the TSXV short form offering document contemplated under NI 45-106.

Definition of “Venture issuer”

Finally, the amendments propose a new definition of “venture issuer” which would, unlike the current definition, exclude debt-only issuers, preferred share-only issuers and those issuing securitized products. This group of issuers that meet the current definition of “venture issuer” in NI 51-102, to be referred to as “senior unlisted issuers”, will continue to be subject to the NI 51-102 venture issuer requirements.

In proposing the changes, the CSA recognized the unique characteristics of the venture market in Canada and specifically outlined some of these attributes in their notice. For example, the CSA noted, among other characteristics, that venture issuers typically (i) have limited financial resources, which can make it more difficult to hire staff dedicated to securities regulatory compliance, (ii) may lack the foreseeable prospects of generating significant revenue and (iii) may be more likely to rely on financing to fund development for a prolonged period.

They further note that venture investors are more likely to be retail investors with smaller positions than investors in more senior issuers, while limited institutional involvement and analyst coverage may result in investors having to conduct their own research in the absence of broker generated reports. Investors in venture issuers may expect more dramatic growth and are more likely influenced by material news than historical financial statements. They are also typically interested in the amount that officers and directors have invested and may be particularly concerned about the issuer’s burn-rate.

The CSA’s proposals recognize the fact that venture issues play an important role in our capital markets and require a set of rules that better reflect the needs of venture investors and resources of venture issuers. The proposals are a step towards a more streamlined reporting regime. The proposals remain open for comments until October 29, 2011.

BCSC grants limited relief from its new private placement disclosure form

As we discussed last September, this past August and earlier this week, private placements in British Columbia will soon be subject to expanded post-trade disclosure requirements. The requirements to be imposed on foreign issuers and Canadian private issuers were expected to have a chilling effect on private placements into the province as detailed in our previous posts. The new requirements, found in Form 45-106F6, are set to come into force on October 3rd.

Earlier today, however, the BCSC issued an order exempting investment funds from the requirement to file the new Form 45-106F6, provided that a Form 45-106F1 is filed. Form 45-106F1 is the current form required to be filed in a Canadian jurisdiction under NI 45-106 Prospectus and Registration Exemptions.

Meanwhile, issuers and underwriters filing the report in respect of private placements by certain foreign public issuers (defined to include issuers subject to prescribed reporting requirements in the U.S. and certain other designated jurisdictions) will now be exempt from Item 4 of the new report, being the requirement to provide information regarding the securities beneficially owned or controlled by their insiders and promoters. The designated jurisdictions are Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland and the U.K. While the order provides relief from Item 4 in respect of these designated foreign public issuers, they must still file the report in compliance with the remaining provisions. No relief was extended to Canadian private companies.

The BCSC also concurrently published an order exempting representatives of the media from the prohibition against using information contained in Schedule I of the report provided they only disclose the information for journalistic purposes. The information contained in Schedule I includes the name of individual purchasers, the number and type of securities they purchased and price paid, the date of distribution and indication of whether the purchaser is an insider or a registrant.

Expanded disclosure requirements in BC could have chilling effect on private placements

As we discussed in a blog post of August 16, the British Columbia Securities Commission recently announced that, effective October 3, 2011, exempt distributions (private placements) in British Columbia will be subject to expanded post-trade disclosure requirements. These new rules are expected to have a chilling effect on private placements into British Columbia, particularly by foreign public companies and investment funds, and other issuers that are not “reporting issuers” (public companies) in Canada.

While issuers making an exempt distribution in B.C. will generally be required to file the new Form 45-106F6 (in addition to filing a Form 45-106F1 in other Canadian jurisdictions, as applicable), issuers that are not reporting issuers in any jurisdiction of Canada will have to comply with more onerous requirements. As we mentioned in our earlier blog post, however, an exempt distribution report on the new Form and on Form 45-106F1 will only be required for distributions effected pursuant to prescribed prospectus exemptions. The practical feasibility of collecting the required information and the fact that the additional information will be publicly accessible must be carefully considered by issuers before they decide to make a private placement in British Columbia.

Specifically, the new form will require non-reporting issuers to provide disclosure in the main body of the report regarding the securities beneficially owned, or directly or indirectly controlled, by each insider and promoter of the issuer. The term “insider” under British Columbia securities legislation captures a wide range of persons including, for example, directors and officers of entities holding more than 10% of the voting rights of the issuer. Investment funds managed by an investment fund manager registered in a Canadian jurisdiction, however, will not have to provide the additional information. Importantly, the required information will include the price paid for all securities held by the insider or promoter and their directors and officers on the distribution date, including securities previously acquired. Underwriters and issuers, particularly those involved in global offerings by major non-Canadian issuers will likely face significant practical difficulties in collecting, vetting and disclosing the required information within the prescribed 10-day timeframe for filing. Also, since the information will be required in the main body of the form, it will be publicly accessible in electronic form.

As such, non-reporting issuers should carefully consider these new requirements before undertaking an exempt distribution in British Columbia. Those continuing to make exempt distributions in British Columbia after October 3 should review their subscription and other related documentation to ensure they are obtaining the information necessary to fulfill these new reporting requirements.

For more information, see our blog post of August 16, cited above.

British Columbia to require more disclosure on private placement purchasers

Kathleen G. Ward, Keith R. Chatwin, John F. Anderson and Ramandeep Grewal

On August 11, the British Columbia Securities Commission (BCSC) published advanced notice that effective October 3, 2011, it will require expanded disclosure about purchasers purchasing securities in the exempt market. Breaking with its counterparts in other Canadian jurisdictions, the BCSC has determined that the need for increased disclosure about the exempt market in British Columbia warrants a “local response.” The BCSC has therefore adopted a new Form 45-106F6 (BC Form) as its own form of report for certain prospectus exempt distributions (private placements) in British Columbia in lieu of the existing form used in all other Canadian jurisdictions (Form 45-106F1).

The BC Form expands the disclosure that is required under Form 45-106F1 in a number of ways.

  • For issuers that are not reporting issuers in any jurisdiction of Canada (private companies), the BC Form requires disclosure of the name, municipality and country of residence for each insider and promoter of the issuer, including details regarding their insider or promoter status and total securityholdings in the issuer, as well as the price paid for all securities held by the insider or promoter on the distribution date, including both previously held securities and securities purchased in the distribution subject to the report. This information must be supplied in the main body of the report itself (as opposed to the Schedules) which means it is publicly available in electronic form. For insiders and promoters that are not individuals, disclosure is required in respect of their directors or officers.
     
  • For all issuers, public and private, disclosure is required as to whether purchasers are insiders or registrants, as well as their names and addresses, the number and type of securities purchased, total purchase price paid, exemption relied upon and the date of the distribution.
     
    • For non-individual purchasers (i.e. corporations, trusts, etc.) this information, including the name and telephone number of their contact person, is included in the body of the report and will be publicly available in electronic form.
       
    • For purchasers who are individuals, the name, insider or registrant status, number and type of securities purchased, total purchase price paid and distribution date are contained in Schedule I, which information is made available for public inspection at the BCSC’s offices in paper format only. Schedule II, containing the residential address, telephone number and exemption relied upon for individual purchasers will not be publicly available in either electronic or paper format. 
       
  • Information on whether any person receiving compensation (either commission or finders fees) in connection with the distribution is an insider or a registrant will also be required and publicly available.

In addition to expanding the nature of disclosure required, the BC Form differs from existing reporting requirements under Form 45-106F1 in that under Form 45-106F1, the name, address and telephone number of the purchaser (individual and non-individual), as well as the number of securities purchased, purchase price paid and exemption relied upon are contained in Schedule I and is information that is not placed in the public file by any securities regulator. To address privacy concerns, the BCSC has inserted a provision into National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106) and the BC Form itself prohibiting any person from using the information contained in Schedule I for any purpose other than research concerning the issuer for the person’s own investment purpose. NI 45-106 will also contain transition provisions to permit the filing of the existing Form 45-106F1 for (i) distributions made in British Columbia between September 23, 2011 and October 3, 2011 (i.e. the ten days preceding the implementation date of the BC Form), and (ii) investment funds making distributions during the financial year in which the BC Form comes into force, provided the form is filed no later than 30 days after the end of that financial year.

Notably for investment funds, the BC Form requires the filer to disclose the jurisdiction(s) where the manager of the investment fund is registered if it is registered in Canada. If the manager is a Canadian registrant, the fund is exempt from providing information regarding the insiders and promoters of the issuer or regarding the purchasers (as described in the first two paragraphs above), regardless of whether the fund is a reporting issuer. Such funds will therefore be exempt from most of the expanded reporting requirements under the BC Form (and be required to provide less disclosure in B.C. as compared to the Form 45-106F1 filed elsewhere), with the BCSC stating that “they have not seen problems in the exempt market involving this category of issuer.”

A single harmonized form for reporting private placements has been in place in Canada for a number of years under Form 45-106F1. Effective October 3, 2011, a separate filing on the BC Form will be required for all distributions taking place in British Columbia. Due to the approach taken in the British Columbia securities legislation as to when a distribution takes place in that province, the BC Form will need to be filed not only if purchasers are resident there, but also in respect of all purchasers (in any jurisdiction) where the distribution is made by an issuer with a “significant connection” to British Columbia.

