Making a Bright Line at the Border: CSA and OSC Seek to Clarify How Canadian Securities Laws Apply to Trades Outside Canada
July 5, 2017
On June 29, 2017, the Ontario Securities Commission (OSC) published a Second Notice and Request for Comment (Second Notice) on an amended Proposed OSC Rule 72-503 Distributions Outside Canada (Rule 72-503) and Proposed Companion Policy 72-503CP (72-503CP, and together with Rule 72-503, the Proposed Rule), which aims to provide Ontario issuers and their underwriters with more certainty regarding the application of Ontario prospectus and dealer registration requirements to distributions of securities to investors outside Canada.
The new version of the Proposed Rule responds to comments the OSC received on the initial iteration published in June 2016 (2016 Proposal). For more information regarding the 2016 Proposal, please see our July 2016 Blakes Bulletin: Proposed OSC Rule 72-503 Aims to Provide Clarity on Distributions from Ontario to Outside Canada.
Concurrent with the OSC’s publication of the Second Notice, the Canadian Securities Administrators (CSA) published proposed amendments to rules for offshore resales in a Notice and Request for Comment (Proposed NI 45-102 Amendments) to National Instrument 45-102 Resale of Securities (NI 45-102) and the Companion Policy to NI 45-102 (45-102CP).
The changes to the Proposed Rule described in the Second Notice are largely welcome and responsive to many of the comments received. They would, however, only apply in Ontario, as other Canadian provinces continue to have different regimes regulating distributions from their jurisdiction. In contrast, the Proposed NI 45-102 Amendments represent a CSA effort to achieve harmonization at least in the area of regulating offshore resales.
Comments on the Proposed Rule and the Proposed NI 45-102 Amendments are due by September 27, 2017.
For those familiar with the 2016 Proposal, key changes in the Second Notice include:
- Clarifying that guidance around factors affecting whether securities come to rest outside of Canada are not conditions to the express exemptions in the Proposed Rule, but rather an explanation of circumstances where it may not be necessary to rely on the exemptions in the Proposed Rule.
- Clarifying that the requirement to sell to a person or company “outside Canada” is satisfied if the issuer or selling security holder has no knowledge, and no reason to believe, that the purchaser is a Canadian resident, except in the case of a pre-arranged transaction, where actual knowledge that the buyer is outside Canada is required.
- Amending the form of certification in the distribution report so that the individual signs on behalf of the issuer, qualified to his or her knowledge, having exercised reasonable diligence.
- Other conditions involving compliance with laws now include materiality qualifiers.
BACKGROUND: SUMMARY OF THE 2016 PROPOSAL
Under the 2016 Proposal, four new exemptions from the Ontario prospectus requirement would have been available:
- The “Foreign Public Offering Exemption”: Public offerings of securities made in the U.S. or other “designated foreign jurisdictions” would have been prospectus exempt provided that a receipt or similar regulatory approval of the offering document was obtained in that jurisdiction. The list of “designated foreign jurisdictions” was limited to Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland and the United Kingdom.
- The “Concurrent Canadian Prospectus Exemption”: Distributions of securities outside Canada would have been prospectus exempt if made in accordance with foreign securities laws and concurrently with a prospectus offering in Ontario.
- The “Canadian Reporting Issuer Exemption”: Distributions of securities outside Canada would have been prospectus exempt if the issuer of the securities was, and had been, a reporting issuer in a Canadian jurisdiction for the four months immediately preceding the distribution outside Canada and the distribution was made in accordance with foreign securities laws.
- The “Restricted Canadian Resale Exemption”: Any other distribution in a jurisdiction outside Canada in accordance with foreign securities laws.
Under the 2016 Proposal, securities distributed outside Canada under the first three new prospectus exemptions would have been freely tradable and could therefore be subsequently sold back into Canada without restriction. Securities distributed under the fourth “catch-all” Restricted Canadian Resale Exemption would have remained subject to restrictions on sales back into Canada, such that a resale back into Canada would have been considered a distribution, unless:
- The trade was to a person or company outside Canada, or
- The issuer was, and had been, a reporting issuer in a Canadian province or territory for the four months immediately preceding the resale and at least four months had elapsed from the distribution date
Dealer Registration Exemption
The 2016 Proposal also provided an exemption from the dealer registration requirement in Ontario for a dealer acting in connection with a distribution outside Canada that, among other requirements, had its head office or principal place of business in the U.S., Canada or a “designated foreign jurisdiction” and was registered or otherwise permitted under applicable foreign law to act as a dealer on the distribution.
Form Filing Requirement
Issuers that relied on the Concurrent Canadian Prospectus Exemption, the Canadian Reporting Issuer Exemption or the Restricted Canadian Resale Exemption were required to file a trade report with the OSC on proposed new Form 72-503F within 10 days after closing. The new form required relatively limited disclosures regarding the issuer, the underwriters and the securities distributed, including the aggregate amount and purchase price of the securities distributed. The report required unqualified certification by a director or officer of the issuer that its statements were true.
HOW THE PROPOSED RULE DIFFERS FROM THE 2016 PROPOSAL
The Proposed Rule includes the following significant differences from the 2016 Proposal:
- The OSC has replaced the definition of “designated foreign jurisdiction” with an expanded definition of “specified foreign jurisdiction” that includes all member countries of the European Union.
