The Quebec Autorité des marchés financiers (Authority) recently published two general decisions (commonly referred to as blanket orders) granting certain Canadian institutional investors exemptions from the prospectus requirement in connection with the resale of securities outside Canada. The exemptions, which are effective as of June 30, 2016, pertain to offerings in a foreign jurisdiction by both Canadian reporting issuers and foreign non-reporting issuers in which the qualifying Canadian institutional investor has participated.
This bulletin will answer the following questions:
- Why is relief necessary?
- What is the new resale exemption for securities of Canadian reporting issuers offered in a foreign jurisdiction?
- What is a Canadian issuer?
- What is the new resale exemption for securities of foreign non-reporting issuers offered in a foreign jurisdiction?
- What is a foreign issuer?
- Is the existing Resale Rule not functioning?
- To whom do the exceptions apply?
- How will the exemptions impact Canadian institutional investors outside Quebec?
- What about the Canadian non-reporting issuer?
WHY IS RELIEF NECESSARY?
Section 12 of the Securities Act (Quebec) (QSA) expressly asserts jurisdiction over distributions from within Quebec to outside Quebec, and this requirement applies to treasury issuances of securities as well as secondary trades in previously issued securities that remain within the closed system and thus subject to restrictions on resale. Only securities that have been qualified for sale to the public, entailing the approval or “receipting” by the Authority of a prospectus, can be sold free of resale restrictions (subject to certain exceptions such as control block trades).
WHAT IS THE NEW RESALE EXEMPTION FOR SECURITIES OF CANADIAN REPORTING ISSUERS OFFERED IN A FOREIGN JURISDICTION?
Where securities of a Canadian issuer that is a reporting issuer in Canada have been offered in a foreign (i.e. non-Canadian) jurisdiction under a foreign prospectus and the Canadian institutional investor participated in such offering by way of private placement in Quebec, the securities acquired by such investor will be subject to a four-month hold period (known as the restricted period) under Regulation 45-102 respecting Resale of Securities (Resale Rule) before becoming freely tradable. The restricted period will apply even to a trade by a Quebec investor outside Quebec, as a result of section 12 of the QSA. During the restricted period, the investor will nonetheless be able to resell the securities in the exempt market, under a prospectus exemption (or pursuant to a decision of the Authority following an application for relief). The Authority’s new blanket order (Canadian Reporting Issuer Resale Exemption) eliminates the restricted period and seeks to place the qualifying Canadian institutional investor on the same footing as a foreign investor by allowing the Canadian investor to resell such securities on the foreign market or to a person outside Canada. A key condition of the exemption is that the Canadian institutional investor must have acquired the securities of the Canadian reporting issuer for the same financial consideration as that paid by foreign investors under the prospectus offering. As well, consistent with other resale exemptions available under the Resale Rule, if the Canadian institutional investor is an insider of the issuer, it must have no reasonable grounds to believe that the issuer is in default of applicable securities legislation.
WHAT IS A CANADIAN ISSUER?
For the purposes of the Canadian Reporting Issuer Exemption, a Canadian issuer is an issuer that is incorporated or organized under the laws of Canada or a province or territory of Canada.
WHAT IS THE NEW RESALE EXEMPTION FOR SECURITIES OF FOREIGN NON-REPORTING ISSUERS OFFERED IN A FOREIGN JURISDICTION?
Where securities of a foreign issuer that is not a reporting issuer in Canada have been offered in a foreign jurisdiction (whether under a prospectus or not) and the Canadian institutional investor participated in such offering by way of private placement in Quebec, the securities acquired by the investor will be subject to an indefinite holding period unless the conditions of section 2.14 of the Resale Rule are met, entailing that the foreign issuer must have a de minimis presence of Canadian resident shareholders. More specifically, in order for the resale to be permitted under section 2.14, Canadian residents must not hold, directly or indirectly, more than 10 per cent of the issuer’s outstanding securities and must account for less than 10 per cent of the total number of owners, directly or indirectly, of such securities. While subject to an indefinite holding period, the investor will nonetheless be able to resell the securities in the exempt market, under a prospectus exemption (or pursuant to a decision of the Authority entailing an application for relief). The Authority’s other new blanket order (Foreign Non-Reporting Issuer Resale Exemption and, together with the Canadian Reporting Issuer Resale Exemption, the Exemptions) eliminates the conditions imposed by section 2.14 of the Resale Rule and seeks to place the Canadian investor on the same footing as a foreign investor by allowing the qualifying Canadian institutional investor to resell such securities on the foreign market or to a person outside Canada.
WHAT IS A FOREIGN ISSUER?
Under the Foreign Non-Reporting Issuer Resale Exemption, a “foreign issuer” is defined with reference to National Instrument 71-101 The Multijurisdictional Disclosure System. Under that instrument, a foreign issuer means an issuer that is not incorporated or organized under the laws of Canada or a province or territory of Canada, excluding issuers the majority of whose shareholders are in Canada and having other significant Canadian ties, as further described in that instrument.
IS THE EXISTING RESALE RULE NOT FUNCTIONING?
In its notice discussing the Exemptions, the Authority indicated that numerous Canadian institutional investors voiced concern about the uncertainty surrounding the resale of securities of foreign issuers, and that the restrictions of the Resale Rule hampered the ability of such investors to participate in foreign offerings. In the Authority’s view, the Exemptions provide the needed certainty and favour equitable treatment between foreign and Canadian investors.
TO WHOM DO THE EXEMPTIONS APPLY?
The Exemptions only apply to certain Canadian institutional investors comprising a subset of permitted clients under Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations. The Authority’s rationale for limiting the Exemptions in this manner is that these investors have in the past sought discretionary relief where participating in the kinds of foreign offerings described in this bulletin (such relief having been sought in particular as a result of the de minimis threshold of section 2.14 of the Resale Rule being exceeded). These investors include:
- Canadian financial institutions such as banks, trust companies and insurance companies
- Foreign authorized banks under Schedule III of the Bank Act (Canada)
- Canadian regulated pension funds
- Wholly-owned subsidiaries of the foregoing
- Investment funds that are managed by an investment fund manager or advised by an adviser that is registered in Canada
- Governmental entities such as the Government of Canada, provincial governments, Crown corporations, agencies and government-owned entities
The Authority has indicated that it may expand the Exemptions to include other types of investors as warranted.
HOW WILL THE EXEMPTIONS IMPACT CANADIAN INSTITUTIONAL INVESTORS OUTSIDE QUEBEC?
The Exemptions are decisions of the Authority and therefore have effect only in Quebec. Accordingly, they will apply to trades by qualifying institutional investors to which Quebec securities legislation applies.
HOW WILL THE EXEMPTIONS IMPACT CANADIAN INSTITUTIONAL INVESTORS OUTSIDE QUEBEC?
The Exemptions do not cover securities of a Canadian issuer that is not a reporting issuer. Thus, a Canadian issuer that, for example, goes public in another jurisdiction without effecting a concomitant Canadian offering (or subsequently becoming a reporting issuer in Canada) will not benefit from the Exemptions.