The proposal to expand exempt market reporting in British Columbia was first published for public comment in September of 2010 and received 39 comments. In breaking with its counterparts in other jurisdictions by introducing the enhanced BC Form, the BCSC believes that increasing transparency in the exempt market helps investors by providing them with greater information to assist in conducting due diligence on issuers, thereby levelling the playing field with the insiders and promoters of an issuer. It will be interesting to observe over the coming months whether enhancing disclosure for the benefit of investors will in fact be a disadvantage for those same investors on account of the chilling effect it may have on distributions in British Columbia. Non-reporting issuers in particular, whose insiders and promoters may be sensitive to public disclosure of their ownership interests, may choose to look at other options. While the BCSC did consider the privacy interests of purchasers, concluding that only about 5% of the capital raised in British Columbia would be at risk as a result of the privacy concerns of high-net worth purchasers, it appears not to have turned its attention to the impact on the issuers themselves, who may think twice before extending investment opportunities to any British Columbia purchasers. It should be kept in mind, however, that an exempt distribution report on the BC Form and on Form 45-106F1 is only required for distributions effected pursuant to prescribed prospectus exemptions, such as the “accredited investor” and the “$150,000 minimum investment amount” exemptions. Other exemptions, including the “private issuer” exemption (which private companies may rely on provided they meet the prescribed conditions) are not subject to a post-trade filing requirement.

OSC's Investment Funds Practioner discusses issues in exemptive relief applications and public disclosure filings

The Ontario Securities Commission recently released the May 2011 issue of its Investment Funds Practitioner. The publication discusses various issues arising out of the OSC's review of the public disclosure documents and applications for exemptive relief filed by investment funds and provides the OSC's responses to the various matters.

Specifically, the OSC provides its views on, among other things, applications for exemptive relief from the requirement to calculate daily net asset value of an investment fund that uses specified derivatives (generally, the OSC believes that calculating NAV on a daily basis doesn't create a significant burden); whether the chief compliance officer of the manager is an "executive officer" for the purposes of requiring a PIF (the OSC answered this in the affirmative); and whether an issuer can make use of a short form prospectus for a subsequent offering within a year of filing a long form prospectus in connection with its IPO (the OSC provides that in such a case, a new fund's continuous disclosure record is not comprehensive enough).

Notably, the Practitioner also provides a number of frequently asked questions (and the OSC's response) regarding the newly-introduced requirements to produce and file Fund Facts documents. The FAQs review such issues as the transition period, filing fees, frequency of filing, the format of Fund Facts and disclosure of past performance.

OSC expresses concern regarding improper reliance on the accredited investor exemption

The OSC today released a staff notice expressing concern that issuers and dealers are relying on the accredited investor exemption to sell exempt securities to individual investors who do not meet the applicable requirements of the exemption. According to the OSC, many dealers are failing to collect adequate know-your-client (KYC) information to reasonably determine whether the investor is an accredited investor, and today's notice is intended to set out the OSC's expectations for issuers and dealers selling securities to accredited investors.

The notice focuses on the $1,000,000 financial asset and $5,000,000 net asset tests that apply to individual investors under the definition of "accredited investor" in National Instrument 45-106 Prospectus and Registration Exemptions. Staff have expressed concern that the two concepts are being confused. The higher threshold test based on "net assets" could include an investor's personal residence or other real estate (minus liabilities) whereas the lower test based on "financial assets" does not. According to staff, some dealers are not making it clear to clients that a personal residence or other real estate cannot be included for the purposes of determining financial assets.

The notice also provides a non-exhaustive list of steps that dealers should take when selling exempt securities, including:

  • reading and understanding the definition of accredited investor;
  • developing an accurate form for collecting KYC information;
  • explaining the accredited investor definition to clients and ensuring that the KYC forms are properly completed;
  • not selling an exempt security unless there is sufficient information to determine whether the client qualifies;
  • ensuring the exempt security is suitable for the client;
  • reviewing the KYC form;
  • retaining applicable documentation;
  • establishing appropriate policies and procedures; and
  • reporting the sale of exempt securities.

Notably, with respect to the issue of sufficient information, the notice states that it is not sufficient for issuers and their dealers to simply rely on a client initialling or checking off a box on an accredited investor certificate and that the information contained in the client's completed KYC form or other documentation must also demonstrate that the investor meets the test. Verbal representations, according to OSC staff, are also not sufficient to support that an investor meets the definition.

For more information, see Staff Notice 33-735.

Proposed new CSA Exempt Distribution Rules - new playing field for securitized products not exactly a field of dreams

Mark McElheran

The proposed exempt distribution rules published for comment by the CSA on April 1, 2011, if enacted as proposed, will have a very significant impact on the exempt market for securitization transactions and would effectively transform the exempt market for securitized products into a quasi-public market. In addition to narrowing the scope of eligible exempt investors (creating a special category of “eligible securitized product investors”, which has been discussed in a previous post), the proposed amendments to NI 45-106 would also impose significant disclosure obligations at the time of issuance and on a continuous basis and create certification requirements as part of a broader statutory civil liability regime. The proposed changes to the exempt market are a significant departure from traditional securities regulatory policy and its emphasis on the protection of unsophisticated investors.

Information Memorandum Requirements

In order to qualify for the securitized product exemption, the issuer will be required to deliver an information memorandum (IM) to the purchaser, which must (i) disclose sufficient information about the securitized product and securitized product transaction to enable a prospective purchaser to make an informed investment decision; (ii) describe the rights of action that the issuer will have against, among others, the issuer, the sponsor and the underwriter for any misrepresentations in the IM; (iii) describe the relevant resale restrictions; and (iv) not contain a misrepresentation. For a short term securitized product, the IM also has to be in the prescribed form.

In its request for comments, the CSA indicated that it developed the prescribed form of IM by reviewing, among other things, existing ABCP information memoranda, the information that the Bank of Canada expects when reviewing to accept ABCP as eligible collateral for its standing liquidity facility and comment letters on the October 2008 ABCP Concept Proposal. A typical IM in the market today is basically a very broad overview of the types of assets that will be acquired by the ABCP issuer and a description of the main parties involved in administering and/or providing support to the ABCP issuer and the expected rating of the ABCP to be issued.

While all of this information is required by the prescribed form, it also requires more extensive detail, in particular with respect to specific transactions. For example, the prescribed form requires disclosure of the investment guidelines applied to the pool assets that limit the types and credit quality of assets and asset originators – while a general set of eligibility criteria can be constructed, these will vary somewhat across asset classes and will also vary somewhat from originator to originator. In addition, if the issuer has acquired pool assets, it is required to provide certain disclosure prescribed by Form 45-106F8 (the prescribed form of periodic disclosure for short-term exempt securitized products). This would include disclosure of each asset type acquired by the issuer (expressed as a dollar amount and as a percent of the issuer’s aggregate assets), the industry of the seller (expressed as a dollar amount and as a percent of the aggregate assets) and the percent of assets in the series acquired by each seller. It would also require disclosure describing the assets, including the average remaining term, number of obligors and weighted average life of the assets and detailed performance data, including default and delinquency data. These information requirements would seem to require that an IM be continually updated to reflect the acquisition of new assets, the amortization of existing assets, and to provide an updated performance report. As ABCP issuers are continuously distributing their securities, compliance with these requirements may pose a very significant challenge. Given the periodic disclosure obligations that are proposed to be imposed on ABCP issuers by way of monthly reports (among other things), it isn’t clear why this information would be required to be contained in the IM.

For securitized products that are not short-term, there are no prescribed requirements but, as noted, the IM will need to disclose sufficient information about the securitized product and securitized product transaction to enable a prospective purchaser to make an informed investment decision. This obligation sounds an awful lot like “full, true and plain disclosure” and is clearly a higher standard than applies generally to offering memoranda under existing securities laws (which require that offering memoranda not contain a misrepresentation). Existing disclosure in the exempt term market for securitized products has often been described as “prospectus-like”; and given this heightened standard, coupled with the increased certification requirements discussed below, this is certain not to change.

One of the CSA’s guiding principles in establishing the securitized product rules was that the rules should take into account the particular features of the Canadian securitization market and be proportionate to the risks associated with particular types of securitized products available in Canada and should not unduly restrict investor access to securitized products. Some may question whether the proposed IM rules, which apply irrespective of the type of asset class or issuer involved, are consistent with this guiding principle.

Certification Requirements/Expanded Statutory Civil Liability

One of the more significant aspects to the IM requirements is the requirement that a certificate be signed by the issuer’s CEO and CFO (or individuals acting in a similar capacity), each promoter and each sponsor, stating that the IM does not contain a misrepresentation. In addition, each underwriter will be required to sign a certificate stating that, to the best of its knowledge, information and belief, there is no misrepresentation in the IM. The certifications are required to be true at both the date the certificate is signed and the date the IM is delivered to the purchaser (the latter requirement being further indication that the IM needs to be continually updated). These certification requirements are part of the intended extension of statutory liability for disclosure in information or offering memoranda for securitized products to include third parties such as sponsors and underwriters. The CSA has noted that the statutory civil liability can be achieved in most jurisdictions by prescribing the IM as an offering document to which statutory civil liability rights apply which would then permit a right of action for damages against anyone signing the IM. In Ontario, legislative amendments would be required for statutory rights of action to be available against sponsors and underwriters. Although the standard of disclosure in a private securitized products transaction will not on its face be the same as in a public transaction (which requires full, true and plain disclosure of all material facts), one would expect that underwriters will cease to draw much of a distinction between public and private offerings of securitized products going forward.

A copy of any IM delivered to a prospective purchaser will need to be delivered to the securities regulatory authority and posted on a website within 10 days after a distribution under the IM. A report for the distribution of a short-term securitized product is not required to be delivered if the report is filed not later than 30 days after the calendar year in which the distribution occurs.