- The broad Restricted Canadian Resale Exemption has been deleted and replaced with a prospectus exemption applicable only to issuers that are not Canadian reporting issuers that distribute securities outside of Canada in material compliance with the securities laws of a foreign jurisdiction (Non-Reporting Issuer Exemption). First trades of securities under the Non-Reporting Issuer Exemption will be subject to a restricted period under NI 45-102 (as discussed further below).
- The Canadian Reporting Issuer Exemption has been revised so that (i) the issuer must be a reporting issuer at the time of the distribution (not for four months) and (ii) selling security holders will not be permitted to rely on it. The intention is that offshore resales should be covered by the resale rules in the Proposed NI 45-102 Amendments.
- Additional 72-503CP guidance elaborates on what it means to sell to “a person or company outside Canada.” An issuer or selling security holder would meet the requirement of each of the Proposed Rule’s prospectus exemptions to sell to “a person or company outside Canada” if it has no knowledge, and no reason to believe, that the purchaser is a Canadian resident.
- A new section has been added in the Proposed Rule that provides that a distribution made on or through the facilities of an exchange or market outside Canada is a distribution to a person or company outside Canada if neither the seller nor any person acting on its behalf has reason to believe that the distribution has been pre-arranged with a buyer. The 72-503CP guidance further provides that, where a transaction has been pre-arranged, a prospectus exemption will only be available under the Proposed Rule if the buyer is in fact outside Canada. These changes are consistent with similar changes included in the Proposed NI 45-102 Amendments.
- Guidance in 72-503CP clarifies that the factors the OSC has enumerated that may be considered when determining whether securities have “come to rest” outside Canada do not constitute conditions to the availability of the Proposed Rule’s prospectus exemptions. In addition, the OSC has removed language in 72-503CP that may have been interpreted to mean that the Foreign Public Offering Exemption, the Concurrent Canadian Prospectus Exemption and the Canadian Public Issuer Exemption would only have been available if “reasonable steps” to prevent “flow back” had been taken.
- The prospectus and dealer registration exemptions in the 2016 Proposal were generally conditioned on compliance with applicable foreign securities laws. The Proposed Rule conditions these exemptions on “material” compliance with such laws, and the OSC has added guidance to 72-503CP which states that an issuer or selling security holder will have materially complied with the requirements of a foreign securities law if it has taken “reasonable steps to ensure the distribution is effected in accordance with the securities laws of the foreign jurisdiction.”
- A new dealer registration exemption has been added that may be relied on by issuers distributing securities outside Canada in accordance with the Proposed Rule or under a Canadian prospectus.
- The Proposed Rule revises the certification language in Form 72-503F to be consistent with the proposed amendments to Form 45-106F1. For more information on those amendments, please see our June 2017 Blakes Bulletin: CSA Propose Amendments to Reduce Compliance Burden for Private Placement Reports on Form 45-106F1.
- The Proposed Rule now provides that an investment fund issuer may file Form 72-503F within 30 days after the calendar year (consistent with the Form 45-106F1 timing requirement for investment fund issuers). An investment fund issuer may now also satisfy the reporting requirement by filing a consolidated Form 45-106F1 that includes the information required by Form 72-503F.
- A new provision in the Proposed Rule and guidance in 72-503CP has been added that provides that the Proposed Rule’s prospectus exemptions are not available for any transaction or series of transactions that is part of a bad faith plan or scheme to avoid Canadian prospectus requirements, for an indirect distribution into a jurisdiction of Canada.
PROPOSED NI 45-102 AMENDMENTS
Section 2.14 of NI 45-102 currently provides that securities of issuers that are not Canadian reporting issuers that were initially distributed under a Canadian prospectus exemption may be resold offshore without a prospectus so long as, among other things, Canadian residents did not (i) own more than 10% of the outstanding securities of the class or series, and (ii) represent in number more than 10% of the number of owners of securities of the class or series, in each case, as of the date of and after giving effect to, the initial distribution (10% Requirement). The 10% Requirement has long been criticized as being difficult and impractical for reselling security holders to determine.
The Proposed NI 45-102 Amendments, which would apply across Canada, would repeal section 2.14 and replace it with a new section 2.14.1 that would:
- Delete the 10% Requirement and replace it with a requirement that the issuer be a “foreign issuer” at the time of the relevant initial distribution. “Foreign issuer” would be defined as an issuer that is not incorporated or organized under the laws of Canada, or a jurisdiction of Canada, unless: (i) the issuer has its head office in Canada; (ii) the majority of the executive officers or directors of the issuer ordinarily reside in Canada; or (iii) the majority of the consolidated assets of the issuer are located in Canada. The proposed definition of “foreign issuer” closely mirrors the “business contacts” prong of the “foreign private issuer” definition under the rules of U.S. Securities and Exchange Commission (but does not include any “shareholder test” similar to that definition).
- Add guidance to 45-102CP to clarify that pre-arranged trades with Canadians using the facilities of foreign stock exchanges would not qualify for the section 2.14 resale exemption.
- Add the Non-Reporting Issuer Exemption from the Proposed Rule to Appendix D of NI 45-102, thereby subjecting securities issued under such exemption to a minimum four-month restricted period.
The CSA state in the notice for the Proposed NI 45-102 Amendments that it prioritized the amendments in response to investor feedback and in response to the number of applications for exemptive relief received in connection with the current exemption. The CSA further noted that they are also reviewing the resale regime in NI 45- 102 in its entirety to determine whether it continues to be relevant in today’s markets and to assess the impact of alternative regulatory approaches.
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