Periodic Disclosure Requirements for Exempt Securitized Products

The proposed rules also impose periodic disclosure obligations on issuers of securitized products. These rules would appear to apply not only to new securitized product issuances but also to existing securitized products. As with the IM rules, a distinction is drawn between short-term securitized products and other securitized products. Issuers that distribute securitized products under the securitized product exemption, other than short-term securitized products, will be required to prepare a prescribed form of payment and performance report similar to what is required to be prepared by a reporting issuer and post it on a website within 15 days of each payment date (and deliver a copy to the securities regulatory authority). The issuer is also required to prepare a timely disclosure report upon the occurrence of certain stated events (which are the same events that a reporting issuer is required to disclose). In essence, the continuous disclosure obligations for reporting issuers and non-reporting issuers who issue securitized products maturing more than one year from the date of issuance have effectively been conformed.

Continuous disclosure obligations will be discussed in a future post but would include payment defaults, rating changes, changes in trustees or servicers, certain triggering events such as early amortization events that would materially alter the payment priority or distribution of cash flows and a “difference of 5% or more occurring in a material pool characteristic of an asset pool for outstanding securitized products from the time of issuance of the securitized products, other than as a result of the pool assets converting into cash in accordance with their terms” (one can only imagine the number of ways that this could be interpreted). This report would need to be posted on a website no later than two business days after the occurrence of the event and investors must be provided with a copy or otherwise advised of the report. Query whether all reportable events will be known to the issuer within two business days of the occurrence of the event, in particular asset performance-related events where reporting to the issuer may lag the occurrence of the event.

Issuers of short-term securitized products are required to prepare a periodic disclosure report in the prescribed form dated as of the end of the last business day of each month and within 15 days of the end of each month it is required to delivery a copy to the securities regulatory authority and post a copy to a website. This disclosure report requires a significant amount of information, including very detailed transaction-specific disclosure in regards to asset composition and performance.

If an investor would reasonably require the information to make an informed investment decision, an issuer is also required to provide disclosure of any change to the information disclosed in the most recently delivered report or to the disclosure in the IM as well as disclosure of an event that affects payments or pool performance. This report is required to be delivered to the securities regulatory authority and posted to a website no later than two business days after the date on which the relevant event or change occurred. As noted, for some events there may be a delay between the time when the event occurs and the reporting of that event to the issuer, which would preclude reporting within this timeframe. Also, the requirement to provide timely disclosure of any change to the disclosure in the IM would seem to be a further indication that the IM is intended to be a document that requires continuous monitoring and updating.

Resale Restrictions

The proposed rules would make the first trade of a securitized product that was distributed under the securitized product exemption a distribution, with the effect that the only prospectus exemption that would be available for a resale of a securitized product would be the same securitized product exemption, resulting in a “closed-system” for securitized products.

SEC proposals on ABS may dampen private placements into U.S.

Our colleague Mike Rumball has published a number of posts on our Structured Finance blog regarding the recent proposals by the U.S. Securities and Exchange Commission regarding asset-backed-securities. His latest considers the potential dampening effect on private placements into the U.S. that may result from the proposed requirement that issuers perform a review of the assets underlying an ABS and disclose the nature of the review.

BCSC proposes further disclosure for exempt distributions

The British Columbia Securities Commission (BCSC) yesterday published for comment a proposed new Form 45-106F6 British Columbia Report of Exempt Distribution that would require issuers to provide additional information for private placements taking place in British Columbia. Specifically, the new form would require additional information about purchasers, including identifying whether a purchaser is a promoter or an insider of the issuer. Non-reporting issuers would also be required to provide detailed information regarding their insiders and promoters. The BCSC also proposed making some of the information provided on the form publicly available. Characterizing the exempt market as "high-risk" for investors, the BCSC stated that the new disclosure requirements "should help BC investors make more informed investment decisions and improve transparency in the market."

The proposed new form would set British Columbia apart from other Canadian jurisdictions, which would continue to use Form 45-106F1 Report of Exempt Distribution, effectively requiring an issuer or underwriter to file a separate form in British Columbia for exempt distributions that take place in BC and one or more other jurisdictions of Canada. The BCSC is inviting comments on these proposed amendments until November 9, 2010.

IIROC announces approval of UMIR amendments

The Investment Industry Regulatory Organization of Canada (IIROC) today announced that securities regulators have approved amendments to the Universal Market Integrity Rules (UMIR) respecting trading during certain securities transactions. Rule 7.7 of the UMIR governs the activities of dealers, issuers and others in connection with a distribution of securities, securities exchange take-over bid, issuer bid or amalgamation, arrangement, capital reorganization or similar transaction. Rule 7.7, paralleled OSC Rule 48-501 Trading During Distributions, Formal Bids and Share Exchange Transactions prior to approval of these amendments. While some provisions of Rule 7.7 will now differ from OSC Rule 48-501, both rules will remain substantively similar and it is intended they will be applied in a consistent manner.   Among other things, the amendments:

  • modify the exemption governing bids or purchases of certain securities during restricted periods by permitting such bids at the best independent bid price at the time of order entry rather than at the last independent sale price;
     
  • replace the requirement that a mutual fund be designated by the market regulator prior to qualifying as an exempt exchange-traded fund with a provision that any mutual fund with units that are listed or quoted security in continuous distribution in accordance with legislation would qualify unless the regulator has designated the mutual fund to be a security excluded from the definition of "Exempt Exchange-traded Fund";
     
  • clarify the definition and interpretation of "restricted period";
     
  • clarify the types of private placements that may become subject to restrictions under Rule 7.7 of UMIR;
     
  • clarify that in determining the "best ask price" or "best bid price", reference is made only to orders contained in a consolidated market display for a marketplace that is then open for trading; and
     
  • make further consequential and editorial amendments.

The amendments are effective as of today, January 8, 2010.

TSX amends Form 11 - Notice of Private Placement

Effective November 27, 2009, the Toronto Stock Exchange has adopted amendments to Form 11 - Notice of Private Placement pursuant to which additional details are required concerning broker warrants and anti-dilution provisions as well as identification of any newly created insiders. The form also requires certification by a director or senior officer of the issuer.

Specifically, Form 11 has been amended to add a new section 3(j), which requires a description of any broker warrants (or options), including the number, exercise price, term to expiry and other significant terms. A new section 3(k) now requires a description of any anti-dilution provisions that provide an adjustment for events for which not all securities holders are compensated. With respect to insiders, the form now requires that any new insiders created as a result of the private placement be identified and specifically notes that the TSX may require the new insiders to complete and clear a Personal Information Form prior to the closing of the private placement. A director or officer of the issuer will also have to certify that the notice is complete and accurate and that it does not contain any misrepresentations.

OSC issues staff notice providing guidance for Contracts for Difference and FX Contracts

In response to numerous inquiries, the Ontario Securities Commission (OSC) issued a notice today outlining the OSC Staff's view on the applicability of securities laws to offerings of Contracts for Difference (CFDs), foreign exchange contracts (FX contracts) and similar OTC derivative products. While the notice focuses on CFDs, the guidance is intended to apply generally to FX contracts and OTC derivatives as well.

Specifically, OSC Staff consider CFDs to be securities and, as such, CFD providers offering such products to Ontario investors must comply with registration and prospectus requirements of Ontario securities law absent statutory exemptions or exemptive relief. The notice states, however, that as the prospectus requirement may not be well-suited for certain types of OTC derivative products, OSC staff "may be prepared to recommend relief" from the prospectus requirement under certain situations. The circumstances under which an exemption may be provided are discussed in the notice and an example of such an exemption was provided last week.

The notice is intended to provide interim guidance until such time that a harmonized approach to the regulation of OTC derivatives is developed by the Canadian Securities Administrators and/or Ontario introduces derivatives legislation.

OSC declines application to overturn TSX decision allowing private placement without unitholder approval

On August 26, the Ontario Securities Commission released a decision refusing to intervene in a case where the TSX allowed a private placement of units of a real estate investment trust without unitholder approval. The application to review the TSX decision was brought by NorthWest Value Partners, which objected to, among other things, the placement proceeding without being put to a vote of unitholders. The placement represented approximately 49% of outstanding units of InterRent Real Estate Investment Trust.

The OSC noted that it was entitled to intervene in cases where (i) the TSX proceeded on an incorrect principle; (ii) the TSX erred in law; (iii) the TSX overlooked material evidence; and (iv) new and compelling evidence was presented to the OSC that was not presented to the TSX. It stated, however, that it would do so "only in the rare case" where an applicant met the "heavy burden of proving such intervention is justified" in accordance with the above principles or some other acceptable ground. In the immediate case, the OSC found that the TSX considered all the relevant information, assessed relevant considerations, followed the appropriate process and carefully articulated its reasons. As such, the application to review the decision was dismissed.

The OSC ruling was released on an expedited basis and full reasons are expected in the near future.

OSC publishes proposed amendments regarding prospectus and registration exemptions

On May 22, 2009 the Ontario Securities Commission (OSC) published a request for comments on a second set of proposed amendments to NI 45-106 Prospectus and Registration Exemptions, OSC Rule 45-501 Ontario Prospectus and Registration Exemptions and NI 45-102 Resale of Securities (collectively, the “Prospectus and Registration Rules”). This second set of amendments has been proposed in connection with proposed amendments to the Securities Act (Ontario) (OSA) under Bill 162 An Act respecting the budget measure and other matters (specifically Schedule 26 relating to the OSA). The second set of amendments is required in order to remove or modify certain provisions of the Prospectus and Registration Rules that are proposed to be superseded by specific provisions of the OSA under Bill 162. 

The amendments to the OSA proposed under Schedule 26 to Bill 162 amend statutory provisions in the following areas:

  • registration requirements for dealers, advisers and others,
     
  • exemptions from the registration requirements,
     
  • exemptions from the prospectus requirement, and
     
  • resale of securities previously distributed under an exemption from the prospectus requirement.

Proposed amendments to the Prospectus and Registration Rules were originally published for comment on February 29, 2008 in connection with proposals to reform and harmonize registration requirements across the country under Proposed NI 31-103 Registration Requirements (Registration Reform). As a consequence of Registration Reform, NI 45-106 was proposed to be repealed and replaced (largely to reflect to new approach to registration being required on a business-based trigger as opposed to a trade-based trigger) and OSC Rule 45-501 and NI 45-102 were proposed to be amended to, among other things, reflect corresponding changes.

Under Bill 162, the Government of Ontario has taken the approach of retaining or including certain prospectus and registration exemptions in the OSA, thereby requiring corresponding amendments to the Prospectus and Registration Rules as previously proposed.

The prospectus and registration exemptions that the Government of Ontario intends to retain or include in the OSA relate to:

  • securities subject to other provincial or federal regulatory regimes such as mortgages, securities evidencing indebtedness secured by or under a security agreement provided under personal property security legislation, and financial intermediaries and Schedule III banks,
     
  • securities that Ontario Ministry of Finance staff have advised are subject to securities regulatory considerations as well as broader public policy considerations such as specified debt, including government debt, and
     
  • securities that the staff of the Ministry of Finance have advised relate to key government policy priorities such as school board debt, tax incentive securities and venture capital raising.

Specifically, the proposed amendments to the OSA under Bill 162 would supersede the following exemptions contained in NI 45-106, as previously proposed to be amended: specified debt (proposed sections 2.34 and 3.34), mortgages (proposed sections 2.36 and 3.36), securities evidencing indebtedness secured by or under a security agreement provided under personal property security legislation (proposed sections 2.37 and 3.37), and evidences of deposit issued by a Schedule III bank or an association governed by the Cooperative Credit Associations Act (Canada) (proposed sections 2.41 and 3.41). References to resale provisions in section 72 of the OSA found in Appendix C to proposed NI 45-102 would be modified to reflect proposed amendments to section 72 and a new section 73.7 found in sections 11 and 13 of Schedule 26 to Bill 162. Certain provisions of OSC Rule 45-501 would be modified or deleted in favour of the application of corresponding provisions in the OSA.

If the proposed amendments to the OSA under Bill 162 are passed, implementation is expected to take place in two stages; the first, reflecting transitional provisions corresponding to the implementation of Registration Reform; and the second, at a later time intended to replace the prospectus exemptions enacted in stage one. If the second stage of amendments to the OSA are enacted, the OSC intends to publish new versions of NI 45-106 and OSC Rule 45-501 for comment. These stage two amendments are found at subsection 12(2) of Schedule 26 to Bill 162 and related regulation-making powers are found at subsection 20(17) of that Schedule.

These proposals have been published for a 30-day comment period expiring on June 22, 2009.

CSA publish proposals relating to credit market turmoil issues

 PDF Version

On October 6, 2008 the Canadian Securities Administrators (the CSA) published CSA Consultation Paper 11-405 entitled “Securities Regulatory Proposals Stemming from the 2007 – 08 Credit Market Turmoil and its effect on the ABCP Markets in Canada” (the Consultation Paper). The Consultation Paper is divided into two parts, with the first part providing a narrative overview of the background to the credit market turmoil in the United States, its spread into Canada and its impact on the non-bank sponsored portion of the asset-backed commercial paper (ABCP) market in Canada. The second part of the paper sets out proposals made under the Concept Paper to deal with the credit market turmoil and related issues in Canada. 

The Consultation Paper is the work of a working group or a subcommittee of the CSA which was formed on December 20, 2007 to consider securities regulatory issues stemming from the turmoil in international credit markets that began in August 2007 (the Committee). The Committee consists of representatives of the securities regulatory authorities in British Columbia, Alberta, Ontario and Quebec, and the Concept Paper states that the recommendations contained in it have not been approved by any securities regulatory authorities or the various provincial or territorial governments in Canada. 

The Consultation Paper makes a number of proposals to deal with issues arising out of the credit market turmoil and invites comments on these proposals on or before December 20, 2008. Among the proposals included in the Consultation Paper are proposals to implement a regulatory framework for “approved credit rating organizations”, which would require credit rating agencies to comply with “comply or explain” provisions of the IOSCO Code of Conduct Fundamentals for Credit Rating Agencies, and proposals to amend the current short term debt exemption (available under section 2.35 of National Instrument 45-106 – Prospectus and Registration Exemptions) to make it unavailable for distributions of asset-backed short term debt, as well as to reduce reliance on credit rating agencies in Canadian securities legislation. Other proposals include a separate policy review to consider the appropriateness of the net financial asset threshold of the “accredited investor” exemption, and the “$150,000 minimum investment amount” exemption, for prospectus exempt distributions. The Concept Paper also proposes coordinating with IIROC various regulatory initiatives focused on addressing the role of intermediaries that are registrants in distributing asset backed securities such as ABCP. Also proposed is a review of the terms “related issuer” and “connected issuer” in proposed National Instrument 31-103 – Registration Requirements, to ensure these definitions capture issuers of ABCP and similar products. It is also suggested that the CSA should review whether the concentration restrictions contained in National Instrument 81-102 – Mutual Funds for money market funds are appropriate, whether further restrictions on the types of investments a money market fund can make are required, whether assets such as asset-backed short-term debt are appropriate as eligible assets in the definition of “cash-cover” and “qualified securities” and whether short-term debt investments, including ABCP with a specified credit rating, should be permitted to be aggregated in a statement of investment portfolio.

Comments on these and other proposals discussed in the Concept Paper are invited to be made in writing, again, by no later than December 20, 2008. 

Amendments to TSX Company Manual Approved

The TSX has adopted and the OSC has approved various amendments to the TSX Company Manual. The Amendments, effective as of June 16, 2008, are of a housekeeping nature and including the following:

  • Amendments to correct references to the Securities Act in Part III and Part VI of the Manual, required as a result of changes to the OSA.
  • Changes to Appendix H: Form 11 -- Notice of Private Placement, to clarify that blanket shareholder approvals are not permitted.
  • Changes to Appendix H: Form 12 - Notice of Intention to Make a Normal Course Issuer Bid
  • Appendix A -- Original Listing Application is being replaced with a streamlined application, but no substantive changes have been made.

OSC grants relief from forward-looking information disclosure requirements for foreign offerings

Ralph A. Hipsher and Kenneth G. Ottenbreit | Version française

The Ontario Securities Commission has recently granted relief to dealers distributing foreign securities by way of private placement into Canada to address uncertainties caused by new forward-looking information disclosure requirements.

Effective December 31, 2007, the Canadian Securities Administrators (CSA) made significant amendments to forward-looking information disclosure requirements under continuous disclosure rules applicable to Canadian reporting issuers. The Ontario Securities Commission (OSC) also concurrently amended requirements relating to offering memoranda disclosure contained in OSC Rule 45-501. As a result of these amendments to OSC Rule 45-501, any offering memorandum provided to purchasers in Ontario that contains material forward-looking information (including future-oriented financial information and financial outlooks) is required to also contain certain prescribed forward-looking information disclaimers or safe-harbour type of disclosure. While this disclosure is similar to safe-harbour disclosure provided under U.S. or foreign securities law requirements, it also requires the issuer to address additional matters not typically encompassed by the equivalent non-Canadian disclosure.
 

As a result of the amendments to OSC Rule 45-501, uncertainty has arisen in the market in the context of foreign issuer private placements and the disclosure requirements, if any, regarding forward-looking information, including future-oriented financial information and financial outlooks. To address this uncertainty, the OSC recently granted exemptive relief to certain foreign dealers allowing for the distribution of securities by way of private placement to "accredited investors", provided the foreign offering documents contain safe-harbour disclosure that complies with U.S. federal securities laws or a disclaimer that the disclosure may differ from that which is required under Ontario securities laws. To deal with this issue in the long-term, the OSC has also proposed to repeal these requirements from OSC Rule 45-501. However, if implemented, this proposed repeal will not take effect until December 2008. Until then, staff at the OSC have advised that they will attempt to deal with exemptive relief applications on an expedited basis.

Until such time as the OSC repeals the forward-looking information disclosure requirements in OSC Rule 45-501, foreign dealers and issuers offering foreign securities into Canada should be aware of these potential issues in order to avoid any unnecessary delays when carrying out private placements into Canada. In addition, consideration should be given to applying for exemptive relief from the forward-looking information requirements in OSC Rule 45-501 consistent with the relief recently granted by the OSC.
 

Passport Phase II: How Ontario Will Fit Into the Multilateral System

Canada moves towards implementing the next phase of the Passport System to further simplify securities regulation, despite the OSC’s lack of participation.

Ramandeep Grewal and Alex Colangelo

In September, 2004, the provincial and territorial Ministers responsible for the regulation of securities in Canada, other than Ontario, agreed to a memorandum of understanding with the intent of providing market participants with a single window of access in a harmonized securities regulatory regime. To that end, Phase I of the Passport System was introduced with Multilateral Instrument 11-101 (“MI 11-101”), which came into force on September 19, 2005. Phase I of the Passport System was considered an interim step towards the greater harmonization and streamlining of securities regulations across Canada. The proposed Phase II of the Passport System builds upon the system’s foundations by, amongst other things, further harmonizing the regulation of prospectus reviews and processes for obtaining exemptive relief.

Key features of Phase II of the Passport System

The proposed National Instrument 11-102 Passport System (NI 11-102) and related policies would build on the steps taken in Phase I, while moving further towards the uniformity of requirements across jurisdictions. Further, each issuer would essentially be exempted from: non–harmonized continuous disclosure requirements, prospectus form and content requirements outside of its Principal Jurisdiction and registration requirements, through a general discretionary exemption system.

While the Ontario Securities Commission (OSC) has not signed onto the Passport System, Phase II has been designed for adoption by all Canadian securities regulatory authorities. 

Proposed Interface Rules with the OSC

Despite Ontario’s reservations, the design of the Passport System allows for Ontario market participants to access Passport System jurisdictions. Further, National Policy 11-202 Process for prospectus review in multiple jurisdictions (“NP 11-202”) and National Policy 11-203 Process for exemptive relief applications in multiple jurisdictions (“NP 11-203”) have been proposed to provide an interface between the OSC and the Passport System regulators. These proposals are designed to protect the efficiencies currently available under the Mutual Reliance Review System by allowing issuers to deal with only one regulator in most circumstances for prospectus review and exemptive relief applications. 

Generally speaking, the proposed interfaces of NP 11-202 and NP 11-203 would work as follows:

Prospectus Review (NP 11-202)

  • The market participant would file its prospectus with the Principal Regulator and with the non-principal regulator in each other jurisdiction in which it wishes to offer securities;
  • If the OSC was the Principal Regulator, the filer would deal with the OSC, and the decision of the OSC would be the decision of all Passport System regulators. The receipt of the OSC would result in a deemed receipt from each jurisdiction in which the prospectus was filed;
  • A market participant for which Ontario was not the Principal Regulator would deal with its Principal Regulator (under the Passport System), which would then coordinate its review with the OSC, and obtain the OSC’s comments. The receipt of the Principal Regulator would result in a deemed receipt from all Passport System regulators and, if the OSC cleared the prospectus, of the OSC.

Exemptive Relief Applications (NP-203)

  • If the OSC was the Principal Regulator, the filer would pay fees to the OSC only, which would then deal with the application. The decision of the OSC would result in an automatic exemption in all Passport System jurisdictions;
  • If the OSC was not the Principal Regulator, the filer would file the application and pay fees with its Principal Regulator and the OSC. The Principal Regulator would then coordinate its review with the OSC. The decision of the Principal Regulator would result in an automatic exemption in all other Passport System jurisdictions and would evidence the decision of the OSC, if the OSC agreed with the decision;
  • If the application was outside the scope of NP 11-102, it would be dealt with as a “coordinated review application” and filings and fees would be submitted in each jurisdiction in which the exemption was required.

Registration

The proposed interface for registration, which has not yet been released for comment, is expected to work in much the same way as described above.

Implementation and transition

Phase I of the Passport System came into force on September 19, 2005.  The CSA is targeting March 2008 for the implementation of all but the registration portion of the Passport System, with the registration portion planned for adopted in July, 2008.

National Registration Reform Proposal - Impact on non-Canadian investment funds

On February 20, 2007, the Canadian Securities Administrators (CSA) published for comment Proposed National Instrument 31-103 - Registration Requirements (Proposed Registration Rule). The comment period will expire on June 20, 2007.

The Proposed Registration Rule is one phase of the CSA Registration Reform Project which is intended to harmonize and streamline registration requirements across Canada. It represents a major restructuring of the Canadian dealer, adviser and investment fund manager registration rules, and has implications for Canadian and non-Canadian dealers, advisers and investment fund managers doing business on a registered or exempt basis in any province or territory of Canada.

Proposed changes to the registration and exemption regime

The primary effects of the Proposed Registration Rule on non-Canadian investment funds are:

  1. repeal of the dealer registration exemptions contained in National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"), including the exemption for trades with an "accredited investor";
  2. continuation of the requirement for portfolio managers to register in Canada;
  3. introduction of a requirement for "investment fund managers" to register in Canada;
  4. introduction of a national exemption from the adviser registration requirement for "international portfolio managers" provided that securities of the investment fund are distributed through a registrant; and
  5. introduction of a national exemption from the investment fund manager registration requirement for "international investment fund managers" provided that securities of the investment fund are distributed through a registrant.

Current dealer and adviser registration and exemption regime

Except in Ontario (and the Yukon Territory and Newfoundland and Labrador), provincial and territorial securities laws generally permit a non-Canadian investment fund to sell its own securities to "accredited investors" on a dealer registration and prospectus exempt basis subject to certain disclosure requirements and post-distribution filings. Such exempt distributions are common private placement transactions in Canada. In Ontario, the dealer registration exemption, but not the prospectus exemption, has been removed for "market intermediaries".

The Ontario Securities Commission (OSC) considers an adviser to be acting as an adviser in Ontario if it, directly or through a third party, acts as an adviser for an investment fund that distributes its securities in Ontario, notwithstanding that the advice to the fund may be given to, and received by, the fund outside of Ontario.

As a result, portfolio advisers to investment funds that distribute securities in Ontario must either be registered as advisers in Ontario or rely on an adviser registration exemption. In Ontario, a common practice is for non-resident investment funds to rely upon an adviser registration exemption if the securities of the investment fund are (i) primarily offered outside of Canada, (ii) only distributed in Ontario through a registrant, and (iii) distributed in Ontario in reliance upon an exemption from the prospectus requirements (e.g., "accredited investors").

The practical effect of the Ontario rules is that the sale of investment fund securities in Ontario is typically intermediated by an Ontario-registered dealer, subject to compliance with certain disclosure and post-distribution filing requirements.

Requirement to register as a portfolio manager and investment fund manager

The Proposed Registration Rule makes a distinction between those that are in the business of advising others as to the investing in of securities (i.e., a portfolio manager) and those that are in the business of managing and administering an investment fund (i.e., an investment fund manager). Persons or companies that are in the business of managing an investment fund will be required to register as an investment fund manager.

The Proposed Registration Rule requires that portfolio managers to investment funds and investment fund managers be registered in Canada or comply with the limited international portfolio manager and international investment fund manager exemptions. The Proposed Registration Rule effectively imposes a registration requirement on portfolio managers and investment fund managers where investment fund securities are distributed in any Canadian jurisdiction. The Proposed Registration Rule is silent on what specifically triggers the registration requirement for non-Canadian investment fund service providers.

The British Columbia Securities Commission is considering not adopting the registration requirements for persons who are in the business of dealing in the exempt market. It is unclear whether this will affect the registration requirements for portfolio managers and investment fund managers.

In cases where a company is both a portfolio manager and an investment fund manager, registration will be required in both categories under the Proposed Registration Rule. The registration requirements include application of various "Fit and Proper" requirements such as the requirement to have an Ultimate Designated Person, a Chief Compliance Officer and registered personnel that meet certain proficiency standards, capital and insurance requirements, financial statement filing obligations, and other requirements.

Proposed international portfolio manager and international investment fund manager exemptions

The Proposed Registration Rule contains exemptions from the registration requirements for "international portfolio managers" and "international investment fund managers".

International portfolio managers and international investment fund managers to an investment fund will be exempt from the registration requirements if:

  1. the securities of the fund are primarily offered outside of Canada;
  2. the securities of the fund are only distributed in Canada through a registrant; and
  3. the securities of the fund are distributed in Canada in reliance upon an exemption from the prospectus requirement.

In order to rely on the exemption, an international portfolio manager must also satisfy certain client notification and disclosure requirements.

An "international portfolio manager" is a portfolio manager that has no establishment in Canada or officers, employees or agents resident in Canada, and engages in the business of a portfolio manager in the jurisdiction in which its head office or principal place of business is located.

An "international investment fund manager" is an investment fund manager that has no establishment in Canada or officers, employees or agents resident in Canada, and engages in the business of an investment fund manager in the jurisdiction in which its head office or principal place of business is located.

Significantly, under these definitions, "international portfolio managers" and "international investment fund managers" need not be registered in their home jurisdictions. Such entities must simply engage in the business of a portfolio manager or investment fund manager, as the case may be.

Notably, investment funds cannot be distributed through a non-resident dealer relying on the proposed "international dealer exemption" contained in the Proposed Registration Rule. Consequently, investment funds must generally be distributed through an "exempt market dealer", a proposed new category of dealer registration, or a fully registered Canadian investment dealer.

Transition

The Proposed Registration Rule does not set out any grandfathering or other transitional relief for non-Canadian investment funds that have issued securities to Canadian investors prior to the coming into force of the Proposed Registration Rule. For funds with limited redemption features, this may be an issue. It is also unclear how these requirements will apply to the service providers to non-Canadian investment funds that placed securities in Canada before the Proposed Registration Rule becomes effective.

National Registration Reform Proposal: Impact on international dealers registered in Ontario

On February 20, 2007, the Canadian Securities Administrators (the CSA) published for comment Proposed National Instrument 31-103 - Registration Requirements (the Proposed Registration Rule). The comment period will expire on June 20, 2007.

The Proposed Registration Rule is one phase of the CSA Registration Reform Project which is intended to harmonize and streamline registration requirements across Canada. It represents a major restructuring of the Canadian dealer, adviser and investment fund manager registration rules, and has implications for Canadian and non-Canadian dealers, advisers and investment fund managers doing business on a registered or exempt basis in any province or territory of Canada, including non-Canadian dealers registered in Ontario in the category of "international dealer."

Proposed changes to the dealer registration and exemption regime

The primary effects of the Proposed Registration Rule on non-Canadian dealers are:

  • elimination of the "international dealer" registration category in Ontario;
  • repeal of the dealer registration exemptions contained in National Instrument 45-106 - Prospectus and Registration Exemptions (NI 45-106), including the exemption for trades with an "accredited investor";
  • introduction of a national "international dealer exemption" that significantly narrows the list of clients with whom a non-Canadian dealer may trade on an exempt basis; and
  • introduction of an "exempt market dealer" registration category that will permit Canadian and non-Canadian dealers to trade (i) in securities being distributed under a prospectus exemption or (ii) to persons or companies to whom a security may be distributed under a prospectus exemption (for example, trading with an "accredited investor").

Current dealer registration and exemption regime

In Ontario, registration as an "international dealer" permits a non-Canadian dealer to trade with "designated institutions" in non-Canadian equity securities and certain Canadian debt securities. The practical effect of the international dealer registration regime in Ontario is to permit a non-Canadian dealer to trade in permitted securities with any person or entity, other than an individual, that qualifies as an "accredited investor."

Except in Ontario (and the Yukon Territory and Newfoundland and Labrador), provincial and territorial securities laws generally permit a non-Canadian dealer to trade in both Canadian and non-Canadian securities with an "accredited investor" on a dealer registration-exempt basis.

Proposed international dealer exemption will narrow list of permitted clients

Under the Proposed Registration Rule, a non-Canadian dealer that has no establishment in Canada may rely on the international dealer exemption to trade with a narrow list of "permitted international dealer clients" when trading in "foreign securities" and certain Canadian debt securities. Subject to the filing of submission to jurisdiction forms and delivering client notifications, the practical effect of the proposed international dealer registration exemption is to significantly narrow the list of clients with whom a non-Canadian dealer is permitted to trade on an exempt basis and to require registration as an "exempt market dealer" as a condition to trading with the full range of "accredited investors."

Non-Canadian dealers that are presently registered as international dealers in Ontario will no longer be permitted to trade with the following clients in Ontario under the proposed international dealer exemption:

  • a person or entity that has net assets of C$5,000,000 (note: this category was used by international dealers to trade with corporate entities and hedge funds);
  • an investment fund that is not advised by a person registered as a portfolio manager in Canada;
  • a registered charity; or
  • a person in respect of which all of the owners of interests, direct, indirect or beneficial, are persons that are accredited investors.

In the Canadian provinces and territories that presently permit non-Canadian dealers to trade in securities with "accredited investors" on an unregistered basis, the Proposed Registration Rule will require such dealers to rely on the international dealer exemption. As a consequence, an unregistered non-Canadian dealer will only be permitted to trade with a narrow list of permitted clients or, alternatively, will be required to register as an "exempt market dealer" to gain access to the full list of "accredited investors" with whom they are presently permitted to trade (summarized below). Significantly, in the provinces and territories where a non-Canadian dealer may presently trade in securities with an "accredited investor" on a dealer registration-exempt basis, the proposed international dealer exemption would not permit the dealer to trade with any of the following "accredited investors":

  • the persons and entities identified above; and
  • individuals who meet the accredited investor asset or income tests.

Under the proposed international dealer exemption, non-Canadian dealers will be restricted to trading only in "foreign securities," the definition of which does not include an inter-listed security (i.e., a security that is listed or traded on a marketplace in Canada), and in certain Canadian debt securities. Presently, a non-Canadian dealer may trade in both Canadian and non-Canadian securities on a dealer registration-exempt basis with an "accredited investor" resident in most provinces and territories, other than Ontario. The "foreign securities" restriction is a requirement presently applicable to registered international dealers in Ontario.

Overview of Permitted Clients

 

Current

Current

Proposed

Proposed

PERMITTED CLIENT CATEGORY

International
Dealer
Registration (Ontario)

Accredited Investor Registration Exemption1

International Dealer Registration Exemption

Exempt - Market Dealer Registration

Financial Institutions

       

Domestic or Foreign Authorized Banks

#

#

#

#

Loan / Trust Corporations

#

#

#

#

Savings / Credit Unions / Co-Operative Credit Societies

#

#

#

#

Business Development Bank of Canada

#

#

#

#

Insurance Companies

#

#

#

#

Government Entities

#

#

#

#

Registered Canadian Dealers and Advisers

#

#

#

#

Advisers Acting for Fully Managed Accounts

#

#

#

#

Funds

       

Pension Funds

#

#

#

#

Investment Funds

       

Advised by Registered Adviser

#

#

#

#

Advised by Unregistered Adviser

#

#

NO

#

Restricted to Accredited Investors

#

#

NO

#

Registered Charities

#

#

NO

#

Corporate Entities / Other Business Entities

#

#

NO

#

Entities Wholly Owned by Accredited Investors

#

#

NO

#

Accredited Investor Individuals

NO

#

NO

#

1 All provinces and territories except Ontario, Newfoundland and Labrador and the Yukon Territory

"Exempt market dealer" registration requirement

Under the Proposed Registration Rule, a non-Canadian dealer will be required to register as an "exempt market dealer" to trade in Canadian and non-Canadian securities with the full list of "accredited investors." A non-Canadian dealer that wishes to register as an exempt market dealer will be required to:

  • make informational filings for each of its directors and senior executive officers;
  • register each of its individual dealing representatives that will trade in Canada, who will be subject to Canadian proficiency requirements;
  • register an Ultimate Designated Person (i.e., the senior person in charge of the firm's activities requiring registration) and a Chief Compliance Officer (i.e., the person responsible for the day-to-day monitoring of the firm's adherence to its compliance policies and procedures).

Exempt market dealers will also be subject to "fit and proper" requirements, such as annual and quarterly financial statement reporting requirements, capital adequacy calculation and reporting requirements, insurance, bonding and other notice filing requirements. In addition, exempt market dealers will be subject to specific custody rules for client assets.

CSA to overhaul adviser, dealer and investment fund manager registration

Kathleen Ward, Alix d'Anglejan-Chatillon, Ramandeep Grewal, Jennifer Northcote, Darin Renton and Simon Romano

The Canadian Securities Administrators (CSA) have now released for comment the much anticipated proposed NI 31-103 - Registration Requirements (the Proposed Registration Rule), along with the accompanying companion policy (the Companion Policy) and forms. The Proposed Registration Rule represents a major overhaul of the current registration regime by moving from a "trade trigger" to a "business trigger" to require registration for those not only advising (as is currently the case) but also dealing in securities and by imposing a new registration requirement for investment fund managers.

New registration regime

The Proposed Registration Rule represents one piece of what is proposed to be a national, harmonized and simplified registration regime. The full regime is proposed to be brought into force through consequential amendments to securities legislation and related instruments, which will work in conjunction with the National Registration System and implementation of core client relationship principles through SRO by-laws (which are yet to be proposed).

In Ontario, for example, it is proposed that the Securities Act (Ontario) will be amended to require registration by anyone who is in the business of acting as a dealer or representative of a dealer, or who is an adviser or representative of an adviser or an investment fund manager. While the legislation will determine who needs to be registered, the Proposed Registration Rule will set out the categories of registration, for both firms and individuals, and the related requirements for these categories, including "fit and proper" requirements, conduct rules for dealers and advisers and obligations regarding conflicts of interest. Exemptions from the requirement to register as a dealer, including the exemption for trades with accredited investors, will be eliminated. While the text of the Proposed Registration Rule and related Companion Policy has been published for comment (summarized below), the detailed legislative amendments required to implement this regime have not yet been provided.

Meaning of "in the business"

The CSA propose certain factors to be considered in determining whether an activity is conducted as a business. These include, inter alia: undertaking an activity with repetition or regularity; being or expecting to be remunerated or compensated for undertaking the activity; soliciting others in connection with the activity; and holding oneself out as being in the business of conducting the activity.

Moving to this type of "business trigger" for dealers means dealer registration exemptions relating to specific types of trades or trades to specific types of investors will be eliminated (for example, the dealer registration exemptions contained in National Instrument 45-106 - Registration and Prospectus Exemptions, including the accredited investor exemption). These will be replaced by registration requirements for those "in the business of" dealing. While most security issuers themselves would not be "in the business" of dealing in securities (and therefore will not require registration or a registration exemption), the Companion Policy clarifies that an issuer that creates a secondary market in its securities or is a market maker for its own securities would likely be considered to be "in the business of" dealing in securities. Similarly, the Companion Policy states that, in most instances, the CSA would not consider a person whose main or sole activity is dealing for their own account to be in the business of dealing in securities.

Categories of registration

The Proposed Registration Rule contains five basic categories of dealer registration:

    1. Investment dealer

    2. Mutual fund dealer

    3. Scholarship plan dealer

    4. Exempt market dealer

    5. Restricted dealer

The exempt market dealer category is similar to the current "limited market dealer" category in Ontario and Newfoundland and Labrador, although the fit and proper requirements are more onerous than those applicable to limited market dealers. Persons registered as exempt market dealers would be permitted to deal only in securities being distributed under a prospectus exemption or to persons or companies to whom a security may be distributed under a prospectus exemption (for example, trading in prospectus qualified securities with accredited investors). British Columbia is considering not adopting the exempt market dealer category based on concerns that imposing registration requirements on those dealing in the exempt market will negatively impact venture capital business. Other categories of dealer in the various provinces would be eliminated.

The Proposed Registration Rule also contemplates two categories of adviser registration, namely, portfolio manager and restricted portfolio manager, as well as certain registration exemptions, including exemptions for international dealers and advisers. For an overview of the impact on international dealers and advisers, Stikeman Elliott has published a related Canadian Securities Law Update (February 2007).

Registration for investment fund managers

One of the more significant changes included in the new regime is the proposal to impose a registration requirement for managers of investment funds (which includes domestic, foreign, reporting and non-reporting issuers, but does not include private investment clubs). Investment fund managers will not only be required to register, but will also be subject to registration related obligations imposed under the Proposed Registration Rule, including solvency, proficiency and others (discussed below). The CSA's rationale for imposing fund manager registration is to allow regulators to directly regulate fund managers, impose requirements on fund managers relating to resources and supervision of out-sourced activities, and impose a framework for managing conflicts. Managing an investment fund is considered to include administering the fund but not acting as portfolio manager for the fund.

Individual registration categories

The Proposed Registration Rule also sets out two new categories of individual registration by requiring all registered firms to designate an individual as the ultimate designated person (UDP) and the chief compliance officers (CCO). The UDP is proposed to be the person in charge of the registrant firm or the division in the firm that carries on the activity requiring registration, and the CCO is proposed to be the person responsible for the day-to-day monitoring of compliance policies and procedures. Of importance to smaller registrants, the CSA also clarify that these functions can be carried out by the same individual.

Considerations for private equity and venture capital

While the Proposed Registration Rule does not expressly address private equity or venture capital funds, some guidance is offered in the Companion Policy in respect of registration requirements for general partners. Here the CSA state that whether the general partner will be in the business of providing advisory services and so required to register as an adviser will depend upon the business purpose of the limited partnership and the services the limited partners expect the general partner to provide.

The CSA state in the Companion Policy that if the general partner of a limited partnership selects investments where it will be involved in the management and development of those investments, the CSA would not consider the general partner's activities to be portfolio management activities requiring registration. This is in contrast to the situation where the purpose of the limited partnership is simply to invest in exempt securities relying on the expertise of the general partner. In the CSA's view, as the general partner does not bring "special expertise" to the underlying investments, it would be required to be registered as a portfolio manager. The CSA also state that they would not consider a firm that provides merger and acquisition advisory services without participating in the distribution of securities to be in the business of dealing in securities.

Referral arrangements

Specific requirements and disclosure obligations for referral arrangements pursuant to which a registrant pays or receives any compensation for the referral of a client are included in the Proposed Registration Rule.

Further requirements and rules

The Proposed Registration Rule also contains rules relating to proficiency, solvency and financial records for registrants (fit and proper requirements), detailed and technical conduct requirements (governing matters such as account opening and know-your-client, relationship disclosure and record-keeping), disclosure and compliance requirements relating to conflicts of interest and provisions governing suspension and revocation of registration. Details on these and other matters governed by the Proposed Registration Rule will be provided in our forthcoming updates.

Comment period

The Proposed Registration Rule is open for comments until June 20, 2007. Implementation is expected to stretch well into 2008 as the CSA have yet to provide any specifics on implementation dates or transition matters.

Legend Requirements for Private Placements of Book-Entry Only Securities

CDS Declines to Accept Legended Securities in the Book-Entry System

With the coming into force of National Instrument 45-106 - Prospectus and Registration Exemptions(NI 45-106), the Canadian Securities Administrators (CSA) also adopted a number of consequential amendments to various related policies and instruments. These included consequential amendments to Multilateral Instrument 45-102 - Resale of Securities (now National Instrument 45-102 or NI 45-102).

Under NI 45-102, the first sale of securities issued in reliance upon certain private placement exemptions is considered to be a distribution (i.e. generally requiring a prospectus), unless certain prescribed conditions are satisfied. One of these conditions is that the certificate representing the security carries a legend indicating that the securityholder may not sell the security until the later of four months and a day after the acquisition date or the date the issuer becomes a reporting issuer. This requirement was amended, effective March 30, 2004 to respond to the increased use of book-entry-only securities. Since the time of this amendment, subsection 2.5(2)3 of NI 45-102 has required that the certificate representing the security, or an ownership statement issued under a direct registration system or other electronic book-entry system, carry the prescribed legend. Section 1.7 of the Companion Policy to NI 45-102 (the Companion Policy) stated (prior to the implementation of the amendment discussed below) that "[i]nvestors may receive either a paper certificate representing their security or an electronic alternative such as an ownership statement under a direct registration system."

As part of the consequential amendments made to NI 45-106 effective September 14, 2005, the CSA changed this provision of the Companion Policy to read that a " [b]eneficial securityholder must receive either a paper certificate or an electronic alternative such as an ownership statement under a direct registration system, scheduled to be phased into operation during 2005." The CSA's intentions in requiring what appears to be the mandatory delivery of a confirmation statement to beneficial securityholders are not clear. Nor is it clear that, in adding this requirement, the CSA considered whether clearing agencies such as The Canadian Depositary for Securities Limited (CDS) would have the technological capability to carry it out. It is also not known what the CSA intended when referring to a ".direct registration system, scheduled to be phased into operation during 2005."

These amendments, whose effects appear to have been inadvertent, are part of the Companion Policy and not part of the Instrument itself. While they may represent the view of the CSA, they do not have the force of law. CDS has nevertheless taken the position that it will no longer accept restricted securities (i.e. those required to carry a legend indicating a restriction on resale) in the book-entry system. This effectively means that unless an issuer can deliver an ownership statement carrying the required legend to each beneficial purchaser, every security issued under a private placement (pursuant to a prospectus or registration exemption) will have to be certificated.

However, in at least one offering, staff at the Ontario Securities Commission (OSC) agreed to an interim solution that allowed CDS to accept debt securities that were privately placed. In that case the issuer sent a letter to CDS, with a copy to the OSC, stating that the issuer was not a reporting issuer and was unlikely to be one, that the debt securities being offered would be sold under the "accredited investor" exemption under NI 45-106, that the issuer took the position that subsection 2.5 of NI 45-102 does not require it to legend the certificate representing the debt securities and therefore the issuer would deposit with CDS a global certificate representing the aggregate number of securities to be issued without the legend. Staff at the OSC confirmed that they would not object to the deposit by the issuer of the global certificate without a legend and CDS agreed to hold and transfer the debt securities in the book-entry system. This solution may be viable for offerings where the securities issued will always be subject to a restriction on resale. As discussed above, the conditions set out under subsection 2.5 of NI 45-102 must be satisfied so that the first sale of securities previously issued under a prospectus or registration exemption does not require a prospectus. Where the securities in question are not contemplated to be sold to secondary market purchasers, satisfaction of the conditions set out under section 2.5 of NI 45-106, including the condition that the security certificate or confirmation statement carry the required legend, is therefore not relevant.

In another transaction, we have been able to develop what appears to be an alternative interim solution that is also acceptable to CDS. We propose that a confirmation statement carrying the required legend be sent to purchasers at the time their purchase is confirmed by the applicable dealer (that is, at the time the dealer's confirmation slip or ticket is sent to purchasers). In conjunction with this, the issuer of the security would apply to the applicable regulator for confirmation that the delivery of such a statement is in accordance with Section 1.7 of the Companion Policy (requiring that beneficial securityholders receive an ownership statement carrying the required legend). Based on discussions with CDS, we believe that this is an acceptable alternative interim solution that will allow other types of private placements to proceed in the book-entry system until the CSA have resolved this issue. While this method does impose an additional obligation to deliver a written confirmation statement, it has been proposed only as an interim measure to deal with CDS's reluctance to accept these securities in the book-entry system. Ideally, any long-term solution implemented by the CSA would support more efficient methods of holding and transferring securities and not impose additional paper-based obligations.

Effectively barring privately placed securities from the book-entry system represents a significant setback in the progress that has been made in the electronic holding and transfer of securities over the last number of years. With an increasing number of issuers moving to a book-entry only system, and investors preferring this system, this issue is a matter of great significance for Canadian capital markets and it is to be hoped that it will be resolved in the very near future.

We are currently working with the CSA and CDS to resolve this issue for all types of offerings.

NI 45-106 Would Consolidate and Harmonize Private Placement Prospectus and Registration Exemptions Across Canada

Members of the Canadian Securities Administrators (CSA) recently published for comment proposed National Instrument 45-106 - Prospectus and Registration Exemptions (the Instrument).

Substance and Purpose

The Instrument is intended to:

  • consolidate and harmonize the prospectus and registration exemptions contained in various provincial statutes and national, multilateral and local instruments, and the disclosure and filing requirements associated with those exemptions, into a single national instrument;

  • repeal or make consequential amendments to a number of national and multilateral instruments;

  • modify the existing exemptions to make them more concise and consistent; and

  • create new exemptions for relatively routine exemptive relief applications.

Under the current regime, most jurisdictions have a similar, but not identical, set of exemptions. This means that market participants wishing to effect a multi-jurisdictional exempt distribution in Canada must comply with all the various exempt distribution regimes of the relevant jurisdictions. The Instrument, however, will generally enable market participants to view the landscape of exemptions, with the exception of those jurisdictions, including Ontario, that will retain certain local exemptions. Ontario local exemptions will be consolidated in the revised OSC Rule 45-501.

Summary of the Proposed Instrument

The substance of the proposed Instrument can be summarized as follows:

Definitions

  • "Founder" will be defined based on MI 45-103. The term "founder" will replace the concept of "promoter," which is currently contained in the securities legislation of most jurisdictions. A designation as a "founder" requires active involvement in the business of the issuer at the time of the trade and not simply the ownership of a certain percentage of an issuer's securities.

  • "Control" will have two different interpretations in the Instrument. The exemption for trades to employees, executive officers, directors and consultants will contain a broader concept of "control" than for the rest of the Instrument, in order to "accommodate trades of compensation securities in a wide variety of business structures."

Capital Raising Exemptions

Among the list of prospectus and registration exemptions, the following changes are worth highlighting:

  • the "Accredited Investor" exemption contains additional categories to include an investment fund managed by a registered adviser and a person acting on behalf of a fully managed account if the person is registered as an adviser in Canada or, except in Ontario, in a foreign jurisdiction.

  • a new "Private Issuer" exemption (welcome back!) will replace the closely-held issuer exemption in the existing OSC Rule 45-501 and the closed company exemption in Quebec.

  • the "Minimum Amount Investment" returns and the prescribed minimum amount for all jurisdictions is set at $150,000, payable in cash at the time of the trade.

  • the "Family, Friends and Business Associates" exemption will be available in all jurisdictions except Ontario. It applies to executive officers, directors and control persons of the issuer and certain of their close family, friends and business associates. Saskatchewan requires a signed risk acknowledgment from close friends and business associates.

  • the "Family, Founder and Control Person" is an Ontario exemption for founders, affiliates of founders, control persons and certain family members of an executive officer, director or founder of the issuer.

  • the "Affiliates" exemption, relating to trades by an issuer in a security of its own issue to an affiliate of the issuer purchasing as principal will be a new exemption for most jurisdictions, except in Ontario.

  • the "Offering Memorandum" exemption will not be adopted by Ontario. There will be two versions of this exemption, one for British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador, and another for Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Quebec and Saskatchewan. The primary difference between the two versions is that the latter requires purchasers to either be "eligible investors" as defined in the Instrument, or to purchase securities at an aggregate acquisition cost that is less than $10,000.

Old Friends-But With New Limitations

  • the proposed return of the private issuer and $150,000 exemptions, albeit in slightly modified form, is welcome in Ontario, as these exemptions were frequently very useful and have been missed. The closely-held issuer exemption, which replaced the old private company exemption, was fraught with traps for the unwary, and the accredited investor exemption was on occasion just not broad enough.

  • a new restriction, however, is proposed on the use of each of the accredited investor and $150,000 exemptions. An accredited investor includes a person, other than an individual or certain funds, with net assets of at least $5 million according to its most recent financials. Despite this, the proposed exemption would not be available to such a person if the person is "created primarily" to purchase securities in reliance on prospectus exemptions or is "used primarily" to purchase securities under "these" (the meaning of this word is unclear) exemptions. Similar limitations apply to all entities in the case of the proposed new $150,000 exemption. The reasons for these limitations are not entirely clear, especially in the case of the accredited investor exemption, and they could pose a number of (probably unintended) difficulties for entities that would otherwise be considered sophisticated and that might wish to participate in a substantial private placement.

  • the new $150,000 exemption would also require payment in cash at the time of the purchase, creating a more restrictive situation than existed in the past, when obligations in that amount could be incurred instead.

Transaction Exemptions

Certain exemptions that are transactional in nature relate to:

  • trades made in connection with an amalgamation, merger, reorganization, arrangement, dissolution or winding-up of an issuer.

  • an asset acquisition with a fair value of not less than $150,000.

  • an acquisition of mining, petroleum or natural gas properties or any interest in them.

  • securities issued to settle bona fide debt of the reporting issuer owed to a creditor.

  • an issuer's acquisition or redemption of its own securities.

  • trades pursuant to take-over bids and issuer bids.

Investment Fund Exemptions

Additional exemptions pertaining solely to investment funds include:

  • reinvestments allowing trades of securities of the issuer to existing security holders of the issuer under a plan, if the plan permits the security holder to direct that "dividends or distributions out of earnings, surplus, capital or other sources" payable in respect of the issuer's securities be applied to the purchase of additional securities of the same class.

  • additional investments in investment funds if the purchaser has initially purchased securities at a cost of not less than $150,000, paid in cash, or if the net asset value of those securities is at least $150,000 at the time of the trade.

Employee, Executive Officer, Director and Consultant Exemptions

  • exemptions will be available for trades to employees, executive officers, directors and consultants, and are based on the current MI 45-105, with some modifications.

Miscellaneous Exemptions

Exemptions available in the miscellaneous category of the Instrument include trades relating to:

  • isolated trades.

  • trades to and among underwriters.

  • trades of "debt securities" that are rated and issued or guaranteed by governments, "Canadian financial institutions" and "Schedule III banks."

  • trades in non-convertible negotiable promissory notes or commercial paper maturing within one year of issue and with an "approved credit rating."

  • trades in non-syndicated mortgages on real property by a registered or licensed person.

  • trades in a security evidencing indebtedness "secured by or under" a security agreement for the acquisition of personal property if the security is not offered for sale to an individual.

  • trades in an evidence of deposit issued by a "Schedule III bank" or an association governed by the Cooperative Credit Associations Act (Canada).

  • conversion, exchange or exercise of securities automatically, at the option of the holder or at the option of the issuer.

  • in Ontario only, certain registration exemptions for trades in Ontario by market intermediaries are removed, preserving Ontario's current universal registration regime.

Registration Only Exemptions

An exemption from the registration requirements would be available for trades:

  • under judicial procedures such as the probate of estates, receivership, bankruptcy, liquidation or judicial sale.

  • by lawyers, accountants, engineers, teachers, notaries in Quebec and publishers and writers for newspapers, magazines or business journals under certain circumstances.

  • there is an exemption from the requirement to be registered as an adviser for registered investment dealers who manage the investment portfolios of clients through discretionary authority, but otherwise must comply with the rules and policies for portfolio managers set out by the Investment Dealers Association of Canada. In Ontario, a registered investment dealer must also provide the OSC with the names of partners, directors, officers or employees designated and approved to make investment decisions.

Control Block Distributions

"Eligible institutional investors" (as defined in NI 62-103) will continue to be exempt from the prospectus requirements in connection with "control block distributions."

TSX Venture Exchange Offerings

Except for Ontario, there would be an exemption from the prospectus requirements for TSX Venture Exchange issuers that file a TSX Venture Exchange offering document and comply with certain other requirements.

Report of Exempt Distribution

Form 45-106F1

Changes to Existing Exemptions in Ontario based on NI 45-106

As discussed above, Ontario will experience changes to its existing exemptions as a result of the Instrument, including:

  • Minimum amount exemption - the prescribed minimum amount is $150,000, payable in cash at the time of trade.

  • Private issuer exemption - will replace the closely-held issuer exemption currently set out in OSC Rule 45-501.

  • Securities for debt exemption - currently available in British Columbia, but will be available pursuant to the Instrument in all provinces, with guidance on the appropriate circumstances of usage contained in the companion policy.

  • Schedule III banks - based on the fact that Schedule III banks have been receiving relief from the registration and prospectus requirements by way of exemptive orders for several years.

Consequential Amendments and Repeals as a Result of NI 45-106

Amendments

  • consequential changes will be made to NI 33-105 Underwriting Conflicts, NI 45-101 Rights Offerings, NI 62-103 The Early Warning System and Related Take-Over Bid and Insider Reporting Issues.

  • MI 45-102 Resale of Securities has been amended to include Quebec. With Quebec's inclusion, 45-102 would become a national instrument. Other revisions include updating definitions, removing obsolete transitional provisions and revising appendices to incorporate the exemptions contained in the Instrument and transitional provisions for current exemptions.

  • in Ontario, the resale provisions currently set out in both the existing Rule 45-501 and MI 45-102 have been consolidated into the amended MI 45-102. In the Instrument and the revised 45-501, the concept of "founder" has replaced the concept of "promoter" in many cases. However, the current Ontario resale regime for securities acquired under the existing Ontario promoter exemptions before the coming into force of the Instrument and the revised 45-501 will apparently be maintained, which adds a lot of extra complexity. Going forward, if a promoter or founder acquires a security under the exemptions in the Instrument and the revised 45-501, the first trade will be subject to either a restricted period or a seasoning period.

  • in Ontario, amendments will be made to update OSC Rules 13-502 Fees, 31-503 Limited Market Dealers, 91-501 Strip Bonds and 91-502 Trades in Recognized Options according to the securities legislative references contained in the Instrument. Replacements will be made to OSC Rules 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans and 81-501 Mutual Fund Reinvestment Plans by sections 2.2 and 2.18 of NI 45-106, respectively.

Misrepresentations in Ontario

  • requirements relating to the statutory right of action and right of rescission referred to in section 130.1 of the Securities Act (Ontario), for misrepresentations, would apply in the use of an offering memorandum in connection with a distribution made in reliance on the following exemptions: accredited investor, private issuer, family, founder and control person (Ontario), affiliates, additional investment in investment funds, and government incentive security.

  • however, section 130.1 would not apply in respect of an offering memorandum delivered to a Canadian financial institution, a Schedule III bank, the Business Development Bank of Canada or a subsidiary of any of the foregoing as a prospective purchaser.